India - Third National Agricultural Extension Project

Document of The World Bank FOR OFFICIAL USE ONLY - C jR. ~~~~~~~~~/> 3-A),t Report No.P-4426-IN REPORT AND RECOMMENDATION OF THiE PRESIDENT OF THE INTERPATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT IN AN AMOUNT OF SDR 71.70 TO INDIA FOR THE THIRD NATIONAL AGRICULTURAL EXTENSION PROJECT December 19, 1986 This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of December 19, 1986) US$1.00 = Rs 13.19 Rs 1.00 " US$ 04O760 Rs I million * US$75,804 The US dollar/rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 13.00. FISCAL YEAR April 1 - March 31 ACRONYMS AND ABBREVIATIONS AAU - Assam Agricultural University ADA - Assistant Director Agriculture ADO - Agricultural Development Officer AEO - Agricultural Extension Officer CADA - Command Area Development Authority CDD - Community Development Department DAO - District Agricultural Officer(s) DDA - Deputy Director of AgricuLture DOA - Department of Agriculture DOE - Directorate of Extension GOA - Government of Assam COUP - Government of Uttar Pradesh COI - Government of India COHP - Government of Himachal Pradesh HP - State of Himachal Pradesh JDA - Joint Director of Agriculture MOA - Ministry of Agriculture M&E - Monitoring and Evaluation NAEP - National Agricultural Extension Project NARP - National Agricultural Research Project ?CC - Project Coordinating Committee SAU - State Agricultural University/Universities SDAO - Subdivisional AgricuLtural Officer SMS - Subject Matter Specialist SSP - Special Subproject T&V - Training and Visit System VEW - Village Extension Worker  FOR OFFICIAL USE ONLY INDIA THIRD NATIONAL AGRICULTURAL EXTENSION PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiaries: The States of Assam, Himachal Pradesh, and Uttar Pradesh, and the Ministry of Agriculture, Government of India (COI) Amount: SDR 71.70 million (US$85 million equivalent). Terms: Standard. On-lending Terms: From COI to the State Governments of Assam, Himachal Pradesh and Uttar Pradesh (UP), as part of Central Government assistance to state development projects on terms and conditions applicable at the time. GOI will bear the foreign exchange risk. Project Description: The project would (a) introduce the Training and Visit (T&V) system of agricultural extension in the State of Himachal Pradesh and in Eastern Uttar Pradesh; (b) further strengthen the reorganized agricultural extension system and the linkages between extension and research introduced in the State of Assam under the Assam Agricultural Development Project (Cr. 728-IN of June 30, 1977); and (c) assist in the implementation of special subprojects on extension related activities at the central and state level through the replenishment of the Special Subproject Fund established in the Ministry of Agriculture under NAEP I (Credit 1523-IN of December 12, 1984). There are no major project risks although a number of administrative problems that are frequently encountered in extension projects, such as pressure on extension staff to perform non-extension duties and inadequate linkage between extension and research may impede implementation. Such risks would be mitigated under the project because all incremental extension staff would work exclusively on extension within the Department of Agriculture (DOA) and through the establishment of formal committees Link- ing research and extension institutions. Furthermore, the provision made for strong monitoring and evalu- ation units in each state, the proposed mid-term review and the important role DOE wouLd play in proj- ect monitoring and coordination would ensure constant review of implementation problems that might arise. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Estimated Cost: I/ (USs million equivalent) Local Foreign Total State Subprojects Incremental Staff 24.7 - 24.7 CiviL Works 26.6 1.4 28.0 Vehicles and Equipment 4.5 0.9 5.4 Incremental Operating Costs 12.2 0.3 12.5 Training 3.8 - 3.8 Special Subprojects 40.2 2.1 42.3 Subtotal 112.0 4.7 116.7 Physical Contingencies 2.2 0.1 2.3 Price Contingencies 20.5 0.7 21.2 Subtotal 22.7 0.8 23.5 TOTAL 134.7 5.5 140.2 Financing Plan: 1/ (US$ milLion equivalent) GOI/States EDA Total Himachal Pradesh (COHP) 7.8 14.8 22.6 Uttar Pradesh (GOUP) 24.1 36.3 60.4 Assam (GOA) 5.9 9.0 14.9 Special Subprojects/GOI 17.4 24.9 42.3 TOTAL 55.2 85.0 140.2 Estimated Disbursements: 2/ (US$ million equivalent) FY87 FY88 FY89 FY90 FY91 FY92 FY93 Annual 0.8 5.6 8.6 18.0 20.0 19.0 13.0 Cumulative 0.8 6.4 15.0 33.0 53.0 72.0 85.0 Rate of Return: Not applicable. Appraisal Report: No. 5794-IN, dated December 19, 1986. 1/ Includes taxes and duties of approximately US$1.9 million equivalent. 2/ IDA fiscal year.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE THIRD NATIONAL AGRICULTURAL EXTENSION PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Government of India (GOI) far SDR 71.70 million (US$85 million equivalent) on standard IDA terms, to help finance a national agricultural extension project for the purpose of introducing the TFV agricultural extension system in the State of Himachal Pradesh (HP) and in Eastern Uttar Pradesh (UP) for the first time, and further strengthening and expanding the reorganized agricultural extension system in the State of Assam. The proceeds of the credit would be channeled to the State Governments of Assam, HP and UP in accordance with COI's standard terms and arrangements for the financing of State development projects. The foreign exchange risk would be borne by COI. I. THE ECONOMY 1/ 2. A country economic report, "India: Economic Situation and Development Prospects" (6090-IN, dated May 9, 1986), was distributed to the Executive Directors on May 12, 1986. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 780 million (in mid-1986) and an average per capita income of about US$260. Agriculture continues to dominate the economy, accounting for about two-thirds of employment. The steady increase in population, which continues at a rate of 2.0% a year, has put increasing pressure on natural resources, in particular cultivable land. By the mid-1960s, nearly all productive land had been brought under cultivation. Although irrigation continues to expand total cultivable area, an increasing share of the labor force will have to be absorbed in non-agricultural activities. Industrial development has not progressed rapidly enough to provide employment opportunities for the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result, the long-term growth of per capita income has only averaged about 1.4% p.a. and close to one-half of India's population continues to live beLow the poverty Line. Alleviation of poverty has been and remains thus at the core of India's development strategy. 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Third Bombay Water Supply and Sewerage Project (No. 4412-IN), dated November 19, 1986.  -2- 4. During the 1950s and 1960s, India's economic performance was characterized by slow economic growth, moderate inflation and a sustainable external position. CDP grew at about 3.5%, agriculture at 1.8% and industry 4.8Z; imports grew at 4.6Z and exports at 5.8Z a year. Although India was able to reduce its dependence on foodgrain imports, from a peak of 14% of total consumption in 1966/67 to 4.5Z in 1969/70--mainly as a result of the Green Revolution--progress in poverty alleviation was slow. 5. The steep rise in international oil prices and accelerating global inflation led to a sharp deterioration of India's terms of trade in the early 1970s, eroding its capacity to import. In response, the Government intensified its export promotion efforts and Liberalized access to imported inputs. As a result of these efforts, which were helped by the expansion of export markets, particularly in the Middle East, export growth rose from an average of 2.2% a year during the 1950s and 1960s to 7.3% in the 1970g. In turn, this expansion of exports together with continued import substitution, particularly in food grains, and increased remittances made it possibLe for India to attain a surplus in its current account between 1976/77 and 1978/79. Thus India was able to achieve, in a relatively short time, a comfortable foreign exchange position, which was further enhanced by a steady increase in concessional aid. Towards the end of the 19709, India experienced a series of domestic and external setbacks. Industrial production, plagued by labor unrest and a shortage of key inputs began to stagnate. One of the worst droughts in India's history reduced agricultural output in 1979/80 by more than 15%. And, in the same year, a second major increase in international oil prices more than doubled the costs of India's oil import bill. As a result, the current account showed again a deficit and the remarkable price stability that the Indian economy had enjoyed after 1975 came to an abrupt end. The Government responded by mounting an economic adjustment program, which was eventually embodied in the Sixth Five Year Plan (1980-85). The principal objective of the program was to raise the GDP growth rate from its historical level of 3.6% to 5.22 per annum, through alleviation of infrastructure and supply constraints, increased energy independence, improved efficiency in resource use, promotion of exports and efficient import substitution. The Sixth Five Year Plan (1980-85) 6. Overall the adjustment program has been successful, despite unfavorable weather in several years, a continued worsening of the external environment and adverse political developments. The developments of the Indian economy during the Sixth Plan underscore the fundamental soundness of key policies and programs, particularly in agriculture and energy, and attest to prudent and skillfuL macro-economic management, which allowed production to grow while at the same time keeping external borrowing well within acceptable levels of risk and holding inflationary pressures in check. But the results during the Plan period also highlight the disappointing performance of industry, continuing shortfalls in electric power generation, rising public sector deficits and the importance of regaining and sustaining momentum in export growth.  -3- 7. During the Sixth Plan period, CDP grew by 5.4% per annum, 1/ well above India's long-term growth rate of 3.62. This increase in the average growth rate reflects improvements in the performance of several key setors. In agriculture, the ambitious Plan target. with respect to foodgrain and oilseed production were virtually attained, and the average growth of agricultural value added of 4.5% a year exceeded the Plan target of 3.8%. The progress achieved is an indication of the effectiveness of programs to expand irrigation, strengthen research and extension and encourage the efficient use of other agricultural inputs. At the same time, while achieving output gains, agriculture appears to have become more resilient and resistent to poor weather. During the Sixth Plan, India also succeeded in raising the output of most raw materials. Domestic production of petroleum grew at 201, well above the planned rate of 12.12, natural gas output at 19.2%, coal output at 6.9%, and the production of cement and fertilizer at 10.6% and 8.1%, respectively. The Sixth Plan also witnessed rapid growth in the services sector, in particular transport and communications. 8. However, this dramatic improvement in performance did not occur evenly throughout the economy. The manufacturing sector performed relatively poorly, growth averaged about 4.3% (1980/81-1984/85) a year--below the growth rates achieved in the 1960s and 1970s. Industrial growth has been inhibited by an inadequate policy environment, coupLed with a depressed domestic demand, power shortages, and labor unrest. In addition, quantitative restrictions and high tariffs on imports of inputs and capital goods have Led to high inflated costs and prices of industrial goods and manufactures, which has severely impaired India's competitiveness in world markets. India's export performance under the Sixth Plan reflects this. Instead of the targetted 9% a year, exports grew only by 4.5%. The savings performance of the economy also deteriorated somewhat. The national savings rate, which had risen steeply in the 1970s, fell from 24.3% to about 23%, and remained well below the rate required (24.5%) to finance the investment program of the Sixth Plan. As a consequence, gross investment grew only at 6.4% a year instead of the targetted 8.9Z. The shortfall in savings was most noticeable in the public sector, mainly because of the low profits or financial losses of public enterprises and lower than expected tax revenues. The Seventh Plan (1985-90) 9. The Seventh Plan aims to buiLd upon the accomplishments of the Sixth Plan, which is regarded by many as a turning point in Indid's development experience. To deal effectively with the dual challenges of alleviating pervasive poverty and expanding employment opportunities for a growing labor force, the Seventh Plan will neee to sustain the growth momentum attained under the Sixth Plan. India's policy makers have become acutely aware in recent years of the development constraints and, in particular, the shortcomings of the existing policy framework. The Seventh Plan portends to break new ground in dealing with these constraints. More so than previous i/ Actual CDP growth rate during the 1979/80-1984/85 period was 5.4% per annum. However, this figure overstates the trend in recent years because of the relatively low base year (1979/80). The 4.5% CDP growth per annum and 3.3% annual agricultural growth between 1980/81-1983/84 (two "normal" years) are more representative of the growth rates during the period.  -4- plans, it focusses on the urgent need for greater efficiency, productivity and competitiveness in the economy. In its various sectoral strategies the Plan adopts some new approaches: in agriculture, the Plan gives top priority to the completion of ongoing irrigation schemes; in industry, the Plan emphasizes improvements in productivity, reductions in costs, and improved competitiveness. Unlike previous plans it encourages a greater role of the private sector and promises to provide the incentives needed to attract private industrial investment; in the wake of the liberalization measures taken under the Sixth Plan, which provided entrepreneurs with greater Elexibility in decision making, the Seventh Plan envisages further changes in licensing policies and the pricing of comnodities which are subject to administered price controls; the Plan aims also for continued trade Liberalization and places particular emphasis on the promotion of export growth; the Plan also seeks to ensure that, even with accelerated growth, the benefits of that growth are distributed proportionately. Sufficient availability of food, which would have a dampening effect on food prices and thus protect real incomes of the poor, as well as additionaL employment and productivity increases which would raise per capita incomes, remain the top priorities of the Plan. 10. Recent Developments. In its effort to implement che economic strategy embodied in the Seventh Plan, the Government has provided, in the past year, the cricicaL details of its new economic policy framework through a series of policy scatements and committee reports. The latter incLuded the Hussain committee report and the import and export policy statement on trade policies; the Narasimham committee report on shifting from physical to financial controls; a report on the black economy; the Chakarvarty committee report on monetary policies; and a statement on long term fiscal policy issues by the Ministry of Finance. These reports deal with many of the major is9ues that constrain economic growth in India. Attainment of the Sevench PLan targets depends now to a large extent on the early implementation of their recommendations. The Covernment's commitment to policy change is underscored by its decision to introduce, in short succession, a series of new policy initiatives in the industrial sector and with respect to trade and fiscal policy. 11. In addition to the measures implemented in 1984185 that aimed primarily at improving industrial efficiency--including the opening up of the telecommunication equipment manufacturing industry to the private sector, new initiatives in the development of the electronics and computer industries, introduction of "broadhanding" into the automotive and machine tool industries--the focus of the policy changes introduced by the Government was directed at further reducing industrial controls: the number of industrial units coming under the Monopolies and Restrictive Trade Policies act was reduced by 230 to 1505 units; the number of industries required to obtain licenses to install new capacity or expand existing capacity was reduced substantially; the number of industries benefitting from "broadbanding" was increased; and chere was also a series of improvements in procedures that reduced delays in obtaining clearances especially for large units and firms with foreign collaboration. 12. Unlike the changes in industrial policy, many of which represented a radical departure from the past, recent changes in trade policy, in particular those with respect to export promotion, failed to show the same strong commitment. In its new Import-Export policy, the Covernment provided  -5- both measures to liberalize imports incLuding substantial import duty reductions and export incentives. While che import liberalizing measures led to a surge in imports, the export promotion measures--which included a simplification of the administrative requirements for duty free imports, a widening of the eligibility for advance licenses, and a reduction of export taxes and improvements in foreign exchange forward cover facilities--had only a marginal impact on the overall ease and profitability of exporting. This result was at least in part due to several poLicy changes that undermined the export promotion effort. The advance licensing system, for example, was tightened and a number of facilities previously available to large export houses were withdrawn or restricted. A future strengthening of existing export promotion policies is clearly of high priority, if India is to meet its export targets under the Seventh Plan. 13. In parallel with the policy changes in the industrial and trade sectors, the CovernmenL introduced significant changes in the tax policy. In its 1985/86 budget the Government reduced income tax rates for individuals and abolished the surcharge on income tax. Wealch taxes were also lowered which together with Lower income tax rates reduced the maximum marginal tax rate on income from wealth from aver 110% to 70%. In the 1986/87 budget, further concessions and simplification foreshadowed by the Long Term FiscaL Policy statement were made. But perhaps the most far-reaching poLicy change in the 1986/87 budget was the introduction of the modified value added tax system for 37 of the 68 chapters of the excise tariff covering about 35% of its manufactured production. Other potentially important policy changes included a new, more smoothly phased, excise tax concession scheme for small scale industry and simplification of the excise tariff schedule through the elimination of special excise duties covering 132 items. 14. The performance of the economy in the first year (1985/86) of the Seventh Plan attests not only to the soundness of the Government's overall approach, but also its determination to attain the ambitious Plan targets. Economic growth during this past year was indeed robust. ReaL CDP is estimated to have grown by almost 6% with industry growing somewhat faster than the Seventh Plan's target of 6.6%. Agricultural CDP growth is expected to be roughly on target with foodgrain production reaching about 150 million tons, just a little beLow the peak production level of 1983/84. There was also a marked improvement in the performance of the key infrastructural sectors. During the first ten months of the fiscal year, electricity generation increased by B% on top of the 13% increase achieved in the previous year, mainly because of better utiLization of thermal plant capacity. Coal productiDn grew more slowly than in the previous year, reflecting the Government's efforts to reduce large pithead stocks. Railway freight traffic increased by more than 9% during the first nine months as larger quantities of cement, coal, petroleum and fertilizer were shipped. The strong performance of the agriculture, energy, and transport sectors, combined with the new initiatives in trade and fiscal policy have lead to a surge in industrial oucput and a buoyant stock market. 15. Inflation, in terms of the wholesale price index, rose by onLy 6% during the first nine months of the fiscal year, compared to 7X during the same period in 1984. High foodgrain stocks, sugar and edible oiL imports, the strict control of non-pLan expenditure, and increases in the statutory Liquidity ratio of commercial banks were key factors restraining inflation.  -6- The recent price increases of coal, fertilizer, grain and petroleum products are not expected to significantly affect the inflation rate. 16. However, with respect to one of the principal objectives of the Seventh Plan, namely to accelerate export growth to a level that would allow India to finance its imports, performance during the past year has been disappointing. Preliminary data indicate a 1X decline in the US dollar value of non-petroleum exports and a 212 increase in imports during the first halE of the fiscal year over the same period in 1984/85. Most of the increase in imports was due to a bunching of bulk imports by canalizing agencies in the first two quarters of the year to take advantage of declining commodity prices. During the third quarter, import growth subsided significantly and there was also a discernible improvement in exports. Despite the expected increase in the trade deficit for the year as a whole, however, reserves are expected to increase by US$600 million. This is in part due to a moderate increase in worker remittances, tourism receipts and a surge in non-resident deposits which amount now to almost US$1.4 biLlion. 17. Development Prospects and Policies. Attaining the objectives of the Seventh Plan in the years ahead will place heavy demands on policy adjustment and entail major challenges. India will need to: maintain the recent higher rate of expansion of agricultural production; accelerate industrial production and export growth through policy changes which enhance competition and efficiency; expand supply capacities in the economy by improving basic infrastructure services and the availability of energy; improve the efficiency with which resources are used, including the existing and new capital stock in infrastructure and industry; and further improve the already high resource mobilization effort. 18. Agriculture. Despite an impressive performance under the Sixth Plan, Indian agriculture faces many challenges in the second half of the decade. As possibilities for extending cultivated acreage shrink, agricultural growth will depend on finding new ways of increasing the productivity of land through further development of irrigation, better water management, more intensive use of new technology, efficient delivery of inputs and services, and appropriate pricing policies. High priority must be given to the expansion of the country's irrigabLe area through completion of ongoing irrigation projects, as well as selective investment in new undertakings. Besides creating new irrigation potential, the efficiency of irrigated farming will have to be enhanced through the improvement of water management practices in existing irrigation systems. Greater emphasis should also be given to obtaining higher yields under rainfed and dryland farming conditions. Finally, even greater efforts must be made to build and strengthen institutions to ensure the efficient delivery of agricultural services, input supplies, credit and technology. 19. IndustrX and Trade. Prospects for raising India's CDP growth rate will, to a large extent, depend on more rapid industrial production and export growth. A key requirement will be greater competitive pressure on industry than has been the case in the past. The size and domestic orientation of the Indian economy make it necessary that this competitive pressure come mainly from within the domestic economy. An important complement, however, will be greater exposure to foreign trade to stimulate domestic competition as well as to induce technological innovation and modernization.  -7- 20. To increase domestic compatition, domestic policies will need to allow freer entry and exit of firms in the industrial sector and greater reliance on market price signals. As indicated above the Government has taken various initiatives in the above directions during the past several years. These changes have begun to produce a marked favorable impact on the investment climate, private corporate profitability and the growth of the stock market. All these suggest that the manufacturing sector is beginning to respond to the new policy changes in industry. However, the policy changes initiated to date only begin the long process of adjusting the trade and industrial policy environment under which industry operates. Much more remains to be done to transform the policy onvironment from one based on a system of extensive direct physical controls to one in which competitive pressures both within the country and abroad induce the improvements in productivity and technology upgrading which are required by Indian industry for accelerated investment, production and export growth. As indicated above, the Government has introduced a number of measures to promote exporcs. Up to now these changes have had little impact on export growth. If further efforts fail to bring the export growth rate closer to the 7% target of the Seventh Plan, the prospects for sustaining the import liberalization effort and in turn the prospects for accelerating industrial and overall GDP growth will be seriousl! affected. Thus, there remains an urgent need for the Government to intensify its efforts in improving direct export incentives and to provide greater access to imported inputs and capital goods through continued import liberalization; review tariffs, eliminating anomalies and lowering their overall Level; and modify trade policies in such a way that the net impact of incentives i3 more neutral between exports and import substitution. 21. Infrastructure Sectors. Investments in these sectors currently constitute about one-third of total investment in India, and the efficiency with which these investments are managed has an important bearing on the efficiency of total investment and the growth rate of the entire economy. There is substantial evidence that better planning and management of public investments in power, coal, railways and irrigation could improve returns and lower the current capital-output ratios. For example, more efficient use of investment could be achieved by better water management in irrigation projects, improved load factors in thermal power generation, better capacity utilization in the fertilizer industry and improved efficiency in railway transport. 22. Resource Mobilization. India's gross national savings rate (22.6% in 1980-85) is already high for a country at India's level of income. The Seventh Plan calls for a public sector outlay of 1,800 billion rupees. Out of this total, 42% is to be financed from the public sector's own resources, compared to the 37% level during the Sixth PLan period. Financing of the Plan--while holding foreign savings as a share of GDP at prudent levels--wilL require, apart from restraint in current expenditures (including a reduction in the rapidly growing food and fertilizer subsidies), some further increase  -8- in the aggregate savings rate especially in public savingo.1/ Economically efficient pricing policies in public enterprises, supporced by improvements in their operational efficiency, would be the preferred means for increasing public resource mobilization. 23. Balance of Payments. A policy of sustained CDP growth of 5% per annum will need to be complemented by measures which assure a viable balance of payment. position. Acceleration of Lndustrial growth will lead to a substantial increase in import requirements, even after allowing for continued import substitution of key bulk commodity items. Bank staff estimates place the export volume growth necessary to support these growing import requirements without excessive increases in external borrowing at about 7% a year over tho Seventh Plan period. Proupects for India to attain the needed higher export growth ratos will depend heavily on changes in domestic policy to improve the profitability of exports. 24. Even assuming EavorabLe export performance, India will continue to need substantial external capital flows to augment its own resources for the foreseeable future. Even with 8% export growth, the 5% CDP growth implies an increase in gross capital inflows from US$17.5 billion to US$23.5 billion between the Sixth and Seventh Plan periods. In the past, the bulk of this financing was provided in the form of official development assistance. In more recent years the availability of concessional assistance to India has declined. Total bilateral grants and concessional loans declined from a level of about US$1.3 billion per annum over the years 1979/80-1981/82 to US$1.1 billion in 1984185. Moreover, there was a large deterioration in the terms of aid from multilateral sources. For example, while total lending from the Bank Group continued to increase in nominal terms, the grant element declined from 71% to 41% as new commitments of IDA decLined from a peak of $1,535 million in FY80 to $673 million in FY85 and about $600 million in FY86. 25. In the event that official development assistance does not increase significantly from recent levels, nearly the full additional financing required would have to be provided from additional non-concessional borrowing from official and commerciaL sources. This will increase India's debt service ratiL from the present level of 15.5% to 21.6Z by 1989190. Provided India can, in fact, expand export earnings along the lines described earlier, the country should be able to raise the projected amounts. 26. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of the growth strategy described earlier. Although India is currently in a position to increase borrowing on commerciaL terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth 1/ As indicated above, the Government has introduced significant changes in its tax poLicy, including a reduction of income tax rates for individuals and the introduction of a modified value added tax system. While it is too early to judge the longer term impact of chese changes, it is encouraging that the Central Government's tax receipts during 1985186 were running well ahead oF last year and of the budget estimates.  -9- objectives rather than accept debt on unfavorable or unmanageable terms. While therefore a greater volume of both official concessional and non-concessionaL assistance is warranted, concessional assistance, in particular, will be invaluable in moderating the build-up in India's debt service burden. Apart from the quantitative arguments for concessional aid, there remains the imperative to assist India in addressing the problems of pervasive poverty. While India is now better pLaced than other poor countries to tackle its development problems, the mobilization of additional resources to address poverty problems is heavily constrained. Concessional asaistance can play an important role in relieving this constraint. II. BANK GROUP OPERATIONS IN INDIA 27. Since 1949, the Bank Croup has made 100 loans and 185 development credits to India totalling US$10,228 million and US$14,000 million (both net of cancellations), respectively. Of these amounts, US$1,735 million has been repaid, and US$9,169 million was still undisbursed as of September 30, 1986. Bank Group disbursements to India in the current fiscal year through September 30, 1986 totalled US$182 million, representing an increase of about 2 percent over the same period last year. Annex II contains a sumnary statement of disbursements as of September 30, 1986. 