India - Twelfth Railway Project

FEDLE CP DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1347-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE TWELFTH RAILWAY PROJECT December 6, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CU RBiNCY EQU IVALENITS (As at November 23, 1973) uS$1 .00 = Rs- 8.08 Rs 1.00 = US$ 0.l24 Rs 1 millicn US$ 12h,000 (The Rupee is officially valued at a fixed Pound Sterling rate. As the Pound is now floating relative to the US Dollar, the US Dollar/Rupee exchange rate is subject to change. Conversions in the appraisal report were made at US$1 to Rs 7.h5 which was the rate at the time of appraisal.) FISCAL YEAR April 1 - IMIa c, 3_1  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOHMENDATION OF THE PRESDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE TWELFTH RAILWAY PROJECT 1e I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$80 million on standard IDA terms to help finance a twelfth railway project. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (156-IN, dated May 8, 1973), was distributed to the Executive Directors on May 24, 1973 (R73-113). A country data sheet is attached as Annex I. 3. India is exceptional among the Bank Group's member countries for its size, diversity, and extreme difficulty of its economic conditions. India's economic policies and performance can be criticized on many counts. Some of the shortcomings have their origins in the open political system, where the reconciliation of conflicting political views tend to favor les:u than optimal economic solutions; others are due to the sheer magnitude of the task facing the Government. Governing a country divided into more than 20 States with a population of 577 million and over 60 major languages is an extraordinary responsibility. The country's poverty and poor natural resource endowment, supplemented by a net transfer of external resources averaging in recent years well below US$1 per head per annum, have imposed sharp limitations on the rate of growth. Any judgment of India's economic performance must take these underlying circumstances into accuunt. So, also, must account be taken of two massive uncertainties which overbang India. The first is the availability of water. A bad monsoon, which is inevitable from time to time, has a pervasive influence over the entire economy and wipes out the results of years of effort. The second uncertainty is the availability of external assistance. The vast majority of bilateral aid is committed annually, usually several months after the start of the fiscal year, and bas too often proved vulnerable to the political exigencies of the donor. Any delay in IDA replenishment hba an enormous impact on aid flows. Together, these considerations severely complicate planning and force a high degree of caution in foreign exchange management. 4. In this perspective, the performance of the economy has been far from bad. Since the inception of economic development planning in 1950/51, national income has grown at nearly 4 percent per annum, which compares very favorably with the average annual growtb rate of less than one percent during the preceding 50 years. Pbpulation has also grown faster in the past two decades than previously, but per capita income has nevertheless risen from a more or less stagnant level in the first half of this century to achieve an average growth of roughly one percent a year since independence.  - 2 - 5. Progress has been impressive on many fronts but disappointing on Wtiers and has all too often fallen short of India's massive needs. The growth of the socio-economic infrastructure (transport, education, health services, etc.) has been spectacular, but has often been achieved at high cost and has yielded results of variable quality; many industrial and agricultural investment schemes have been highly successful, but others have taken excessively long to be completed and have operated well below full capacity; in some regions of the country growth and structural change have been rapid and compare favorably with developments in many other parts of the world, but in other regions there has been stagnation and possibly even decline. Despite these improvements and although the distribution of income in India is relatively even by comparison with many other countries, there has been little impact upon the living standards of the vast masses of the urban and rural population. The Government has become increasingly conzerned about the plight of the lower income strata, which, conservatively measured, consist of some 200 million people with incomes of less than US$60 per head per year. As indicated in its preliminary proposals for the Fifth Five-Year Plan (l97h/75-1978/79) GOI is planning to intensify its efforts to alleviate their poverty. 