India - Third National Cooperative Development Corporation (NCDC) Project

Document of The World Bank FOR OFFICIAL USE ONLY C P. i& d- 7t) Report No. 5035-IN STAFF APPRAISAL REPORT INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT May 30, 1984 South Asia Projects Department Agro-Industries and Credit Division 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.  CURRENCY EQUIVALENTS 1/ US$l = Rs 10.8 WEIGHTS AND MEASURES Metric Units are used 1 kilogram (kg) = 2.20 pounds 1 metric ton (ton) = 1,000 kg = 0.98 long ton I quintal = 100 kg 1 meter (m) = 1.09 yards 1 centimeter (cm) = 0.01 meters 1 millimeter (mm) = 0.001 merers i square meter (m2) = 10.75 square feet I kilometer (km) = 0.62 mile 1 hectare (ha) - 2.47 acres 1 square kilometer (km2) = 0.386 square mile 1 lakh = 100,000 1 million (M) = 10 lakhs INDIAN FISCAL YEAR April 1 to March 31 Kharif season - Monsoon season (Nay to October) Rabi season - Dry season (November to April) 1/ This Dollar/Rupee exchange rate is subject tc change. Conversions in this report have been made at US$1 to Rs 10.8 which was the long-term rate projected by the Bank in May 1984.  FOR OFFICUL USE ONLY ABBREVIATIONS ACSTI Agricultural Cooperative Staff Training Institute AP Andhra Pradesh CCTIMP Center for Cooperative Trainers' Training and Materials Production CDS Cooperative Development Service CGC Cotton Growers' Cooperative CTC Cooperative Training Center DCCB District Central Cooperative Bank ERR Economic Rate of Return FRR Financial Rate of Return GOI Government of India GCoS State Government ICAR Indian Council of Agricultural Research IFFCO Indian Farmers Fertilizer Cooperative Ltd. HP Msadhya Pradesh NABARD National Bank for Agriculture and Rural Development NCCT National Council for Cooperative Training NCDC National Cooperative Development Corporation NDDB National Dairy Development Board RTC National Textile Corporation DILFED State Cooperative Oilseed Growers' Federation in HP OSCS Oilseed Growers' Cooperative Society PACS Primary Agricultural Credit Society PCS Primary Cooperative Society PLDB Primary Land Development Bank RAJFED SCMF in Rajasthan RBI Reserve Bank of India RCS Registrar of Cooperative Societies RNS Regional Marketing Society SAU State Agricultural University SCB State Cooperative Bank SCMF State Cooperative Marketing Federation SES State Extension Service SLDB State Land Development Bank SSC State Seed Corporation UP Uttar Pradesh This document has 2 resricted distnbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disisd without World Bank authorization.  INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: National Cooperative Development Corporation (NCDC). Amount: SDR 210.2 million (US$220 million equivalent). Terms: Standard. Onlendint Terms: Government of India (GOI) to NCDC: Repayment over 15 years, including 3 years' grace, at an interest rate of not less than 7% per annum, the standard rate for GOI onlending to NCDC for projects taken up with foreign assistance. NCDC to State Cooperative Banks (SCB) and State Land Development Bank (SLDB): Repayment over 15 years, including 3 years' grace, at an interest rate of not less than 8% per annum for rural storage investments and not less than 9.5% per annum for agro-processing investments. SCB and SLDB to ultimate beneficiaries: Repayment up to 15 years, including up to 3 years' grace, at an interest rate of not less than 10% per annum for rural storage investments and not less than 12.5% per annum for agro-processing investments. GCOI will bear the foreign exchange risk. Proiect Description: The proposed project is designed to support the development of the Indian cooperative movement by strengthening the capabilities of the National Cooperative Development Corporation, through expanding the scope of its activities and extending its involvement into new areas in nine participating States. The project provides credit for a rural storage component, involving the construction of about 7,800 rural godowns in six States; a soybean production and processing component, involving the establishment of 800 Oilseed Growers' Cooperative Societies, together with soybean seed processing plants and solvent oil extraction plants in six States; a cotton processing component, involving the establishment of eleven *:otton ginneries and five spinning mills in five States; and an institution-building  component, involving the establishment of Staff Training Institutes in six States, and developmeut of a training program for staff of the rural godowns, processing plants, and cooperative agencies. The major risk in a project of this scope would be poor implementation. lovever, NCDC has considerable experience and capable management and has performed satisfactorily in previous IDA-financed projects, so this risk is c'nsidered to be small. Technical risks are minor. Estimated Cost: 1 (US$ millions) Item Local Foreirn Total Rural Storage 94 11 105 Soybean Production & Processing 91 8 99 Cotton Processing 132 21 153 Institution-building 9 1 10 Base Cost 326 41 367 Physical Contingencies 22 4 26 Price Contingencies 68 7 75 Total Project Cost 416 I/ 52 468 jj 1/ Including about US$40 million in taxes and duties. Financing Plan: (US$ millions) Local Foreign Total IDA 168 52 220 State Governments 80 - 80 NCDC 146 - 146 Cooperative Societies 22 - 22 Total 416 52 468 m =  Estimated Disbursements: (US$ millions) IDA. FY FY85 FY86 FY87 FY88 FY89 Annual 21.1 52.9 98.3 21.6 26.1 Cumulative 21.1 74.0 172.3 193.9 220.0 Rate of Return: At least 28% Appraisal Report: No. 5035-IN dated May 30, 1984.  INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III PROJECT Table of Contents Pase No. I. AGRICULTURE AND AGRO-INDUSTRIES ........ . . . . . . . .......... ....... 1 - The Role of Cooperatives .. .. ............................... 8 - Previous Bank Group Involvement in Related Activities .... 10 II. PROJECT INSTITUTIONS ............... ........ ..... 11 - The National Cooperative Development Corporation (NCDC) and its Role in the Agricultural Credit System ........ 11 - State Cooperative Banks (SCB) ..................... 13 - State Land Development Banks (SLDB) 14 - State Cooperative Marketing Federations (SCMF) ........... 15 - Primary Marketing Societies (PMS) ........a............. 15 - Primary Agricultural Credit Societies (PACS) ............. 16 - Cotton Growers' Cooperatives (CGC) ...........O ...... 17 - Cooperative Training ....... .. ..... .. ...... ....... .... 17 III. PERFORMANCE UNDER THE PREVIOUS NCDC PROJECTS ................ 18 IV. THE PROJECT AREA . 20 V. THE PROJECT .................... ...... 21 - Project Genesis ....9.- .. .. ... ... 21 - Project Objectives and Rationale ............22 - Project Description .... ....... ........ ..... 24 - Project Costs .......................................... 27 - Finauciug .........0*00-46 29 - Lending Terms ........... ....... 30 - Procurement ..... *.*..* ..*..... *****.....*.. 32 - Disbursement .......................................... 33 This report is based on the findings of an appraisal mission to India in November/December 1983 comprising Messrs. J. Duester, A. Felleke, Nmes P. Annez and N. Mattson (Bank) and Messrs. F. Heidhues and J. Villeneuve (Consultants).  -ii- VI. ORGANIZATION AND MANAGEMENT .... .. ... .. ....... .. .... .. ... .... 34 - Implementation Organization .............................. 34 - Preparation and Appraisal of Subprojects ................. 34 - Physical Implementation - General ........................ 35 - Implementation of Rural Storage Component ................ 36 - Implementation of Soybean Production and Processing Component ...........*.**.*.......*a..........***e*. 36 - Implementation of Cotton Processing Component ............ 37 - Institution Building and Training ........................ 37 - Review of Textile Sector ...*es....* ...*........**............ 38 - Monitoring and Evaluation, Accounts, Audits and Reporting ......................................****.. 38 VII. PRODUCTION AND MARETING . ............... ..... . . ................... . 39 - Soybean Production .........*............... 39 - Production of Processed Products .......................... 40 - Marketing of Soybean Products ............................ 