28. Since 1959, IPC has made 45 commitments in India totalling US$396 million, of which a total of US$209 million has been repaid, sold, terminatad or canceLled. Of the balance of US$187 million, US$179 million represents loans and US$8 million equity. A suunary statement of IC disbursements as of September 30, 1986, is also included in Annex II. 29. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricuLtural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and raiLways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of development finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 30. This pattern of assistance remains relevant, and consonant with Government priorities, as reflected in the the Seventh Plan. Priority will continue to be given to COI's agricultural program. While India has made significant progress in agriculture, productivity growth will have to be sustained to improve the balance between food demand and supply and to contribute to poverty alleviation arid employment. Thus, the Bank Group will  -10- continue to support irrigation, fertilizer production and distribution, and agricultural extension, research and credit. Second, alongside COI's efforts in promoting greater efficiency and faster development of the industrial sector, increased assistance wiLl be provided for industrial development. Third, in line with the stress which the Seventh Plan gives to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources, the Bank will continue to provide substantial support to the development of the energy, transporc and telecommunications sectors to alleviate critical shortages which constrain output in both the agricultural and industrial sectors. Fourth, support of urban deveLopment and other GOI basic social services programs for the poor will also continue in Light of the growth in population which, despite successes in lowering birth and death rates, still increases by about 16 million each year. 31. 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 part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth rates achieved during the Sixth Plan period. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in agriculture and the social sectors. 32. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from IDA. However, IDA lending to India is declining from a peak of US$1.5 billion in FY80, mostly due to funding constraints. The amount of IDA funds available to India is likely to remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Given its development prospects and policies, India is judged creditworthy for Bank lending to supplement IDA assistance. A continuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and improvement in the balance of payments. India's debt service ratio is estimated at about 15.2Z in 1984/85. This ratio is projected to rise to around 20% by 1989/90, mainly due to the hardening structure of India's debt; and to increase slightly over this leveL through the mid-1990's. Although the projected debt service ratios are considerabLy above historical levels, they are still manageable and will not adversely affect India's creditworthiness. 33. Of the external assistance received by India, the proportion contributed by the Bank Group has grown significantly. tn 1970/71, the Bank Group accounted for 22% of total commitments, 11% of gross disbursements, and 10% of net disbursements as compared with 62%, 40% and 51%, respectively, in 1985/86. In 1985/86, about 23.8% of India's total debt service payments were  -11- to the Bank Croup. On March 31, 1986, India's outstanding and disbursed external public debt was estimated to be about US$26.7 billion, of which the Bank Croup's share was US$11.9 billion or 452 (IDA's US$9.8 billion and IBRD's US$2.2 billion). As of September 30, 1986, outstanding loans and credits to India held by the Bank totalled US$22,492 million, of which US$9,169 million remain to be disbursed, leaving a net amount outstanding of US$13,323 million. III. AGRICULTURE AND AGRICULTURAL EXTENSION IN INDIA Agriculture 34. A major objective of agricuLtural policy in India during the past 15 years has been to achieve self-sufficiency in foodgrains and to increase farm incomes in an equitable manner. Significant progress has been made in recent years enabling India to become self-sufficient in the production of foodgrains, although a shortage of edible oils persists. Nevertheless, continuing efforts to improve agricultural productivity are essential to meet the projected increase in the demand for food for a population that is growing at about 2.2% per annum. These projections require an annual growth of about 2.7%, compared with the growth rate of about 2.52 per annum for the period 1967/68 to 1981/82. Moreover, in recent years the rate of yield increases has been falling, and parts of the country have shown little growth in agricultural production. The projections of demand for foodgrain by 1990, the last year of the Seventh Five-Year Plan, call for foodgrain production of 168-170 million tons annually, compared with the production of about 150 million tons in 1984/85. 35. Nearly 90% of the recent increases in food production have come from wheat and rice, predominantLy in irrigated areas. Further increases in wheat and rice yields are expected to be more difficult to achieve as cultivated areas benefiting from improved technology are beginning to experience problems not confronted previously, including increasing incidence of pests and disease and micro-nutrient deficiencies, demanding even more sophisticated technology. Moreover, most of the future increase in foodgrain production will have to come from rainfed regions, which are expected to constitute more than 50% of the area under cultivation, even after the nation's irrigation potential has been fully developed. Given the ecological diversity of such regions, greater problems can be anticipated, both in developing the improved technology needed for such heterogenous agroclimatic conditions and in transferring this technology and know-how to farmers. 36. The future pattern of agricultural development in India points to the crucial roLe that improved agricultural extension and research will have to play in helping the country sustain selE-sufficiency in foodgrains. Agricultural extension remains a major, yet relatively low-cost means of increasing agricultural productivity, of making more effective use of past investments in infrastructure and research, and of reaching all farmers, especially small farm.ers.  -12- AgricuLtural Extension 37. Soon after independence in 1947, the Covernment of India (COI) began sponsoring a number of programs designed to meet the need for more effective, countryside agricultural development, but these programs only covered a small proportion of farmers and mostly met the needs of larger ones. In order to achieve a more broadly based increase in agricultural output and in response to changing rural conditions, COI, with IDA assistance, introduced the training and visit (TMV) system in 1977. The T&V system aimed at increasing farm productivity and the income of farmers by simultaneously addressing constraints to the transfer of new agricultural technology, the dissemination of the results of research, and obtaining feedback on actual farm problems. rt did so by providing farmers, on a regular and systematic basis, with up-to-date advice on proven farming practices best suited to their specific conditions. These objectives were accomplished through a fixed schedule of training and visits by field staff supported by professional advice from state-level institutions. 38. Organizationally, the T&V system has sought to establish a single line of command from the State Director of Agriculture to the Village Extension Worker (VEW) and to merge all agricultural field staff into a unified extension service employed exclusively on agricuLtural extension. Between 700 and 1,2C0 farm families are served by a VEW, working through selected contact farmers. An Agricultural Extension Officer (AEO) supervises about eight VEWs and works with them during field visits. Subdivisional staff include a Subdivisional Agricultural Officer (SDAO), with an Assistant SDAO in larger units, to ensure satisfactory supervision, training, and guidance to about 6 - 8 ABOs. To strengthen technical support and training, a team of Subject Matter Specialists (SMS) at the subdivisional level instructs VEWs in agronomy, plant protection and related topics. At the district level, a District AgricuLtural Officer (DAO), also supported by a SKS team, supervises the work of subdivisional staff. World Bank Activities in Agricultural Extension 39. World Bank assisted projects have introduced the T&V system of agricuLtural extension in 14 Indian States. Introduction of the T&V system has not been easy and the shift from a system based on multi-purpose Community Development functionaries to one based on single-purpose professional agricultural extension workers involves major administrative and conceptual reform that inevitably encounters bureaucratic, political, and logistical hurdles. In addition the new system calls for attitudinal changes on the part of farmers and concerned Government officials. The experience of early years of implementation of the T&V system has highlighted a number of underlying problems in agricultural extension projects financed by the World Bank in India which need continuing attention. These include: the involvement of extension staff in non-extension activities; weak technical supervision of field staff; inadequate or delayed budgetary provisions; insufficient location specific research-generated technology especially for rainfed and tribal areas; poor feedback from field to research institutions; weak interministerial and interdepartmental coordination; and slow starc-up of monitoring and evaluation. The continuing involvement of extension staff in non-extension activities, the probLems concerning the generation and transfer of relevant technology to farmers and the adequacy of fieLd stafE supervision, which are the three most intransigent constraints, are being  -13- addressed under the First and Second National Agricultural Extension Projects (NAEP I & II) and the Second National Agricultural Research Project (NARP II) 1/, and would be given equal attention under the proposed project. 