India - Madhya Pradesh Agricultural Credit Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK LJt. DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1258-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE MADHYA PRADESH AGRICULTURAL CREDIT PROJECT May 8, 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 It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY EQUIVALENTS (April 27, 1973) Currency Unit = Rupee (Rs.) US$1.00 Rs. 7.50* Rs. 1.00 = US$0.13 Rs. 1 lakh (105) = US$13,333 Rs. 1 crore (107) = US$1.3 million India has-not declared a new par value following devaluation of the US dollar. The rupee is officially valued at a fixed pound sterling rate and, as the pound sterling is now floating relative to the US dollar, the US dollar/Rupee exchange rate is subject to change. Conversions have been made at the rate of Rs. 7.5 to US$1 in this and the appraisal reports. However, by the end of the week April 27, 1973 the rate was about Rs 7.55 to US$1. FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE MADHYA PRADESH AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount equivalent to US$33 million for the Madhya Pradesh Agricultural Credit project. This project has as its objective the provision of medium to long-term credit to farmers in that State for on-farm investment in minor irrigation and land levelling as a means of increasing agricultural produc- tion and furthering the adoption of new production techniques. PART I - THE ECONOMY 2. The economy of India is dealt with in paragraphs 2-11 of the President's Report, of the same date on a proposed development credit to India for an Agricultural Credit Project in Uttar Pradesh State, (No. 107a-IN). A Country Data Sheet is attached in Annex I. PART II - BANK GROUP OPERATIONS IN INDIA 3. The proposed credit would be IDA's 52nd operation in India, bringing the total of IDA funds committed to US$2,233 million. For a review of Bank Group lending in India, reference is made to paragraphs 12-16 of the President's Report of the same date on the proposed Uttar Pradesh Agricul- tural Credit Project. Annex II contains a summary statement of disbursements as of March 31, 1973, and notes on the status of currently active loans and credits. PART III - THE AGRICULTURAL SECTOR 4. Reference should be made to paragraphs 17-22 of the President's Report of the same date on the proposed Uttar Pradesh Agricultural Credit Project. PART IV - THE PROJECT 5. The proposed credit finances minor irrigation (dugwells only) and related land-levelling in Madhya Pradesh. The project was appraised in April and November 1972. The Appraisal report (104a-IN) is being distributed separately. Negotiations were held in April 1973. The Borrower was re- presented by Mr. M.A. Quraishi, Secretary of Cooperatives, Ministry of Agriculture and Mr. V.N. Rajagupalan, Deputy Secretary, Department of Economic  - 2 - Affairs, Ministry of Finance. The Agricultural Refinance Corporation (ARC) was represented by its Managing Director, Mr. Chidambram, and the State of Madhya Pradesh by Mr. S.R. Sharma, Special Secretary, Ministry of Agriculture. The Madha Pradesh State Cooperative Larnd Development Bank (LDB) was represented by its Chairman, Mr. T.C. Agarwal and the State Directorate of Ttibewells and Groundwater Surveys (DTGS) by its Director, Mr. G.G. Puri. A project summary is attached as Annex III. 6. Madhya Pradesh, the largest State in area in India, with a population of 42 million, suffers from high population density since almost 60 percent of its land area is not under cultivation, being mainly forest. Small farms and poor farmers predominate. Compared with other major States, it is rela- tively backward and heavily dependent on the agricultural sector both for its output and for the employment of its population. ToD accelerate the pace of agricultural development aimed principally at expanding foodgrain production and providing employment for a growing labor force, the Government of Madhya Pradesh is giving high priority to the introduction of high-yielding varieties and fertilizers and, because extensive areas continue to depend on uncertain rainfall and are subject to periodic drought, the installation of wells. The groundwater resources in Madhya Pradesh are generally adequate to sustain further irrigation development but, because miuch of the project area is crystalline hard rock, control of groundwater use is needed to prevent over- investment and overexploitation. 7. The project would support a three-year lending program of LDB and qualified coimmercial bankcs. The investments would comprise construction of about 25,000 new dugwells, improvement of 15,000 existing dugwells and the installation of about 29,000 electric and 12,000 diesel powered pumpsets and about 2,700 Persian wheels. Shortages and unreliability of electricity supplies in the State make it necessary to finance diesel as well as electric operated pumpsets. Because the terrain in the project area is not uniformly level, some related land development of about 30.000 ha to enable water from the wells to be constructed to be used will be necessary and is included in the proposed financing. About 70 pneumatic boring drills to be financed from sources other than the proceeds of the credit will be procured by the State of Madhya Pradesh to meet the incremental needs of the program. 8. The total project cost is estimated at US$60.3 million, of which the proposed credit would finance US$33 million. The Association's credit would cover the foreign exchange cost estimated at US$2.9 mil'lion or 5 percent of project cost and 53 percent of iocal currency costs. Of the total project costs, IDA would finance about 55 percent; farmers 12 percent; and LDB, participating commercial banks, and ARC, 33 percent. 