41 - Narketing of Cotton Products ............................. 42 VIII. BENEFITS AND JUSTIFICATION .............. . ............. -. 43 - Economic Analysis ... . ..................... ..... 43 - Beneficiaries and Employment Effects .................... 46 - Foreign Exchange Earnings . ......................... . ... 47 - Financial Analysis ..................................... 47 - Role of Women .....................................*... 49 - Environmental Effects ...... ........4...... *...*. 49 - Project Risks ................................*... 49 XI. ASSURANCES AND RECOKMENDATIONS ................ . ........... 51 ANINEXES 1. Sumary Cost Tables 2. Economic Analysis of Project Investments 3. Financial Analysis for Project Processing Plants and Rural Godowns 4. Eligibility Criteria for Project Coopera_ive Institutions 5. Subproject Appraisal Criteria 6. NCDC Financial Statements 7. NCDC: Program Projections and Funding 1983184 to 1989/90 8. Target Indicators and Nonitoring Trigger Levels 9. Projected Quarterly Disbursements 10. Table of Contents Project File  -iii- CHARTS World Bank 26083: Agricultural Credit in India ............. e. 75 NAPS IBRD 18023 IBRD 18024 IBRD 18025 IBRD 18046  INDIA NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) III I. AGRICULTURE AND AGRO-INDUSTRIES Introduction 1.01 India has a population of about 720 M, growing at an annual rate of about 2Z. Since 1960, per capita income has grown at an annual rate of 1.4% and reached US$260 in 1982. Much remains to be done to improve the living standards of the vast mass of urban and rural poor who comprise almost 50% of the total population. Accordingly, Government of India's (GOI) develop- ment plans emphasize maintaining food self-sufficiency, alleviating poverty and creating employment, especially in rural areas. Agricultural Sector Performance 1.02 Agriculture is the dominant sector of the economy. It contributes about 40% of GDP, accounts for about 70% of all employment and provides the base for about 50% of India's exports. During the last decade GOI has con- centrated on raising foodgrain production by increasing use of irrigation, fertilizers, plant protection and quality seeds and backed this effort with improved extension and research services. The response has been impressive and foodgrain production grew sufficiently to meet consumer demand, eliminate imports and reduce real foodgrain prices to consumers. At the same time India was able to build up buffer stocks which enabled it to overcome the effects of severe droughts in 1979/80 without foodgrain imports. After two years of normal rainfall with annual production growth of 15Z and 5% in 1980/81 and 1981/82 respectively, the country experienced in 1982/83 one of the worst droughts in recent years. It is remarkable that agricultural production only declined by 4% to 6%. While performance in the recent past suggests that future average foodgrain supplies would exceed demand, the balance remains delicate and the need for foodgrain imports to maintain consumer supplies or adequate buffer stocks could arise from time to time. The shortage of edible oils persists and, unless a major breakthrough in oilseed production is achieved, the situation may continue or even worsen. Agricultural Sector Priorities 1.03 GOI continues to give high priority to grain production, and the Sixth Five-Year Plan (1980/81 - 1984/85) target is to build a 15 M ton reserve stock. Expanded and improved rural storage, marketing, and input supply facilities play a vital role in this strategy. Since the domestic foodgrain situation has significantly improved, diversification has become an increasingly important goal.  -2- Agricultural Production and Services 1.04 Production of foodgrains dominates the agricultural sector and cereals occupy about 61% of cropped area, followed by pulses (19%), oilseeds (10%) and fibers (5.5%). The rest of the arable area (4.5%) is devoted to root crops, sugar cane, plantation crops (including important export crops like tea, coffee and cashew), orchards and a wide variety of vegetables and spices. Foodgrain production has increased rapidly from about 60 M tons in the early 1950s to about 133 M tons in 1981/82, mainly due to the increase in production of wheat (8 H to 38 M tons) and rice (25 M to 54 M tons). Due to severe drought, foodgrain production fell to about 127 M tons in 1982/83. While oilseeds are among the most important agricultural commodities in India, production growth has not kept pace with that of foodgrains. To accelerate production, GOI is actively promoting diversification into non-traditional seeds such as soybean, sunflower and safflower. Groundnut still remains the most important edible oilseed crop, but non-traditional seeds represent an increasing share in total oilseed production. Soybean production, which assumed greater importance in the early 1970s, has grown since 1975/76 at the phenomenal rate of 38% p.a., largely as a result of area expansion. Cotton production showed a moderate growth rate of 2.6% p.a. between 1971 and 1982, of which about 2.2% was the result of variety improve- ment and yield increase. 1.05 An efficient input supply system plays an essential role in increas- ing productivity. Between 1960 and 1981/82, fertilizer use has increased from 0.3 M to over 6 M nutrient tons, or at an average annual growth rate of 15%; and it continues to grow rapidly. Improved seeds supply has been sup- ported by the two National Seed Projects (Ln. 1273-IN and Cr. 816-IN), in which six of the seven soybean and cotton project States participated. Use of pesticides has also increased from 100 tons technical grade material to over 60,000 tons in the last 20 years. A continued rapid increase in input use, particularly by small and marginal farmers, will require an expanded and modernized storage and distribution system, able to reach the less accessible rural areas. The proposed project, through the involvement of Cooperative Societies, is specifically designed to provide this infrastructure in rural areas. Through the efforts of GOI and the States, storage capacity owned by Cooperative Societies and by private businesses has increased from 12 M tons in 1975 to over 24 M tons in 1981/82. With these additions to capacity, storage availability is beginning to catch up with needs that arose with large increases in agricultural production in recent years. The proposed project would support the planned capacity expansion of the Cooperative Societies. 1.06 GOI and State Governments (GOS) give high priority to providing adequate agricultural research and extension. State specific research is the responsibility of State Agricultural Universities (SAD). Region specific research is undertaken jointly by the Indian Council of Agricultural Research (ICAR) and SAU. On behalf of GOI and GOS, ICAR sanctions research programs, and provides funds and technical support to SAU. While research efforts for cotton are quite adequate, much must still be done in soybean research which began in the early sixties at SAU, Pantnagar, Uttar Pradesh (UP) and Jabalpur, Madhya Pradesh (MP). ICAR, under its "All India Coordinated Soybean Research Project" maintains research centers in various States including NP. A number of soybean varieties and production technologies have  _3_ been evolved from this work. SAU Rajasthan has been given primary respon- sibility for soybean research, although no research has yet been undertaken since soybean is a new crop. However, it maintains a foundation seed farm in the area which would be used for the soybean program. ICAR's "All-India Cotton Research Project" supports joint research with SAU, providing research staff, working capital, and equipment. Besides cooperative cotton research, ICAR also maintains four regional centers to serve the main cotton regions of India. A number of varieties and hybrids have been released to date, and further intensive research is underway. Oilseeds 1.07 Oilseed production and processing are important because edible vegetable oils are key consumer items, being the main source of essential fatty acids in the Indian diet. Annual consumption of vegetable oils is about 6 kg per capita as compared to only 4 kg in the early 1960s. (In developed countries, average per capita consumption of oils is 25 kg). Growtn in consumption has been particularly rapid since GOI liberalized its policy on imports in 1976/77. The composition of aggregate consumption of fats has changed over time. After World War II, there was a considerable substitution toward vegetable oil consumed in hydrogenated form (Vanaspati) from animal fats (ghee). In addition, cheaper alternatives to groundnut oil, traditionally the most widely consumed vegetable oil, have slowly become popular. Refined cottonseed oil is now widely consumed, particularly in the southern States, and refined soybean oil is marketed in small quantities in soybean producing areas. 