40. Indicators of the impact of completed five-year, IDA-supported agricultural extension projects are favorable. Statistical analysis of monitoring and evaluation (M&E) results for seven states 2/ shows that 85% of contact farmers are visited at least once a month by VEWs. Yields on farms that rely on the VEW as the main source of technological information are higher than on farms that rely mainly on other sources of information. Yield indices for wheat and rice 3/ for farmers receiving VEW advice are 114.5; for farmers reLying mainly on advice received from other farmers, 99.1; and for farmers receiving no advice at all, 86.1; these values suggest a 15-28% yieLd advantage from VEW presence 4/. Other less rigorously analyzed M&E data demonstrate a positive relationship between the frequency of VEW visits and technoLogy adoption and yields. In Haryana, 73% of the farmers visited once a month applied the recommended basal fertilizer to rice, compared with 33Z for farmers not visited. In Maharashtra, 51X of the farmers visited twice a month used the pesticide recommended for wheat, as compared with 16X for farmers not visited by VEWs. In 1983-84, Cujarat surveys indicated that yields of groundnut, millet, and rice increased as the frequency of VEW visits improved. Surveys conducted by the project M&E unit in Assam have demonstrated that 90Z of the contact farmers and 84% of the non-contact farmers knew their VEW by name, but that the regularity and reliability of VEW visits to contact farmers are less than ideal, emphasizing the need for more intensive VEW supervision. Surveys conducted to measure technology adoption and impact on production in Assam have proved co be inconclusive indicating little difference between contact and non-contact farmers. On the other hand, farmers accepting extension advice from VEWs in Assam have shown higher wheat yields as compared with those who do not seek such advice (1,400 kgs/ha as against 1,000 kgslha). While preliminary results are favorable, more work needs to be done on the measurement of production impact. 41. Appreciable improvements in output and the adoption of recommended practices have been achieved in states which have adopted the T&V system. In Gujarat, average foodgrain production during the period 1978/79-1982183 increased by about 25%, compared with the five-year average of the preproject period. Increases were also registered in the average yields of pearl millet 1/ NAEP I, Cr. 1523-IN; NAEP II, Cr. 1569-IN; and NARP II, Cr. 1631-IN of February 25, 1986. 2/ Cershon Feder, Roger H. Slade and Anant Sunderam, "The Training and Visit Extension System, An Analysis of Operations and Effects," World Bank Staff Working Paper No. 719, 1985. 31 Index of 100% = state average yields weighted according to irrigated and rainfed conditions and contact and non-contact status. 4/ For the seven states included in the analysis (Assam, Bihar, Cujarat, Haryana, Karnataka, Maharashtra, and Tamil Nadu) and after an average of about 2.5 years of T&V experience and without accounting for initial differences or other confounding factors.  -14- (471), sorghum (24%), wheat (22Z), and pulses (11%) during the same period. In Karnataka, agricultural production has increased significantly over the past few years. In 1983/84, a year of unusually favorable weather conditions, Karnataka reached record production levels in foodgrain (7.1 million tons), pulses (0.9 million tons), oilseeds (1.3 million tons), and sugarcane (14 million tons). As a result, the State moved from being a traditionally foodgrain-deficit area to one reporting a marginal surplus. In Haryana, fertilizer consumption almost doubled from 1977/78 to 1982/83 and pesticide usage increased by 65Z, with resulting gains in average foodgrain production during 1980/81-1982/83 of 25.6% above the average level of 1976/77-1978/79. Furthermore, a special study carried out in Haryana 1I has also shown that since 1981 wheat yield increases of 22 per annum are directly attributable to the effects of improved extension. Although it is difficult to ascertain and quantify to what level these improvements are directly attributable to extension, it is not unreasonable to infer that improved extension services and closer Links between extension and field-based research activities account for a significant share of the gains which have been observed. 42. Overall, the World Bank's experience with improving agricuLtural extension services in India has been positive. There is growing evidence of its favorable impact and it has received wide support from the farming community and State Departments of Agriculture. The Project Performance Audit Report for the Rajasthan Agricultural Extension and Research Project (Cr. 737-IN) notes that the project has demonstrated that the T&V system of aricultural extension is an effective way of managing a large number of staff to spread innovations and of providing disciplined review of technical messages; cLearly stimulated a demand for extension services from many farmers; brought discipline to the overview and formulation of technical messages and to the focussing of agricultural research efforts. Project Completion Reports for the Madhya Pradesh Agricultural Extension and Research Project (Cr. 712-IN), Orissa Agricultural Development Project (Cr. 682-IN), and the Composite Agricultural Extension Project (Cr. 862-IN) stress the considerable advances made in institutional development of extension services and the establishment of links with research. Experience also shows that the system adopted for technology transfer is fundamentally sound and that the impact on production, even in the short term, can be substantial. In severaL States, the extension service is now able to identify constraints at the farm level and to exert pressure for improved performance in its own operations and on other support services. It is also exerting considerabLe pressure on the research supprrt network to re-orient its research priorities to meet the needs of farmers. Hence, the World Bank should continue supporting the introduction of the T&V system of extension in the States chat currently operate a different system but wish to change. Moreover, since extension reorganization is still institutionally immature in many States which have accepted the T&V system, it is essential that the technical and supervisory support of the Bank be sustained. 1/ Cershon Feder and Roger H. Slade, "The Impact of Agricultural Extension," A case study of the T&V System in Haryana, India. SuP 756.  -15- Assam Agricultural DeveLopment Project (Cr. 728-IN) 43. The conclusions of the Project Performance Audit Report for the Assim Agricultural Development Project (Cr. 728-IN) which closed on March 31? 1985, indicate that the extension component of this project was well formulated and the efforts made to adhere to institutional objectives have been encouraging. Despite the frequent changes in higher level management and the prevailing security conditions in the State during much of the project period, most of the physical objectives of the project were achieved. After initial delays, civil works construction improved and over 92Z of planned construction and renovation of staff accommodation was completed. Over 95Z of the staff required to implement the extension component was employed on time, including the smooth transfer to the extension services of approximately 960 Panchayat/Community Development staff. While the civil works program for the project's research component was satisfactorily accomplished, the recruitment of research staff needs to be improved significancly to strengthen adaptive research at the zonaL level. Also, little progress has been made in the transfer of responsibility for zonal research from the Department of Agriculture (DOA) to the Assam Agricultural University (AAU). Despite these shortcomings, encouraging progress has been achieved in the field of research, particularly in the context of NARP E as noted below. In short, while Credit 728-IN successfully established the institutional framework of a professional extension service with priority being given ta the transfer of low-cost, simple, proven technology to farmers, much remains to be done, even in basic areas, and the extension service has to move into more sophisticated areas such as improved fertilizer and water use, and pla.Lt protection. A foLlow-up project is required to remedy these shortcomings and to build on the achievements already accomplished. IV. THE PROJECT 44. The proposed project was prepared by the Government of India and the State Governments of Assam, Himachal Pradesh and Uttar Pradesh. The project was appraised in March 1985. A report entitled "Staff Appraisal Report - Third National Agricultural Extension Project" (No. 5794-IN, dated December 19, 1986) is being distribuced separately to the Executive Directors. Negotiations were held in Washington, D. C., in November 1986. GOI and the participating State Governments were represented by a delegation coordinated by Nr. Sundaram Krishna of the Department of Economic Affairs, Ministry of Finance. A Supplementary Project Data Sheet is attached as Annex III. Project Objectives and Rationale 45. The overall objective of the proposed project is to increase agricultural production through the development of professionaL extension services closely linked with appropriate research and manpower development. During the initial years of an extension project, emphasis is placed on the establishment of an administrative framework for reformed extension and of an information service focused on the transfer of Low-cost technology. i'nder the proposed project, this would be the objective in Himachal Pradesh and Eastern Uttar Pradesh where the T&V system of extension wouLd be introduced for the first time. While an administrative framework for extension has been established in the Eirst phase of the Assam Agricultural Development Project  -16- is required to firmly establish the T&V system in the State on a continuing basis. With IDA's assistance, improvements in the quality and depth of extension coverage would allow the State Government to provide a more professional and complete service capable of addressing all aspects of farm improvements and ensuring strong linkages with agricultural research currentLy being supported by IDA under the National Agricultural Research Projects. 