6. In broad terms, the structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 42 percent of national product in the early 1970s compared with around 49 percent twenty years previously. The share of output contributed by the industrial sector has increased only slowly and, partly due to the generally good per- formance in agriculture, since the late 1960s has remaind approximately constant at a level of 23 percent. There has, however, been a shift in the composition of industrial production, with consumer, intermediate, and capital goods now contributing about one-third each compared with an overwbelming pre- ponderance of consumer goods production 25 years ago. 7. Undoubtedly, one of India's most impressive achievements since the mid-1960s has been the doubling of the average growth rate of productivity in foodgrain production. This has been achieved primarily through the intro- duction of new, high-yielding seed varieties and through complementary im- provements in farming practices. Nevertheless, much remains to be done to consolidate the production growth in the wheat belt and to extend it both to other areas and to other foodgrain crops, most particularly rice. Other crops have, in most cases, shown a slow but fairly constant rate of produc- tivity increase. Irrigation bas played a major part in agricultural growth and, by reducing dependence on the monsoon, has reduced variability in per- formance. For instance, the drought-induced decline in foodgrain output in 1972/73 was only some 6 percent, compared with a fall of almost 20 percent due to the drought in the mid-1960s. At present only about balf the poten- tially irrigable area bas been developed. Fuller utilization of the existing irrigation system and the extension of the irrigated area are, therefore, matters of the highest priority in order to meet India's rising food needs and to protect the economy against the vagaries of the weather. Land which cannot be irrigated accounts for about 50 percent of the cultivable area; output from non-irrigated land will thus remain important and substantial benefits remain to be realized through technical change and investment.  8. Performance of the industrial sector has been variable and to some extent disappointing. Industrial growtb averaged about 7 percent a year in the 1950s, rose to 9 percent in the first half of the 1960s, lut has declined to some 5 percent through the early 1970s. The slower growth of recent years is especially worrying. To a large extent it was precipitated by the severe drought of 1966 and 1967 and the accompanying general recession. But it has also been the result of many other factors: the relatively limited opportunities for further import substitution wbich had from the outset been at the center of the industrialization strategy; the recurring bottlenecks in the production of a number of key intermediate goods such as steel and cement; shortages of imported raw materials; and cumbersome administrative procedures. The improvement in output which occurred in 1972, combined with recent measures to simplify administrative controls, should lead to better utilization of India's industrial capacity and a hi4her rate of reinvestment. 9. The gruss domestic savings rate has been in the region of 14 percent for the past decade. While this compares favorably with other countries having similarly low income levels, it has fallen far short of India's resource needs. And although external assistance has been substantial in absolute terms, in relation to national income it has been small, so that the gross investment rate has reached as high as 17 percent in only a few years. More recently, as a result of the recession and a decline in foreign assistance, the gross investment rate has been only about 14-15 percent. 1o. An outstanding feature of the budgetary situation over the past decade has been a sharp increase in the tax burden. Overall tax revenues which represented around 10 percent of national income in 1960/61 rose to nearly 15 percent in 1971/72. Although several important sectors, notably agriculture, are still only lightly taxed, the Government has shown itself capable of swift and difficult decisions in mobilizing extra revetnes. There was a large additional tax effort in response to the crisis of 1971; more recently, early in Nov6ber 1973 the Government doubled the excise duty on gasoline (raising prices to the consumer by 64 percent) and imposed heavy increases on other petroleum products. Despite a near doubling of tax revenues in the last decade, however, there has been a deterioration in the savings per- formance of the public sector, largely due to a sharp fall in the Central Government's current account savings. A disturbing feature of the budgetary situation has been the expansion of the States' expenditures far in excess of the growth of their own revenues. The Central Government bas had to meet the resulting deficits through budget transfers. This, combined with several other factors (the military events and refugee relief of 1971 and 1972, drought relief in 1972 and 1973, and a sbarp drop in net foreign aid in 1972), has forced a massive rise in total deficit financing. As a result of this and also of the shortages of food and other commodities, there has been a sharp increase in the rate of inflation in the past 18 months as has been the case in so many other countries of the world. In the past year, wbole- sale prices have risen by some 20 percent, compared with an average 4-5 percent in the previous three years. The budget for 1973/74 introduced measures to help curb inflation and there have been further budget cuts in the past few months, while the Reserve Bank of India bas also been intervening to control the expansion of money supply.  - 4 - 11. Ever since the balance of payments crisis of 1956/57, a sbortage of foreign exchange bas constituted one of the most criticaa constraints to the development of the econony. This has manifested itself in various ways. The authorities have necessarily acted with extreme caution in their foreign exchange management and have been left with little flexibility or margin to accommodate special and emergency needs. The exchange control and also, in large part, the import and industrial licensing procedures have thus been the result of the acute foreign exchange situation. Even thougb the external sector is small in relation to the national economy, the continuing shortage of foreign exchange together with these controls have retarded and distorted investment and the rate of utilization of exist- ing capacity. This is most clearly seen in the stagnation of non-food imports: for instance, despite expansion of the economy at almost 4 percent per annum, even at current prices the present level of non-food imports is approximately the same as that of the early 1960s, and there has been a continuing shortage of imported raw materials, spares, and components. While exports have expanded somewhat since 1960 and have done especially well in the past two years, they have never achieved a sustained growth sufficient to have an appreciable effect on the foreign exchange problem. Traditional items such as jute, tea, cashew, and textiles, which are all beset with supply difficulties at bome and hlighly competitive or shrinking markets abroad, still constitute the most important component of exports. And despite a rapid expansion in the 1960s, non- traditional items such as engineering goods and chemicals still form only a small share of total exports. 12. Xxternal assistance has played an important role in assisting India's development effort, especially from the late 1950s to the end of the 1960s. Nevertieless, net aid has always been only a saall component of domestic product and has been amongst the lowest for all developing countries, having averaged well below US$1 per head per annum. Moreover, with rising debt service payments and more recently a decline in gross aid, the contri- bution of net aid has declined, both as a supplement to domestic investeant and as a means of financing imports. However, aid remains a vital supplement to domestic resources and there are now encouraging signs that net aid may rise somewhat in the future above its currently extremely low level. 13. As a result of substantial past borrowings, India's external public debt stood at US$845 billion on March 31, 1972. Annrmual debt service paymerts are currently running at a level of around TJS$725 million (before debt relief), eq-uivalent to around 26 percent of merchandize and invisible export receipts. This compares with a level of debt service of about US$200 million iTI the mid-1960s. In order to mitigate the negative effects on growth of such a high burden of external debt and to forestall any danger of a foreign exchange crisis5 the India Consortium from 1968/69 onwards has extended debt relief to India. In 1972/73, the most recent year in which the JonBortium has taken this action, the amount of debt relief was about US$150 million. Debt service is projected to grow somewhat more slowly over the rest of this decade than it did during the 1960s, and the debt service ratio i_pro ected to decline, to snme 21. percent byml9BO. t,artiwr in the mid-3%Zs TTeTre has been some softening in the financial terms of officlal assistance offered by several major creditors, and also an increase in the Dropor- tion of program to project aid. These changes are welcome in helping India to meet her more urgent import requirements, but they are still modest in relation to the country's basic needs. 14. The Government is at present preparing the detailed sectoral programs to be implemented in the Fifth Plan. It is also re-examining the overall internal and external resources position as well as devising the appropriate policies to achieve the Elan objectives. A first draft of the complete Plan is expected to be completed shortly, with the final document being published in March 1974.  - 5 - PART II - BANK GROUP OPERATIONS IN INDIA 15. Since 1949, the Bank Group has made 41 loans and 56 development credits to India totaIling US$1,178 million and US$2,448 million (both net of cancellation), respectively. Of these amounts, US$600 million bas been repaid, and US$1,024 million is still undisbursed. Annex_II contains a summary statmemnet of Bank loans and IDA credits as of October 31, 1973, and notes on the execuation of ongoing projects. 16. Sirnce 1957, IC has made 13 commitments in India totalling US$42.3 million, of tfbhich US$5.9 million has been repaid, US$7.4 million sold and US$6.3 million cancelled. Of the balance of US$22.7 million, US$15.4 million represents loans- and US$7.3 million equity. A summtry statement of WEO operations as of October 31, 1973, is also included in Annex II (Page 2). 