1.08 Edible oils have also played an important role in India's balance of trade. After imports were liberalized, vegetable oils became a major import item. Since 1975/76 they have replaced foodgrains as the largest food import and in 1981/82 amounted to US$424 M. On the other hand, oilseed cakes are one of India's major agricultural exports. Oilcake exports have risen very rapidly during the 1970s, except for some downturns, and in 1981/82 reached US$156 M. They are second only to tea, and in most years account on average for over 9% of total agricultural export revenues. Currently, oilseeds are not imported in any quantity. 1.09 Oil processing is a very old industry in India as extraction of oil with more or less artisanal methods has been carried on for centuries. About 314 of all oilseeds are crushed in outdated plants which do not extract the maximum of edible oil. However, village-based extraction processes using bullock powered mortar and pestle mechanisms (ghanis) are declining in impor- tance, and available seed crushing capacity of this type has fallen substan- tially. Traditional processes have been largely replaced by motor powered expeller units which represent the bulk of oil crushing capacity in the country. Solvent extraction units are also being installed, but these still account for only a small share of the total capacity available in the country. 1.10 The quality of existing oilseed processing technology needs to be improved so that maximum value added could be realized by extracting all products from oilseeds in a usable form. For example, the simple expeller units which dominate the cottonseed crushing industry do not decorticate and delint the seeds before crushing, and valuable linters are thereby lost. The  -4- cake from these crushing units still has a high oil content and when it iS fed to cattle, this oil is lost since it cannot be digested. Although Indian-grown soybeans have a very high protein content, the cake produced and sold for export is sold without premium because poor preparation and treat- ment in existing processing facilities produce unattractive cake, which is not as easily marketable as properly prepared cake. Inadequate drying of groundnut cake is partly responsible for toxin contamination which has created difficulties in export markets. Cotton 1.11 Cotton is a traditional Indian cash crop occupying about 4.6% of the total cropped area in the country in recent years. Cotton lint, cloth, and yarn are all important export earners. Cotton cloth is a basic domestic consumer item, second in importance only to food in the consumer basket of lower income groups. However, annual consumption of cotton cloth is only about 10 m per capita, which is low relative to the world average. 1.12 While India has the largest cotton area in the world (25% of world total), it is only the fourth largest producer, and historically its yields have been among the lowest. In the period shortly after independence, most of Indian cotton production was of the short and mec-ium staple varieties. Since that time, there bas been a major researcb effort to introduce improved varieties with longer staple length, better quality fiber, and higher yields. Much progress has been made and the average staple length of Indian cottons has risen steadily. In recent years two important new varieties, Varalaksbmi and DCH-32, both medium to long staple, have been successfully introduced and the fiber they produce is of unprecedentedly high quality by Indian standards and of very good quality by world standards. 1.13 Cotton processing yields a number of useful products: lint, edible oil, high protein cake, linter, soapstocks, and hulls. The adequacy of processing facilities plays a particularly important role in determining producer incomes since without processing, cotton is of very little use. In addition, cotton is quite bulky and expensive to transport and the returns to growing cotton depend critically on the availability of processing facilities within a fairly small radius. Also, since the lint produced from seed cotton is a high valued product for which substantial quality premia are paid, the technical quality of the processing plays a crucial role iD realizing the full potential value of the raw material. 1.14 Unfortunately, in India, cotton processing has not kept pace with the agronomic advances in cotton production, and existing processing capacity is mostly ill-suited to current needs. This weakness is particularly acute in ginning where most of the installed capacity is very old, much of it even dating from the pre-World War I period. Ginneries rarely have full time professional management. They are generally small locally based family operations. Large industrial investors are virtually non-existent in the sector. Although many of the cottons produced in India are suitable for saw gins, which are more efficient than roller gins, their use is very uncommon. In fact, the superiority of saw ginning for most types of cotton is not yet well recognized. Furthermore, proper cleaning equipment to complement the ginning machinery is rarely used. As a result, even though the seed cotton improves in quality every year, the ginned cotton lint still has a high trash  -5- content because of inadequate cleaning, and reduced staple length due to broken fibers. Even the poorer quality traditional varieties of cotton could be processed to produce much better lint with modern machinery and better operating procedures. The proposed project would address some of these problems. 1.15 The next stage of processing cotton lint, and the final stage with which project investments would be concerned, is cotton spinning. This activity is part of the large and complex Indian textile sector which accounts for about 4.4% of total GDP and approximately 17.2% of industrial production. The performance of the textile sector over the last ten years has been poor. During the period 1971 to 1981, total textile production increased at only 1.5% p.a., compared to the overall growth rate of the industrial sector of 4.7Z p.a. During the same period, yarn production grew at 2.7% p.a. 1.16 The textile industry is broadly divided into the organized mill sector, and the decentralized powerloom and handloom sector. The organized mill sector is composed of composite mills-and spinning mills. Composite mills are vertically integrated units engaged in spinning, weaving, dyeing and finishing. They have a listed installed spindle capacity of 12.4 M spindles and 211,000 looms, while mills with only spinning operations have a listed installed spindle capacity of 10 M. The organized sector can be further categorized into the private sector including cooperative spinning mills (para 1.18), and the publically owned mills. The organized sector employs 1.2 K people representing about 7X of industrial employment, and accounts for almost all the yarn and 25% of the woven cloth produced in the country. 1.17 The decentralized weaving sector, comprising about 3 M handlooms and 570,000 approved powerlooms, is the primary market for the yarn produced in spinning mills. It is estimated that another 160,000 powerlooms are now operating without authorization. The decentralized weaving sector has grown substantia-lly in recent years as urbar-based composite mills have slowly reduced their production. Handloom production increased from 1,977 M meters during 1971 to 3,300 M meters during 1982. In the same period, powerloom production increased from 1,500 M meters to about 4,100 M meters. 