1/ 46. The proposed project seeks to achieve the following specific objectives: (a) Administrative Consolidation and Institutional DeveLopment. The project is directed toward consoLidating the administrative changes introduced under the Assam Agricultural Development Project and would thus provide an incentive for ensuring the continuation of extension reform in Assam. It would also ensure continued support to the Directorate of Extension (DOE) through the provision of financing to replenish the special subproject fund established under NAEP I thus providing for the continued reform and development of DOE as a central extension, coordination, and technical assistance agency with a capacity to prepare and appraise agricultural development projects. In addition, the proposed project would introduce the reorganized extension service aLong with related training and on-farm adaptive research, supported by monitoring and evaluation (M&E), to the State of Himachal Pradesh (HP) and to 21 districts in Eastern Uttar Pradesh (UP), based on the experiences gained in previous extension projects in India. It is expected that the T&V system would be introduced in the remaining 36 districts of Western UP once the eastern districts are covered. In the meantime, the multi-purpose extension services provided by the Community Development Department would continue to function in Western UP. (b) Expanded Coverage. Experiences gained from past extension projects have identified the need for more specialized extension support in order to meet the needs of all farmers and address all aspects of the farming system. The project is designed to address this need by broadening the scope of technical subjects covered under agricultural extension to include, inter alia, soil and water management in the newly developed irrigated areas of Eastern UP as weLl as horticulture and farm forestry in Assam. (c) Quality Improvement. The project would seek to ensure improvements in the quality of extension services. In addition to training programs required in the reorganization of extension in HP and Eastern UP, special emphasis would be placed on expanded and improved extension training programs to address the additionaL technical subjects to be covered and the need for improved extension management and communication skilLs. Given the specialized nature of such training, most of it would be planned and execuced on a national basis with the Directorate of Extension (DOE), of GOI's Ministry of Agriculture, playing a critical role in its organization. DOE would also assist in developing the training capabilities of the States and guide them in coordinating extension approaches, improving the roles of SKSs, AEOs and contact farmers, and in estabLishing cLose permanent links with 1/ NARP I, Credit 855-IN closed on September 30, 1985; NARP II, Credit 1361-IN of February 25, 1986 is currently under implementation.  -17- research. Other areas which require qualitative improvement include extension and training management and information/ communications support, including improved utiLization of mass media to complement the T&V extension system. (d) Strengthening Extension/Research Linkages. Although research is providing increasingly effective support to extension, improvements are needed in the organization of adaptive research and on-farm trials so that research programs respond to actuaL farmer needs. The project would aim to strengthen research/extension linkages by ensuring farmer/extension staff participation in the design of research programs and by encouraging the State Agricuiltural Universities (SAUs) to adopt research strategies designed to generate appropriate location specific technical recommendations. Project Description 47. Incremental Staff Requirements (US$32.1 million) 1/. As the T&V system LS introduced into HP and Eastern UP, agricultural extension, on-farm research, information services and training will need strengthening. Project Monitoring and Evaluation will also need to be undertaken. Incremental staff 2/, disciplines, qualifications, and training requirements have been based on the experience gained with similar T&V projects in other states. In Assam, additional staff will be required to meet the needs of increased specialization and broader extension coverage. To this end, SMSs will be required in disciplines s'ach as horticulture and soil and water management. Incremental staff will also be required in Assam for newly created administrative subdivisions and to maintain VEW to farmer ratios in view of population growth since the introduction of the first extension project in 1977. In each state, incremental staff positions created under the project would be filled by staff with satisfactory qualifications and experience in accordance with agreed schedules. Furthermore, all extension staff under the project would be used excLusively for agricultural extension activities and the emoluments, benefits, and promotional prospects of staff assigned to the extension service wouLd not be adversely affected as a result of such assignment. Moreover, by June 30, 1990, each participating State would furnish IDA for its comments, a mid-term review of project execution, which inter alia would focus on the adequacy of excension field staff arrangements and recommend any adjustments to staffing and facilities found necessary by the review after taking into account IDA's comments. 48. Project Facilities (a) Buildings (US$37 million). The availability of appropriate housing within the field workers' areas of operation is critical to effective extension. Low-cost housing would be provided to meet these needs where they are required. Participating states would, however, 1/ All costs estimates in paras. 47-51 are inclusive of contingencies. 9,' Additional staff requirements over the project period amount to approximately 41 SMS and 983 field staff (SDAOs, AEOs, VEWs) in HP; 253 SMS and 4,303 fieLd staff in Eastern UP, and 57 SMS and 450 field staff in Assam.  -18- continue to encourage the use of rented accommodation by extension staff wherever this is possible. The project would also provide for additional office and training facilities, as well as farm information units in each state. (b) Tnort (S4 million). Effective agriculturaL extension is based on a system of regular and frequent farm visits by field staff supported by regular supervision. Adequate transport would be provided to maintain fixed visit schedules and to enable incremental supervisory and SMS extension staff to reach the field easiLy and frequently. Motorcycles, mopeds, and bicycles would be provided on a Loan-purchase basis under satisfactory terms to meet project needs and to ensure their use by field staff. Accordingly, project states would provide staff with credit for the purchase of vehicles and financiaL incentives, including appropriate travel allowances, to encourage their optimal use. (c) Equipment (US$2.2 million). To meet the needs of expanded coverage of extension activities and increased training, the project would provide funds for the additional requirements of office equipment and furniture and for audio-visual aids to support extension operations. 49. Training (US$5.4 million). Given the increased sophistication and speciaLization of extension services to be developed in Assam, training programs followed under the Assam Agricultural Development Project (Cr. 728-IN) would be further intensified and brc,adened to cover such new areas of specialization as soil and water management, horticulture, farm forestry, and plant protection. Training programs for HP and Eastern UP would ensure adequate basic staff training and understanding of the T&V system. The programs would include pre-service, induction and orientation courses; regular fortnightly in-service training of AEO and YEW, monthly SMS and special courses for Eield staff. The extension education units of the SAUs of Kanpur (UP), Faizabad (UP) Solan (HP), Palamphar (HP) and Assam would be responsible for the monthly training of SMS and other senior staff. Through the special subprojects fund (see para. 52), ic is anticipated that national cencers of excellence for key speciaL subjects would be developed for SMS and senior staff training purposes. Emphasis would also be given to management and communication training of senior and mid-level extension, MHE, and training staff. Where appropriate, staff development training programs leading to undergraduate or postgraduate degrees would aLso be supported. Such opportunity for staff upgrading is considered as one of the most effective incentives availabLe to extension staff. Additional training facilities (seminar halls, trainee hostels, training equipment) and training coordinators would be provided to meet participating State needs as required. 50. Operating Costs (US$16.6 million). The project would provide funds to cover the incrementaL operating expenses of training and demonstration, operation of vehicles, office operating costs, housing and travel allowances and publicity. 