1L7. The enphnasis of Bank Group assistance to India in recent yeare has been on agriculture and agriculture-related projects. This reflects the imr.ortance of agriculture and -he investment priorities of the Government. Agricultural projects wi11 continue to form an important part of the Bank Group's program of wsistance to India. Projects designed to foster agri- cultural production through the provision of essential inputs, such as credit for on-farm irvestment, commnd area developmwnt of existing irriga- tion projects, or domestic fertilizer production, form an important part of the program for this fiscal year. Proposals for investment in processing facilities for special crops and for livestock development which would con- tribute to diversification of agricultural production, will also be considered in this fiscal year. Special empbasis is being given to projects benefiting small farmers in IDA-supported agrirultural credit schemes, and a project is presently being developed in support of the Government's drought-prone--areas program. 18. The industrial sector and investAents in infrastructure development have received substantial amounts of Bank Group assistance over time, esser- tially to cover the large foreign exchange expanditures associated with investsents in these fields. Apart from IDA credits for a number of fertil- izer projects, lending to industry in recent years has been principally through the medium of development finance corporations. In addition, industrial pro- duction has been helped through a series of industrial imports credits. Assistance to infrastructure development has been concentrated in the railways, power and telecommunications. The proposed credit will be the Twelfth Bank/IDA lending operation for Indian Railways (Ia) - and will mark 25 years of asso- ciation between IR and the Bank Group. Credito in support of the Government's power transmission and telecommunications program were extended last year and a rural electrification project is under consideration. India's cities require major investments, especially in water supply to keep up with the growth of their population and water supply projects in Madras and Uttar Pradesh are under consideration. 19. The urgent need for a substantial net transfer of external resources in support of India's economy bas been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Emphasis on lending for such critical sectors as agricultural or urban development in- evitably leads to a relatively slaw transfer of IDA resources. In order to balance our program, our lending includes more rapidly disbursing projects, such as telecommunications, railway and industrial imports projects.  - 6 - 20. The Bank Group has come to contribute significantly towards the provision of external assistance to India. In the three years 1966/67- 1968/69 the Bank Group accounted for some 17 percent of total new commit- ments of external assistance; by the three years 1970/71-1972/73 this had risen to 34 percent. Because of disbursement lags, however, the Bank Group's share in total disbursements has risen more slowly from 14 percent in 1966/67-1968/69 to 16 percent in 1970/71-1972/73, but it is expected to accelerate in the future. As of March 31, 1972, the Bank Group's share in outstanding external public debt was 19 percent. If current trends continue as expected, the Bank Group's share in the total amount outstand- ing will rise to approximately 30 percent, by 1979. Debt service paymen-s to the Bank Group during the year ended Marcb 31, 1972 were 13 percent of total debt service payments made by India. By 1979, the Bank Group's share of total debt service is expected to be around 16 percent. PART III - THE TRANSPORT SECTOR IN INDIA 21. India's principal transport modes are railways and higbways carrying virtually all motorized passenger traffic and in the order of 90 percent of motorized freight traffic. Coastal shipping and pipelines account for the balance of freight traffic; air transport carries about one percent of passenger traffic. Railways are still the most important carrier of traffic, although over the last tuo decades there has been a steady shift from railways to road transport. The railways' share of freight traffic gradually declined from an estimated 75-90 percent in the early 1950s to about 50-60 percent of the total at present. This is due to the inherent economic advantages of taod transport for carrying certain classes of traffic over short and medium distances. Railways continue to be the major carrier of passenger and bulk traffic over longer distances. 22. During the past 20 years, freight and passenger transport increased annually by 6 percent and 5 percent respectively. Transport in terms of output value is expected to grow at an annual average of 6.3 percent during the Fifth Five-Year Flan period (1974/75-1978/79). Public investments in the sector of about Rs 55 billion are planned to meet the requirements of projected traffic growth. These investments represent about 17 percent of the total Fiftli Plan outlays, compared 'with a 20 percent sbare originally projected for the Fourth Plan. Almost Rs 24 billion have been allocated for the railways, representing about 7 percent of the estimated total Plan outlay. The slight decrease in the relative share of transport investments reflects the considerable increase in planned outlays for power generation, housing, education and social programs. 