1.18 While production in composite mills has been on the decline since 1975, the number and capacity of spinning mills has increased substantially in recent years. In contrast to composite mills, spinning mills are dis- persed widely throughout the country, with the more recently established mills located mostly in rural areas. Prior to 1960, textile mills were privately owned. With the closing of many private mills due to such factors as labor problems and obsolescence of equipment, GOI formed the National Textile Corporation (NTC) to take over and operate some of the closed mills. NTC, a public sector corporation, now operates 140 mills, representing 20% of total installed spindles. Since the early 1960s, GOI and GOS encouraged the development of cooperatively owned spinning mills. These now number 66 with a total of 1.6 M spindles, and a mill average of 24,200 spindles, repre- senting about 7% of total installed spindle capacity. 1.19 While it has undergone many changes in recent years, the spinning industry in India still suffers from serious problems. The most important of  -6- these are: a distorted policy environment, high cost operations, low quality products, low labor productivity, poor lint quality, poor factory mainr- tenance, and inadequate management practices. GOI policy influences textile prices, including those for yarn, by a number of fiscal interventions incluid- ing tariffs and domestic taxes. In addition to such interventions, GOI also controls investments through licensing policy. The current policy is to limit the growth of spinning capacity in congested urban areas plagued by labor difficulties, and encourage the location of new capacity in rural areas. While certain GOI policies do have distorting effects in the sector, the cooperatively owned segment of the private spinning industry does not receive special advantages. In 1975, the Bank analysis of the textile sub- sector indicated that privately owned and cooperative spinning mills were treated equally in the legal and administrative structure of the textile industry, and the situation remains very much the same today. Because of poor processing (para 1.14), relative to world standards, Indian cotton lint is excessively dirty, and has a more variable staple length and a higher percentage of Immature fibers. This low quality lint causes many operational difficulties in spinning and tends to both raise the cost of operations and lower the quality of the yarn produced. The third major weakness of the Indian spinning industry is the very inefficient use of labor. Besides using excessive numbers of workers, mills also manage the labor force they have very poorly. Mills are staffed so that workers have no off days in the week. Working conditions are quite substandard and the work environment is unhealthy, particularly at certain times of the year. Labor productivity inevitably suffers. Absenteeism is a serious problem, and in fact, is one of the main causes of down time for many mills. For the skilled and semi-skilled jobs involved in the spinning process, minimal training is provided, and workers are expected to just learn their job by experience. As a result, the jobs are often done poorly, and since almost all workers receive close to minimum wages, they have little incentive to do differently. In the proposed project mills, many of these labor practices would be changed. While the labor force would be much smaller, the mill would be staffed to plan free days for workers. Environmental conditions would be improved and formal training and job grading provided (para 5.16). 1.20 As the foregoing discussion shows, the Indian spinning industry is beset with a number of difficulties. Nonetheless, some mills, among them some of the best cooperative mills, function very well even in this difficult environment. Well run and managed mills should be promoted even further by setting up model cooperative mills in rural areas. These mills would incorporate a number of innovative practices that should greatly increase efficiency of operations and hence profitability. Their improved functioning could demonstrate to cooperative and other mills in the States the benefits of these superior operating practices. 1.21 Given the difficulties in the sector, a thorough re-examination of existing policy must be undertaken to elaborate a plan for gradual rationalization and policy reform in the sector. For this reason, a review of the textile sector should be undertaken. Important issues to be addressed are:  -7- - the yarn supply and distribution system and cloth marketing system; - labor policies and their impact on the sector's efficiency; - regulations governing pricing and composition of mill outputs; - tax, duty and surcharge structure, including import and export duties and quantity restrictions. This should-also include the duty and tax structure on polyester viscose and polynosic fibers; - GOI regulation of loomage in the organized and powerloom sector; - availability of credit and RBI regulations governing working capital requirements; and - support service structure for the sector, particularly research in appropriate technology and training. To begin examining these issues, GOI would undertake a textile sector review based on Terms of Reference agreed with the Bank. The study would propose a set of measures which would result in an increase in the efficiency, competi- tiveness, and export potential of the industry (para 6.13). Demand Projections 1.22 Overall domestic demand for cloth, both for the long-term period 1961-1982 and the short-term period of the late 1970s to early 1980s, has increased at a fairly consistent rate. Total demand for textiles grew between 1961 and 1981 at about 1.85% annually. Within this total, demand for blended fabrics increased most rapidly, at 21% p.a. during the 1970s, while demand for man-made fabrics expanded by about 5% p.a. However, a reversal of the trend occurred in 1978 and in 1980-83, the composition of textile demand had stabilized. Therefore, it has been assumed that in the medium term, the structure of demand for cotton and non-cotton fabrics would remain unchanged. At the same time, per capita income growth is projected to accelerate sub- stantially. Earlier, low per capita income growth at a time of rising food prices led to a postponement of demand for textiles in general. This situa- tion is expected to improve in future and would result in a rising textile demand. 1.23 In projecting future demand development, a declining population growth rate of 2.10% to 1.97% p.a. from 1985 to 1990 and of 1.81% p.a. to 1995 has been assumed. The annual GDP growth rate has been assumed to remain at the 5% level achieved during the first three years of the current Five-Year Plan. A high investment ratio of about 25% of GDP and a diver- sified export structure augur well for a continuing high growth performance. Based on numerous studies, which have estimated income and price elasticities for textiles in India, an elasticity with respect to changes in per capita income of 0.4 has been used in this projection. The projections are rela- tively insensitive to a change in income elasticity. Relative prices have been assumed to remain constant. Thus, taking into account both population growth and per capita income growth, the demand for textiles is estimated to increase at 3.26% p.a. during 1984 to 1990, and at 3.16% p.a. thereafter.  -8- Total consumption of fabrics would increase from 10 billion m in 1983 to 15 billion m in 1995. The projected total textile demand has been broken down into cotton, cotton blends and man-made fabrics on the basis of the 1980-1983 structure of demand. Under these assumptions, the demand for cotton textiles would increase from 7.5 billion m in 1983 to 10.9 billion m in 1995. Per capita consumption of fabrics is projected to increase from the 1983 level of 14.3 m to 16.5 m by 1995. Of this, 73Z would be cotton cloth, 9% cotton blends, and 18% man made fabrics. Requirements for Additional Spinning Capacity 1.24 Of a total of 22 M spindles of registered installed capacity, only about 20 M are truly available for production, the other 2 M being so obsolete as to be unusable. Given Indian spinning efficiencies and availability factors, which are somewhat lower than world standards, avail- able capacity would have to be fully utilized to reach the level of yarn production estimated for 1983. To arrive at projections of future spinning capacity, the expected decline in the usable capital stock must be taken into account. Installed capacity in India is relatively old. In fact, it is estimated that over 50% of installed spindles are now over 20 years old. Given a useful life of 30 years for spinning equipment, future replacement requirements will be very substantial. In addition to 2 M totally obsolete spindles, it is estimated that there are now probably 2 M spindles in an early stage of obsolescence and another 6 M in need of modernization and rehabilitation. Based on the projected demand for cloth, total spindles required, given current efficiency ratios and availability factors, reach levels of 24.3 M in 1990 and 28.4 N in 1995. When compared with the 20 M spindles currently available for production and the levels of available spindles projected for the future, the need for investment is clear. This investment should be a balanced mix of new mills, as under the proposed project, and modernization and rehabilitation of existing mills. The Role of Cooperatives 1.25 The cooperative movement in India started in 1906 with the organiza- tion of farmers' credit societies. Since then, it has grown and diversified and is now an established institution of considerable national importance. GOI maintains a strong commitment to the continued development and irprove- ment of the cooperative structure, and has assigned to Cooperative Societies an important role in reaching national development objectives, particularly in the agriculture and agro-industrial sectors. Cooperative Societies today number over 0.3 M and total membership is over 90 M people. Cooperative Structure 1.26 The cooperative system functions as a tiered system operating at the village, district, and State level. Primary Agricultural Credit Societies (PACS) provide farmers with short-term credit, distribute inputs and consumer goods, and some have started to provide marketing services for agricultural commodities. District Cooperative Central Banks (DCCB) provide PACS with medium and short-term credit. They are partly financed by State Cooperative Banks (SCB), but use also their own resources. Some spinning mills and ginneries are organized as Primary Cooperative Societies (PCS), and PCS are also sometimes organized in support of specific crops as in the case of  -9- soybeans. Regional Cooperative Marketing Societies and State Cooperative Marketing Federations (SCMF) provide wholesale marketing services. In agro-industrial and specifice crop development activities, specialized apex institutions at the State level generally provide support to the PCS. In some activities, such as dairy farming and cotton spinning, cooperative institutions operating nationwide and providing technical services have also been established. 1.27 The State and national level cooperative institutions most concerned with the proposed project are NCDC, SCB, State Registrars of Cooperative Societies (RCS), Cooperative Federations, PACS, PMS, and other PCS. These are discussed in Chapter II. Some others of major significance are: - National Cooperative Union of India, established in 1929 for promotion, research, education, training, national and inter- national liaison, public relations, and dissemination of information. - National Dairy Development Board (NDDB), set up by GOI in 1965 to provide technical, engineering, research, training advisory and support services for development of India's dairy industry. NDDB, in conjunction with its financial affiliate the Indian Dairy Corporation, concentrates on extending finance and services to cooperative dairy development projects. Recently, NDDB has also become active in the promotion of oilseed production and processing. - National Agricultural Cooperative Marketing Federation of ineia, established in 1958 as an apex national body of several State Marketing Federations to assist in marketing of farm produce, distribution of consumer goods, and supply of farm machinery and inputs. Cooperatives and Agro-Industry 1.28 In recent years, Cooperative Societies have become active in process- ing of a number of agricultural commodities. They are, among others, involved in the production of fertilizers, compound animal feed, milled rice, sugar, tea, lint cotton, cotton yarn, and edible oils. Cotton processing is an area in which cooperatives have been quite active. The first cooperative spinning mill was establishad in 1966. Now, 39 mills are run by Weavers' Cooperatives and 27 by Cotton Growers' Cooperatives (CGC). Most cooperative spinning mills and ginneries are run by PCS, but in some cases, SCMF own and operate mills as well. In some cotton producing States, State Cooperative Spinning Mill Federations assist in setting up new mills, provide technical assistance to existing mills, and coordinate the activities of cooperative mills in the State. The All india Federation of Cooperative Spinning Mills offers a number of engineering, management, quality control and testing, and research services to the cooperatives. 1.29 Oil extraction is another important agro-processing activity for Cooperative Societies. The oldest cooperative oil processing plant, located in Maharashtra has hbn Qperating siz.ce 1964. There are now about 40 cooperative solvent extraction units in operation and eight more are under  -10- construction. In addition, numerous small expeller mills are also coopera- tively owned and operated. While most oil mills are private businesses, about 12% of registered cottonseed crushing capacity is cooperatively owned. Cooperative Societies have only recently become active in soybean oil extrac- tion and they now own about 5% of total oil extraction capacity. Performance 1.30 The performance of Cooperative Societies varies substantially from State to State and from one activity to another. Agricultural credit activities at the village level have generally had very mixed results (paras 2.17-2.20). Still, many PACS in States with a strong agricultural base function well and make a substantial contribution to agricultural develop- ment. Indian cooperative dairy activities are recognized as an example of successful cooperative organization all over the world. Cooperatives are a major force in the Indian fertilizer industry. Yet some other cooperatively owned agro-industrial concerns are not nearly so successful. 1.31 In cotton ginning and spinning, the performance of Cooperative Societies is much like that of the rest of the industry, variable. In gin- ning, Cooperative Societies often operate better than average ginneries because they tend to be newer and thus have more modern equipment. Some of the cooperative spinning mills are among the best anywhere in the country, while others do not match this performance. In oilseed processing, the Cooperative Societies have recently taken a new direction, and attempted much more ambitious, and more economically viable undertakings. 1.32 The performance of the cooperatives often depends on their success in solving problems of ineffective management. In some activities such as village level storage and credit, resources are often insufficient to properly train and pay managers. In others, particularly agro-processing, Cooperative Societies are under pressure to pay less than competitive salaries to managers and sometimes to accept political appointees in manage- ment positions. Under the project, a number of steps would be taken to improve cooperative management. Previous Bank Group Involvement in Related Activities 1.33 In their continued efforts to increase agricultural production, GOI and GOS have given a high priority to making inputs and credit readily avail- able to farmers. Because of the long standing institutional involvement of the cooperative movement in these activities, GOI and GOS rely on it as an important part of the network for delivering these services. Also, with the substant'al progress India has made toward self-sufficiency in food, the need to balance support for production with improvement of post-harvest facilities has become apparent. GOI has encouraged the Cooperative Societies to take on many of these activities, and the Bank Group has supported a number of GOI undertakings in this area. 1.34 Through a series of credit projects, ARDC I-IV (Cr. 540-IN PPAR #2702, Cr. 715-IN PPAR #3518, Cr. 947-IN and Cr. 1209/Ln 2095), the Bank Group funded term credit for on-farm investments to oe provided through Cooperative and Commercial banks. Although the schemes financed met with  -11- considerable difficulties in recovering on loans, GOI and GOS are increasing their efforts to collect overdues and thus recycle the funds disbursed. 