51. Special Subprojects (SSP) Fund (US$42.3 million). The proposed project would replenish the SS fund established under NAEP I. Fourteen State SSPs have been selected under NAEP I for appraisaL along with two centraL SSPs, of which four have already been appraised. Of these, two are central SSPs which provide for the establishment of a National Center for  -19- Agricultural Extension Managemenc and the strengthening of Extension Education Institutes. The remaining two SSPs finance (a) the establishment of a Central Training institute and the strengthening of monthly workshops in Kerala, and (b) the strengthening of forthnightly training and installation of a computer for M&E in Maharashtra. Funds provided Eor SSPs under NAEP I (about US$8 million) are expected to be fuLly committed by late 1987. The funds provided under the proposed project would continue to be used as previously to finance special short-term and discrete subprojects prepared by States with assistance from DOE, or MOA for specific activities designed to further strengthen extension development in areas not covered under ongoing state or national extension projects. SSPs will generally fall under two broad categories: (a) those which seek to strengthen or augment a particular aspect of the extension system across states or at the national level; and (b) those which are state-specific and whose objectives are to strengthen the extension system selectively in individual states. The types of activities to be covered wouLd include: strengthening of State Agricultural University extension/training units; establishment of management training facilities; improvement of the processing and analytical facilities at state M&E units; strengthening of training i-stitutions to provide nationwide training facilities in specialized areas such as M&E management, or SMS training in specific crops; and improving the utilization of audiovisuaL aids and the mass media in support of extension. The SSP Fund would also be used to finance the improvement of the existing extension service in the State of Punjab through a strengthening of its Department of Agriculture and university based training, and better utilization of audio-visual equipment and mass media in support of extension activity. Preparation of the Punjab SSP, in which the special features of the states agriculture was taken into consideration is completed and appraisal will be completed in early 1987. Similarly, SSP Funds would be used to strengthen the existing T&V extension services financed under Credit 761-IN in 16 districts in the State of Bihar and the introduction to a further 11 districts in that State. The SSP would finance civil works, incremental staff, vehicle and equipment, training and operating costs required tD strengthen and expand and improve the quality of extension services in the State. Project Organization and Implementation 52. At the central level, the DOE will be responsible for overseeing project implementation, policy guidance of extension strategy on a nationwide basis, and coordination with related government departments and other institutions, particularly in resptct of training. DOE wiLl also be responsible for providing the project states with such technical assistance as they may require and for assisting state or central agencies in the preparation of SSPs, their appraisal, and subsequent monitoring and coordination. SSP appraisals will foLlow a format agreed with IDA; and would be subject to final review and approval by IDA prior to implementation. Because of their size the Punjab and Bihar SSPs (para 51) would be jointly appraised by IDA and DOE. The reporting requirements for SSPs would be the same as for state subvrojeccs (see para 56) buc, in addition, DOEIMOA would undertake to prepare a summary completion report Eor the entire special subproject component. 53. At the state leveL, the Secretarv of Agriculture and the Director of Agriculture will have overall responsibility for implementing the project. Within each state, an Additional Director (Extension) wilL be responsible for  -20- the day-to-day management of the extension service supported by the administrative machinery of the department. The Project Coordinating Committee (PCC) already existing in the State of Assam wouLd continue to function as previously. A PCC would be established in Himachal Pradesh and Uttar Pradesh by June 30, 1987. The PCCs will be chaired by the Agricultural Production Commissioner or Secretary for Agriculture with the Additional Director of Agriculture (Extension), acting as Secretary, and the Vice Chancellor of the SAU, Directors of Agriculture and Horticulture, and representatives of concerned departments and agencies as members. The PCCs would meet at least twice a year to review the progress of project implementation, resolve problems, and ensure interdepartmental cooperation. 54. Coordination among extension, research, and allied agencies (input supply, finance, credit, irrigation, and the SAU) would be maintained through a series of interdisciplinary committ2es at state, zonal and district levels, as weLl as through informal contacts, exchange of staff, workshops, training courses, and collaboration in field testing programs. Programs of research and extension would be reviewed by existing State Technical or Research Advisory Committees, priorities decermined, and recommendations formulated for adoption in the next agricultural season. The project would also support programs of on-farm research triaLs in participating states. 55. DOE would undertake comprehensive semi-annual field reviews of each state subproject and together with the States be responsible for the preparation of semi-annual progress reports giving a summary of activities undertaken during the prior six-month period for each subproject. DOE would submit these reports to IDA each June and December. The project States and COI would undertake a mid-term review of overall project implemenLation performance by June 3G, 1989 for the purpose of making any mid-course corrections, if necessary. The proposed review which would be furnished to EDA for its comments and would cover, inter alia, the need for adjustment of project targets, fund reallocation or cancellation, the progress made in the transfer of zonal research responsibilities from DOA's to SAUs (see paras 43 and 46 (d)) and the adequacy of existing staff. The project States would also prepare completion reports for their respective subprojects. 56. To enable participation in the proposed project, the governments of the project states confirmed that they have made adequate financial provisions to cover the entire costs of their respective subprojects. Beginning July 15, 1987, and each year thereafter, the project states would furnish their project annual budgets to the Association for its review. COUP had issued administrative orders abolishing 890 Command Area Development Authority (CADA) field staff posts and mandating the non-reversible transfer of these posts and 425 Agricultural Development Officer (ADO) posts from the Community Development Department CCDD) to DOA. Schedules for the transfer of these staff posts have been established and COUP had already transferred 283 of the 890 CADA staff to DOA. COUP and GOA had furnished IDA with agreed Memoranda of Understanding with their SAU's defining the SAU's role in project implementation, and COHP agreed to submit such memoranda by March 31, 1987. The individual elements of the project components are summarized below.  -21- Monitoring and Evaluation (M&E) 57. The proposed project would strengthen the analytical capacity of the M&E unit already established in Assam through the provision of computer facilities and additional technical supervisory staff to improve work quality and speed the publication of results. A new M&E unit would be estabLished in UP on the basis of the model developed for other Indian states. It would be equipped with computer facilities, and special training for M&E, technical, and management personnel wouLd be provided. In addition, a special study designed to estimate and attribute the impact of the reformed extension system on farm-level productivity would be undertaken by the University of Kanpur in UP. The study will be supervised by a three man committee consisting of the Director of Agriculture (DOA), Assiscant WDA (Extension), and the Joint DOA (M&E). 58. Under the proposed project, monitoring, reporting, and analysis of physical and financial inputs wouLd be the responsibiLity of each State's DOA. The Stares wouLd undertake M6E of the project in accordance with procedures satisfactory to IDA and the summaries of results would be forwarded to IDA (through DOE) annually. DOE's FieLd Extension Unit would aLso provide technical guidance to state M&E units. Project Costs and Financing 59. The total project cost is estimated at US$140.2 million, of which US$5.5 million represents foreign exchange costs. Physical contingencies (US$2.3 milLion) of 5% have been applied to civil works, vehicles, equipment, traveL expenditures, vehicle and other operating costs, and 10% for training and the cost of the special ME6 study. Price contingencies of US$21.2 milLion have been added to local costs at 7% for 1986/87 through 1987/88, 7.5% for 1988/89, 7.7% for 1989/90, 7.6% for 1990/91 and 4.5% for 1991/92 through 1992/93 and for foreign costs at 7% for 1985/86 through 1986/87, 7.5% for 1987/88, 7.7% for 1988/89, 7.6% for 1989/90, and 4.5% for 1990/91 through 1992/93. 60. The proposed IDA credit of US$85 million equivalent would finance 61% of total project costs, net of taxes and duties, and would cover all foreign exchange costs and 58% of Local costs. The balance of funds for the project would come from GOI and participating State governments. GOI would channel the credit to the participating states in accordance with its standard terms and conditions for Central Government deveLopment assistance. The project would provide for retroactive financing of up to US$2 million for expenditures incurred after April 1, 1985, for essential start-up activities includinjg induction, orientation, and pre-service training of extension staff, as well as the recruitment of key staff, and the establishment of M6E units in Uttar Pradesh. Procurement and Disbursement 1/ 61. Annex TV attached, details the manner in which items would be procured under the project. Civil works contracts, mostlv for houses and 1/ All figures in this paragraph are incLusive of contingencies.  -22- training facilities (US$37 million), would be smalL And widely dispersed both geographically and over time, and therefore would not be suitable for international competitive bidding. Contracts would be awarded on the banis of local competitive bidding in accordance with existing State Government procedures, which are satisfactory to IDA. Where contractors are not forthcoming to execute the works, small civil works estimated to cost US$25,000 equivalent or less may be carried out through force account. Vehicles (US$4.6 million) and equipment (US$2.2 million) of various types would be required under the project. These would be purchased in small quantities over several years and their use would be widLly dispersed in ruraL areas. To ensure adequate maintenance and the availability of spare parts, they would be procured under the State Governments' normal procurement procedures which are satisfactory to IDA. All bidding documents and award proposals for contracts for civil works, vehicles, equipment and furniture estimated to cost US$100,000 equivalent or more would be subject to prior IDA review. Orders for the purchase of minor equipment, furniture, and supplies wouLd be bulked, wherever possible, and purchased according to established local competitive bidding procedures, except where valued at less than US$50,000 equivalent, in which case they would be purchased by prudent shopping through normal commercial channels. The balance of project coscs (US$54.1 million) for the three project States would consist of training and special evaluation survey costs (US$5.4 million), incremental salaries (US$32.1 million), incremental operating expenditures for offices and vehicles, and travel allowances (US$16.6 million). 