23. The size of the country and of the transport network, the federal structure of India and the division of responsibility for transport matters among Government Ministries at the Center make transport planning and coor- dination at the same time important and exceedingly complex. Transport planning is loosely coordinated by the Planning Commission whose functions, however, relate primarily to setting performance targets within the context of the whole economy. There are interministerial and Center/State committees to provide coordination and more recently (1970) the Administrative Reforms Commission made a number of far reaching proposals for better management of  - 7 - this sector. However it became increasingly apparent during the Fourth Plan (1969/70-1973/745 that mucb more attention had to be paid to such basic issues as the role of rail versus road transport, pricing and licensing policies. Also, although inland waterways, coastal shipping, pipelines and aviation played a relatively minor role in the sector, the need to determine how various modes might be integrated was of growing importance. GOI realized that the planning process for transport needed to be strengthened and in the course of negotiation of the previous credit (Eleventh Railway Project, Credit 280-IN), GOI agreed to undertake a trans- port policy review which was then expected to be completed around July 1973. This review took longer than expected but was completed in November 1973. During negotiations agreement was reached on a timetable for further work on policy coordination and on a Bank Group sector mission in 1974. This is expected to establishb in cooperation with 00I, a framework for fau%Mw Bank Group participation in the transport sector. 24. The Bank Group ha. provided substantial assistance to the transport sector, tota).llig US$448.6 million in loane and US$488.5 million in IDA credits. Projects assisted include the construction of ports,and highways, and air transport and shipping. Two credits are presently being disbursed. The shipping project is proceeding on schedule while the current railway credit (Eleventh Railway Project, Credit 280-IM) will be disbursed by the end of December 1973, three months ahead of schedule, reflecting cost increases as well as accelerated investments to moset additional traffic needs early in the Fifth Plan period. 25. In order to define more specifically IR's direct operational and investment responsibilities within the transport sector, a 15-year corporate plan is being prepared by IR in close cooperation with the Plannirg Commission and relevant ministries. The preparation of this plan was proposed during nego- tiation of the Eleventh Credit and was intended to complement the work on policy coordination and to provide the basis for future Bank Group assistance to Indian Railways. A group of well qualified staff, together with a part- time consultant financed by IDA, was assigned in 1972 to undertake this work. Progress to date has been satisfactory and an initial version of the plan will be completed by the end of the year. 26. Although the full results of work on Fifth Plan investments and the initial version of the corporate plan will not be ready until December 1973, IR has already had to take measures to meet expected demand over the next few years. The proposed credit has been timed to follow the current credit in order to maintain continuity. However, unlike more recent credits for IR, which assisted in covering IR's foreign exchange requirements over two to three years. this credit has been designed to cover a more limited period so that further credits can be considered against the background of the frame- work for Bank Group assistance referred to in paragraphs 23 and 25 above.  - 8 - PART IV - THE PROJECT 27. The project was appraised in June 1973 and negotiations were held in Washington from November 5 to 16, 1973. The Borrower was repre- sented by Mr. M. N. Bery, Chairman of the Indian Railways; Mr. K. S. Sundara Rajan, Financial Commissioner, Indian Railways; Dr. M. K. Ganguli, Advisor, Planning Commission; Mr. M. Menezes, Director Planning of the Indian Railways; and Mr. S. V. Sastry, Joint Director, Finance, Indian Railways. A report entitled "Appraisal of a Twelfth Railway Project" (Report No. 2h4a-IN dated December 6, 1973) is being circulated to the Executive Directors separately. 28. The project is the Indian Railways' investment program for ,be period January 1, 1974 to March 31, 1975. The project consists of new and ongoing works which are required to meet projected increases in demand for freight and passenger services and to continue with cost reduction measures, including modernization of equipment. The main elements of the project are the further replacement of steam by diesel or electric loco- motives, additions to freight-carrying capacity through wagon replacements and increases in the wagon fleet, further electrification of mainlines, track renewal works, and increases in worksbop capacity. A credit and project summary appears in Annex III. Project Costs and Financing 29. Tne estimated project cost is US$654 million equivalent, including US$97 million of foreign exchange costs. The proposed credit will finance 82 percent of the foreign exchange costs. The principal items to be financed are components and materials for the manufacture of locomotives and rolling stock (US$65.5 million), materials for track renewals and related works (US$4 million), and materials and components for electrification, signali