1.35 Beginning in 1973, the Bank Group has participated in four coopera- tive dairy projects implemented by NDDB and IDC (Cr. 482, Cr. 521, Cr. 522, Cr. 824). These projects have been quite successful (para 1.30) and are cited as exemplary cooperative projects. More recently, through the NCDC I and II Projects, IDA funded rural godown and cold storage infrastructure (Chapter III). 1.36 To improve the food distribution system and minimize seasonal and inter-regional price variations by building buffer stocks, LnA provided funds (Cr. 267-IN, PPAR #3751) to the Food Corporation of India, for the construc- tion of 90,000 tons of conventional warehouse capacity and 100,000 tons of silo storage. The project has achieved its objective of providing needed storage facilities for the Food Corporation of India (FCI), but due to delays in contracting for a high technology construction method cost overruns occured and only five of the ten envisaged silos were built. The lesson learnt from this project is that traditional storage technology using godowns procured under competitive bidding procedures advertised locally might have been the preferable choice. A second grain storage project (Cr. 747-IN), financing construction of conventional bag warehouses (1 M tons) also for FCI, is now under implementation, and should be completed by June 1985. 1.37 To improve cotton production and to maximize recovery of useful products from cotton activities, IDA funded cotton production enhancement and cotton ginning and seed crushing facilities (Cr. 610-IN) in Haryana, Punjab, and Maharashtra. The ginning component of the project promoted the use of modern saw ginning technology to replace roller gins. The project was successfully completed in March 1984 and the completion report is now being prepared. II. PROJECT INSTITUTIONS The National Cooperative Development Corporation (NCDC) and its Role in the Agricultural Credit System 2.01 NCDC is an all-India public undertaking established under the National Cooperative Development Corporation Act, 1962. Its main objectives are to promote and finance projects and programs carried out by agricultural and agro-industrial Cooperative Societies. Under the Act, NCDC is authorized to advance loans, provide grants and subsidies, and participate in the share capital of cooperative enterprises with inter-State activities. Within these broad limits of authority, NCDC has promoted projects involving grain storage, sugar factories, oil extraction, ginneries, spinning mills, dis- tribution of fertilizer and other inputs, marketing of agricultural produce and trade of consumer goods in rural areas. NCDC provides direct equity participation in some cooperative ventures with inter-state activities, in others, it provides loans to GOS for equity participation in cooperative investment projects. It also channels loan funds tnrough SCB and SLDB and provides technical assistance to banks and Cooperative Societies to ensure that these investments are used and operated efficiently. Thus, NCDC's role is not limited to pure investment financing, but also includes furnishing  -12- technical and managerial support to the investors during the course of sub- project implementation and in the operational phase. NCDC has, over the years, acquired considerable experience in the technical and managerial aspects of the implementation of agro-processing projects. Among others, NCDC has undertaken implementation of several large projects funded by inter- national agencies. Total NCDC disbursements in the three years from 1980/81 to 1982/83 amounted to Rs 1,065 M (US$98.6 M) for agro-processing and Rs 718 M (US$66.5 M) for rural storage projects. 2.02 NCDC is governed by a General Council of 51 with responsibility for policy and a Board of Management of 12 members with responsibility for general management. NCDC's Managing Director is its chief executive. He is supported by a General Manager, a Financial Advisor, a Specialists' Pool and five Chief Directors in charge of storage and marketing, processing, industries, consumer goods, and weaker sections (tribal population, harijans and landless laborers). NCDC has a staff of about 450, including more than 100 specialists in cooperative management and technical aspects of agro-industry. NCDC has seven Regional Offices and four Project Offices in the States. 2.03 In contrast to NCDC's activities in project lending for the coopera- tive sector, the National Bank for Agriculture and Rural Development (NABARD) has sole national level responsibility for refinancing agricultural credit to Cooperative and Commercial Banks. The agricultural credit system includes the banks in the cooperative structure, which handle about 58% of the credit business. At the State level, cooperative banks include the SCB which provide short-term lending and the State Land Development Banks (SLDB) which handle long-term lending. The Commercial Banks and Regional Rural Banks handle about 42% of the business and operate outside the cooperative struc- ture. Chart 26083 details the links between the various institutions in the agricultural credit system. NABARD is responsible for inspection of coopera- tive banks, for guiding and strengthening all agricultural credit delivery and for monitoring effective implementation of NABARD refinanced investments for on-farm development. NABARD refinances annually more than one million subloans to individual farmers, and the sheer volume of these activities makes them difficult to monitor. NCDC lends through some of the same finan- cial intermediaries (SCB and SLDB). There are two important differences in the way NCDC lends which make it highly improbable that the repayment perfor- mance of the loans and control over the use of funds would be as poor as that of the whole agricultural credit system. Subloans to be financed by NCDC through State level banks are channeled to Cooperative Societies for produc- tive investments undertaken by them. Subloans do not go to individual farmers, thus the ability and incentive to repay are much greater. Secondly, the number of subloans is much smaller, only about 8,000 subloans would be made under the project in five years. All subprojects would be thoroughly appraised before subloan commitment (paras 6.03-6.05) and monitored during and after implementation (para 6.14). NCDC's Sources of Funds and Lending Operations 2.04 NCDC'B funds consist of grants and loans from GOI, retained earnings, and borrowings from the market. The first of such market borrowings was made in 1974/75; further issues of Rs 1,390 M (US$128.7 M) followed and bonds outstanding amounted to Rs 1,417 M (US$131.2 M) as of March 31, 1983, while  -13- borrowings from GOI totalled Rs 1,909 M (US$176.8 M). The capital account (called NCD Fund Account) had a cumulative balance including reserves of Rs 823.5 M (US$76.3 M). NCDC's debt:equity ratio currently stands at 4:1 and would rise to about 9:1 by 1988/89. However, NCDC's lending has a very low risk factor since all loans to SCB and SCMF are guaranteed by the GOS con- cerned, therefore this high gearing is considered satisfactory. NCDC's Comparative Balance Sheets, Statements of Income and Expenditure and Sources and Application of Funds are summarized in Annex 6, Tables 1-3. As the figures show, NCDC's operating results have been quite impressive. Interest income increased from Rs 43 M (US$4.0 M) in 1975/76 to Rs 298 M (US$27.6 M) in 1982/83. Excess of income over expenditure also increased during this period from Rs 10 M (US$0.9 M) to Rs 35.3 M (US$3.3 M). However, with the increased activities NCDC would undertake during project implementation in terms of advising investors, reviewing subproject appraisals, monitoring construction progress and operations of project facilities, and in terms of training involvement, the present margin of 0.75% would not be sufficient to cover the costs NCDC would have to incur. Under the project it would be increased to 2.5% for loans for agro-processing facilities and 1% for rural storage facilities (para 5.23). 