62. The proceeds of the credit would be disbursed against the incremental costs of civil works (60% of expenditures); vehicles, equipment, furniture and materials (100% of foreign expenditures and 75% of local expenditures); training, the special M&E study and on-farm trials (!00t of expenditures); incremental salaries 1/ (662 of expenditures on a declining basis); incremental operating expenditures (55% of expenditures on a declining basis); and special subprojects (602 of expenditures). Disbursements against staff costs, operating expenses, payments of less than Rs 300,000 under civil works contracts, and payments under Rs 150,000 for training, locally-procured vehicles and equipment would be made against certified statements of expenditures. Supporting documents for these expenditures would be retained by State Governments and che DOE for inspection in the course of project review missions. Disbursements against expendicures for all other items would be fully documented. Disbursement applications would be channeled through DEA to IDA with copies provided to DOE. A seven year disbursement period is projected for this project based on the average disbursement profile for completed extension projects in eight Indian States and the agricultural project profile for India. The proposed profile is considered realistic given the likely absence of start-up delays in the second-phase Assam subproject, and since U.P. has already begun training staff required for project implementation and can draw on graduate (qualified staff for recruitment as needed. ALl project accounts would be audiced annually for each fiscal year, in accordance with sound auditing principles consistently 11 Actual disbursements against this category in thp dates wruld he made against a declining proportion Ot total eligible szaff costs; over the life of the project, such disbursements would in total be equivaLent t3 66Z of incremental salaries.  -23- applied. Certified copies of project accounts and financial statements with certified audits of statement of expenditures including a separace opinion as to whether expenditures withdrawn against the credit on the basis of statements of expenditures have been used for the purpose for which they are provided would be submitted to IDA within nine months after the end oE the fiscal year, and audit reports submitted when finalized. Benefits and Risks 63. The principal benefits of the proposed project would be to increase crop production and farm incomes in the project States by providing improved extension services to farmers. 64. Attributing a precise Level of economic benefit to this type of project is difficult, since it is often impossible to determine what proportion of benefits expected from improved agricultural practices is due to extension alone and what is due to such other factors as past research efforts, the use of additional inputs, or more work by the farmer. in practice, it is generally the combination of all these factors, with extension services acting as the catalyst that brings the desired benefits. In areas where the reformed extension system has been in operation for some time, including the State of Assam, yield increases are indicated which wouLd give a rate of return well in excess of the opportunity cost of capital (12%). Both K&E studies and crop production statistics (paras 40-42) provide strong indications of the significant beneficial impact of T&V extension upon crop yields, rates of technology adoption, and improvement of cropping patterns and systems. 65. A study undertaken in 1981 by the World Bank in collaboration with Haryana Agricultural Uni*ersity I/ concluded that the T&V extension svstem is more successful than the traditional extension system in delivering information to farmers, achieving direct contact with farmers and diffusing knowledge for all farming practices. The results of the study suggested that, in the case of wheat, a yield increase of 2Z per annum had been achieved over the first four years of the Phase I project, which was directly attributable to extension and independent of the increased use of other farm inputs. The Study also concluded that the inicremental wheat cutput alone was sufEicient to generate an internal rate of return in excess of 152. Moreover, there is clear evidence from areas where the T&V system is well established that it is exerting considerable pressure on other support services? particularly research and input services, to improve performance in parallel with axtension, which underscores the important lead effect of a strong extension service. 66. As mentioned above, however, maintenance of a reformed agricultural extension system is not achieved without difficulty. Direct IDA involvement in the project wouLd decrease the risk that che extension service would be used for non-extension functions and that extension staff would be transferred to handle other administrative activities within the Department of Agriculture. Although extension activity would continue to be vuLnerable 1/ "The Impact of Agricultural Excension." A case scudy of the T&V System in Haryana, India, by Gershon Feder and Roger H. Slade. SWP 156.  -24- to outside pressures, there is increasing recognition that its primary function must be technical and that it cannot substitute for weaknesses in other support services. To reinforce this concept an assurance was obtained that the extension staff of alL Project Scates assigned to DOA for the purposes of the Project would be used exclusively for agriculturaL extension work and that such staff would not be adversely affected in respect of their entitlement to emoluments, benefits and promotional prospects. 67. Without effective two-way communication between research and extension personnel, it is unlikely that the technology needed by farmers to increase productivity would be developed and transferred. To promote such a linkage between extension and research, each State participating in the project has or will shortly provide a written Memorandum of Understanding between its SAU and the Department of Agriculture spelling out university responsibilities for the support of the extension services (para 56). To date, technology has not been a major constraint, but as the backlog of research findings becomes more widely adopted, additional adaptive research, field testing and development of new technology would be required. While early work may be aimed at zonal and district recomnendations, ultimately technology deveLopment needs to be directed more at meeting the more location-specific requirements of farmers and the needs of farmers in more remote and difficult areas. The Second National Agricultursi Research Project is helping to strengthen research efforts to provide relevant technology for extension transfer to such farmers. 68. Apart from monitoring, coordinating, and providing technical assistance to state subprojects, MOA/DOE will play the major role in the appraisal of special subprojects. The capacity of DOE to adequately perform the latter task has been developed and is being tested under NAEP r. Possible risks of DOE not being able to maintain the quality of personnel needed to carry out chese tasks in a sustained manner would be mitigated by a close monitoring of the staffing requirements and performance of DOE both under NAEP I and the proposed project. 69. Various administrative constraints typically encountered in the early years of implementation could impede project execution and would require the continuing attention of GOI and would be closely monitored by IDA in the course of project supervision. Among these problems are late or inadequate budgetary provisions, frequent staff transfers, and failure to implement objective selection criteria for training. Some success has, however, been achieved in the resolution of administrative constraints under earlier projects; these include the installation of a technical, single-function extension service, greater delegation of authority, provision of additional monthly travel allowances and increased vehicle maintenance allowances to extension staff, as well as loans for individual purchases of vehicles Dy staff engaged in extension field work. Employment and Poverty Impact 70. The proposed project would have a substantial indirect impact on employment and income generation throughout the rural areas in the participating States. The dissemination and adoption of improved agricultural production and farm management techniques would lead to increases in on-farm productivity and farm output, thereby generating additional employment and income among the farming community and agricultural  -25- laborers in the States of Asian, UP and UP. The project wouLd also provide direct employment to approximately 6,200 persons and limited employment to skilled, and unskilled workers during the period of civil works construction. There are about 7.8 million farms with an average holding size of 1.4 ha each supporting five to six family members and additional landless farm laborers in the proposed project area. Based on 1981 statistics, 7OZ of India's labor force is employed in agriculture, and the average value added per farm family is US$304 per annum. With an average family size of more than five members, this implies an average annual income equivalent to about US$60 per person--about half of the income level judged to be the absolute poverty level in India. Civen the land and income pattern of the proposed project area, the project's indirect employment and inuome effects will predominantly accrue to the ruraL poor. V. RECNKEUDATION 71. 1 am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. B. Conable President December 19, 1986  IV ,;kX 41j '-I  AM=Z I -27 - a I of 2 tW 0t CADIYT 1. '933 UniOO *i 0001 ObttIrt SAOdITC IN 1644136 lb 'FLago P YI s 0%7.t fltCESS l uLL1Sn.6 3ftift IlLZjiSmm 9511t1L3T lDylI-1dl?1 711113-flh00 U2RLIIfLLDA GOP Pt Markel Wrices 1 ",34 100.0 3.? 3.3 3.? 2.9 4.13. Groom bamestlt lAwgImonit al."S 33.4 Cream batlnol 6a''.8 315-32 30.3 C. r0t Lttewlt falanca SAn i.e Salgoe ILai, lot Labor Pertoy it V..PPamU USS Ol.- -11 a Mg, -i- Wa igno 9.1c;:Wr U921 333I?. TO.: 30s St~a Induolr 24.5 12. 1. 2.3.1.Do? 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