2.05 NCDC lends funds to GOS and client cooperatives. NCDC's loan par- ticipation in individual capital investments has ranged from 50% to 75% of total costs, the balance being met by borrowing Cooperative Societies, by GOS as loans and share capital, or by SCB as loans. 2.06 NCDC lends for two categories of schemes--Centrally (GOI) Sponsored Schemes and NCDC Sponsored Schemes. Programs promoted by GOI include margin money for fertilizer distribution, special programs for underdeveloped States and investments in agro-industries. Most lending under the proposed project would fall into this GOI sponsored category. NCDC schemes include storage, distribution of agricultural inputs, and marketing of outputs and consumer goods. NCDC also finances from its own funds, as grants, numerous promo- tional activities, including training programs. The institution building component of this project would fall into the latter category. 2.07 Loans outstanding at March 31, 1983, totalled Rs 3,698 M (US$342.4 M). About 79% of this was owed by GOS, 19% by SCB and 2% by other cooperative institutions. Equity participation in national level and inter-State Cooperative Societies on March 31, 1983 amounted to Rs 29.9 M (US$2.8 M). NCDC's loan recovery record has been excellent. Recovery against total demand was 99% in each of the three years 1981/82-1983/84. Because of this excellent repayment record and because all lending is guaran- teed by GOS, there is no reserve specifically designated for bad debts. After meeting repayment obligations to GOI on NCDC's own borrowing, loan repayments by borrowers are recycled by further lending. The annual cash inflow from loan repayments between 1983/84 and 1990/91 is expected to average Rs 507.3 M (US$47.0 14). State Cooperative Banks (SCB) 2.08 The SCB in each State is the apex institution in the three-tier short and medium-term cooperative credit structure. The SCB of eight of the nine project States would participate as financial intermediaries (para 2.10). All DCCB within a State are shareholders in the apex SCB, and provide short  -14- and medium-term funds for credit to the village level Cooperative Societies based on limits prescribed by the Reserve Bank of India (RBI). Besides serving as bankers to their member DCCB and Cooperative Federations in the State, SCB do general banking business, arrange for the supervision and inspection of DCCB, and provide training facilities. SCB and DCCB compete with Commercial Banks for deposits, but, by virtue of their lending to DCCB and PACS on the lower levels, they are the major institutional source of short-term credit to small farmers. SCB borrowings from NABARD usually constitute 20-50% of the funds advanced to DCCB and other borrowers in project States. They have been reasonably profitable and their own funds, deposits and lending have generally grown faster than the inflation rate. This trend is expected to continue. 2.09 The Board of Directors/Management Committee of the SCB, which includes the Registrar and State nominees, sets policy guidelines for opera- tions. The Managing Director as chief executive is appointed by the Board with the approval of RCS. The present Managing Directors of SCB in all project States are GOS o-ficers on deputation, and are generally competent and experienced with cooperatives. They recognize the need for further improvements of SCB organization and operational procedures and are currently implementing the recommendations worked out by consultants financed under NCDC II. These efforts are mainly directed toward strengthening Long-Term Loan Departments and setting up Organization and Methods Departments. 2.10 SCB credit operations are in general carried out on a sounder footing than those of other lending institutions because most lending operations are short-term, where incentives for beneficiaries to repay are greater due to the seasonally recurring need for inputs. Recovery performance of SCB in the project States is satisfactory. The percentage of overdues to total demand for all participating SCB is lower than 1OZ. Eligibility criteria for par- ticipation of SCB in the project would be increased from those applied to the NCDC II Project (para 5.10). However, these eligibility criteria have still been set somewhat lower than what the SCB are now achieving to allow them the flexibility to continue onlending activities when the recovery performance would temporarily fall below current levels in cases of bad harvests. The Government of West Bengal has proposed to use, as under the NCDC II project, the SLDB West Bengal as onlending channel for the 1,150 loans planned under the project for storage investments by PACS and PMS in West Bengal (paras 2.11-2.13). While SCB lending to lower level cooperative banks is now limited to short and medium-term funds, they have been chosen to onlend long-term to PCS under the project. The reasons for using SCB rather than the regular long-term lending channel, the SLDB, are primarily: (i) GOI and GOS wished to develop long-term lending capabilities in the SCB so as to diversify long-term lending sources; (ii) the SCB, because of their access to rural savings, are generally much stronger financial institutions; (iii) the SCB have a well established relationship with the PCS who are the final borrowers from other lending activities, while the SLDB only have experience lending to individuals through Primary Land Development Banks (PLDB). State Land Development Banks (SLDB) 2.11 SLDB are the apex cooperative institutions engaged in long-term lending for agriculture in contrast to SCB which lend short and medium-term funds (paras 2.08-2.10), and other than Commercial Banks are the only source  -15- of long-term credit to individual farmers. SLDB function through branches or affiliated Primary Land Development Banks (PLDB). They provide development loans for periods up to 15 years, mostly refinanced by NABARD. Each farmer who wishes to obtain a loan from either a PLDB or an SLDB must become a cooperative member. 2.12 The SLDB West Bengal was chosen as financial intermediary for the rural storage investments by PACS because no other cooperative institution is available, and GOI and GOS West Bengal accord high priority to the godown construction program envisaged under the project. Given the importance of the investment, this program should be carried out in spite of SLDB West Bengal's current unsatisfactory financial position if SLDB West Bengal con- siderably improves its recovery performance in the near future. To ensure this, as a condition for commitment of NCDC funds, SLDB West Bengal would have to meet annual recovery targets (Annex 4). NCDC would monitor the activities of SLDB West Bengal to ensure that the project is properly imple- mented. 2.13 The SLDB West Bengal's recovery performance deteriorated between 1978179 and 1981/82 as the following figures show: 1978179 1979/80 1980/81 1981/82 1982/83 Z of Overdues to demand 34.6 37.0 52.4 65.7 61.4 There are now signs of improvement, however, and GOS West Bengal and the new SLDB Managing Director expect that overdues will drop to less than 50% at the end of 1983/84 because: (i) the climatic conditions to guarantee good har- vests were exceptionally good; (ii) GOS West Bengal's commitment to financial discipline in the credit system has much improved; and (iii) SLDB West Bengal has embarked on a rehabilitation program worked out in consultation with NABARD to improve operations and recoveries. Because SLDB West Bengal's current financial position is weaker than that of SCB in other project States, NCDC would monitor the project much more closely in West Bengal. State Cooperative Narketinx Federations (SCMF) 2.14 SCMF provide statewise wholesale marketing services through Regional Cooperative Marketing Societies (RCMS), PMS and PACS. Procurement, storage, processing and distribution of agricultural inputs and agricultural produce account for most of their business volume. Each SCMF is governed by its general body of members and a Board of Directors with the Managing Director as member. The Engineering Divisions of SCNF in the project States would be actively involved in supervising construction of project facilities (para 6.06). Primary Marketina Societies (PMS) 2.15 PMS distribute farm inputs and market and process agricultural produce at the block and market levels. Both PCS, as societies, and individual farmers may join PMS and use their services. PMS provide wholesale marketing services to PACS and some basic marketing services directly to farmer members. The largest share of their business is the sale  -16- of consumer goods, followed by agricultural inputs, particularly fertilizers, which PMS usually handle as agents of the SCMF. PMS compete with private traders but do business mostly in areas where private traders do not provide adequate services. 2.16 During recent years, PMS have been able to expand substantially. Membership in the project States between 1978/79 and 1981/82 increased by about 3% p.a. While share capital rose by 8.5% p.a., at an annual growth rate of 38%, PMS sales of consumer goods increased more rapidly. Fertilizer sales expanded at 16% p.a., and sales of agricultural produce (excluding UP) increased at almost 6% p.a. (Annex 10). Primary Agricultural Credit Societies (PACS) 2.17 PACS form the basis of the cooperative movement in rural India. Operating at the village level, they are the first tier of both the coopera- tive credit and marketing structure in the State, although in most cases they provide their members with short-term credit only. Gradually, the functions of the PACS have expanded from provision of credit to offering a number of diversified services. New activities include stocking and retailing of agricultural inputs and essential consumer items, and the purchase of foodgrains. Recently, some PACS have also collected savings deposits from members. Each PACS is a member of a DCCB, which is the source of most of its finance. However, to promote lending-in-kind by PACS, DCCB have also supported the farm input supply system and other operations of PACS affiliated with them. 2.18 The weaknesses of the PACS and other PCS include inadequate manage- ment, unclear supervision and ineffective administrative control, a limited resource base, and narrowly focussed service package. Since 1973, to improve the profitability of PACS and other PCS, GOI encouraged amalgamation to make the business base sufficient to justify employing a qualified manager. In the proposed project States, restructuring and consolidation has resulted in a reduction in the number of PCS from 58,232 prior to the organization to 30,400 in 1982 (Annex 10). Reorganization is not complete, however, and consolidation is proceeding. 2.19 Each PACS has a Management Board directing its business. The Board includes the Secretary/Manager paid from income, elected members, and nor- mally three GOS nominees; the DCCB and other banks may also be represented. The Board appoints a paid manager/secretary who, in consultation with the President, carries out the day to day business. Smaller and financially weak PACS may also operate with an honorary secretary. Other staff include an accountant/clerk, storekeeper and helpers, depending on the nature and volume of business undertaken. One weakness of the PACS is that often manager/secretaries are not sufficiently qualified for their jobs. Under the project, all participating PACS would employ a full-time paid manager, suitably trained, to enable him to prepare the subproject report, monitor construction progress, and manage the PACS new business efficiently and with full accountability. 2.20 The PACS in the six rural storage project States have experienced a dynamic development during recent years. Between 1978/79 and 1981/82 their membership increased annually by 6.2% to a total of over 25 M members in  -17- 1982. Thus, in 1983, on average 57Z of all farm households were members of PACS. The percentage for individual States varied from 36% in West Bengal to 97% in Karnataka (Annex 10). Membership is not compulsory, but since many small farmers do not have access to credit from Commercial Banks, only their membership in PACS guarantees them seasonal agricultural inputs. Share capital and lending increased at 10.3Z and 12.7Z p.a., respectively. An improved resource mobilization effort is reflected in the growth rate of deposits of 15.1% p.a. over the period (Annex 10). Repayment performance of PACS to DCCB is highly variable. Therefore, as under NCDC I and II, only PACS which meet certain eligibility criteria would be eligible for lonZ-term investment loans under the project. The eligibility criteria used under NCDC I and II, as the limited experience with repayment performance for NCDC I subloans shows, have worked quite successfully so far (para 3.02). Cotton Growers' Cooperatives (CGC) 2.21 In 1919, cotton growers of Gadag (Karnataka) established the first CGC to market their cotton. Today, Gujarat has the highest number (325) of CGC, out of which 140 own ginning and pressing facilities. The sale of cotton through Cooperative Societies is well developed in India. In 1982/83, about 30% of all cotton lint, a total of 2.4 M bales, was sold through Cooperative Societies including SCMF. Of this, Maharashtra had the highest share (1.8 M bales), followed by Gujarat (0.4 M bales). Cooperative involvement in cotton trading in all other States is much smaller and adds up to 0.2 N bales only. Over time, the functions of CGC have widened to suit each Society's needs. CGC have developed their operations by providing credit, grading and ginning seed cotton, and more recently, spinning cotton lint. Today, 29 cooperative spinning mills are operated by CGC. GOI and GOS actively support integrated development of CGC through loans and equity participation for cotton process- ing facilities. Cooperative Training 2.22 Since 1962, cooperative personnel in India have been trained in a three-tier system administered by the National Council for Cooperative Train- ing, an autonomous organization affiliated to the National Cooperative Union of India. The Vaikunth Mehta National Institute of Management at Poona in Maharashtra educates high level cooperative management staff. At the inter- mediate level, 16 Cooperative Training Colleges offer standard higher diploma courses in cooperation, cooperative marketing, consumers' cooperation and accountancy. These colleges also have short-term functional courses, workshops and seminars for personnel already in service. The Bankers' Train- ing College, the College of Agricultural Banking, the RBI Staff College and the FCI Staff Training College offer specialized training which is open to SCB and other cooperative staff. At the PCS level, 77 Cooperative Training Centers (CTC) offer cooperative training. Their activities are coordinated at the State level by State Committees on Manpower Planning and Training under the chairmanship of the RCS. Tne Managing Directors of the various cooperative organizations, including SCB, are members. The CTC offer basic courses of up to 24 weeks duration as well as short-term management courses of 8 weeks duration in cooperative marketing, consumer cooperation, coopera- tive banking and cooperative audit to newly recruited junior level personnel in PCS and Government departments. CTC training activities have not always been successful. Their courses tend to be academic in nature since they must  -18- cater to staff from all types of cooperatives. As a result, graduates have not been trained in important subjects directly related to their jobs. Since physical facilities, particularly lodging, are unsatisfactory, the CTC are not attractive to students. This problem is compounded by the inadequacy of stipends which requires the students to make substantial outlays of their own. Furthermore, because they find it difficult to function without their secretaries/managers, most Cooperatives Societies are reluctant to depute their staff for training for long pez