9. The proceeds of the credit would be relent by GOI to ARC, which would repay about 50 percent at thze end of nine years at an interest rate of 5-1/4 percent ana the balance at the end of 15 years at an interest rate of 5-3/4 percent per annum. The ARC would supervise and refinance at 6-1/2 per- cent per annum the loan operations of LDB and participating commercial banks. Loans to individual borrowers would Dear interest at a minimum of 9 percent  - 3 - per annum and would be repayable over periods of up to nine years, but extending to 15 years in the case of loans to small farmers. Farmers' contributions would range from 20 percent to 10 percent of the cost of individual investments. In the case of loans made by LDB, the farmers' contribution would include their obligatory share capital contribution of 5 percent of the loan amount. 10. ARC is a subsidiary of the Reserve Bank of India and a familiar lending channel for IDA lending to the agricultural sector in India. It is a sound financial institution with experienced, qualified staff and has demonstrated its capabilities in supervising schemes it refinances. Like other states, Madhya Pradesh has an established banking network which, for long-term investments, is LDB and the commercial banks. 11. Partly because of the size of Madhya Pradesh, LDB is less developed than similar institutions in other States and lacks sufficient primary banks in its federal structure to achieve effective rural penetration. It is handicapped by a relatively low turnover and a high level of arrears. To meet these deficiencies and make full use of existing facilities, the State Government and the banks prepared a banking plan for the project, which was agreed during negotiations. This plan includes a program for the opening of branch offices of commercial banks strengthened staffing arrangements and assistance to the commercial banks by various agencies of the Government; involvement of District and State level coordinating committees and the financial and managerial improvement of LDB. To the extent that overdues of the Primary banks of the LDB in the project area exceed 25 percent at any time during the life of the project the State Government will provide the LDB system with new capital to match the write-off of chronic overdues. With these conditions, the banks in the project area would be adequate to achieve full project implementation within the three-year period envisaged. 12. Individual investments would be appraised by LDB and commercial bank staff under the general supervision of ARC. (DTGS, which is concerned with the investigation of groundwater resources, would supervise the applica- tion of spacing and density criteria to be applied to well construction in the project area. The Directorate is competent and is being expanded to meet the requirements of the project. It does, however, require some technical assistance, which will be provided by the secondment of 5 geohy- drologists for DTGS from the Central Groundwater Board of GOI. 13. Under the project, local contractors and government agencies would carry out the minor irrigation schemes, and the State government's agriculture department engineering wing and contractors would undertake the land development. Mainly local materials would be used. Charges are reasonable and adequate. Pumpsets, including repair and maintenance facilities are readily available in the State. In all, about 43,000 individual small and widely-scattered farm investments would be made, extending over a three year period and international competition would not, therefore, be feasible. Procurement would be through normal commercial channels according to farmers' choice, as for other similar IDA credit projects.  - 4 - 14. Disbursements by the Association are expected to extend over 3-1/2 years and would be against appropriate statements of LDB and commercial bank lending for project purposes refinanced by ARC. These disbursements would average 62 percent of loans disbursed by the lending agencies. 15. The project would have substantial economic and social benefits. It would raise agricultural yields and cropping intensity, as well as increase on-farm employment opportunities in one of the most economically depressed States in India. The livelihood of about 44,000 farmers (including a majority of small farmers) and their families would be improved significantly. Financial returns to farmers, based on prevailing prices, are estimated to range from 35 percent to 51 percent. The rate of return to the economy, based on projected world market prices, is estimated to range from 17 percent to over 100 percent depending on the types of wells and cropping patterns. The gross, incremental value of annual production in the project area at full development, calculated at current domestic prices, would increase by US$22 million. PART V - LEGAL INSTRUMENTS AND AUJTHORITY 16. The draft Development Credit between India and the Association, the draft Project Agreement between the Agricultural Refinance Corporation, the Madhya Pradesh State Cooperative Land Development: Bank and the Association, the draft Agreement between the State of Madhya Pradesh and the Association, the Recommendation of the Committee provided for in Article V9 Section 1(d) of the Articles of Agreement and the text of the Resolution approving the proposed Development Credit are being clistributed to the Executive Directors separately. The draft Development Credit Agreement includes as a condition of effectiveness the implementation of an agreed banking plan for the project, including measures for the financial and managerial rehabilitation of LDB (Section 8.01(d)). 17. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 18. I recommend that the Executive Directors al?prove the proposed credlit. Robert S. McNamara President By: J. Burke Knapp Attachments May 8, 1973  ANNEX I Page 1 COUNTRY DATA - INDLA AREA POPULATION DEbhITY 5,:*68,580 hm2 577 million (mid-1973) 177 per km2 Rato of growths 2.2# (from 1961 to 1971) 350 per km of arable land POKULATION CHARACTERISTICS (1971) HEALTH Cr,de birtn Rate (per 1,000) 38 (est) Population per physician (1971) 4,000 (est) Crude Death Rate (per 1,000) 16 (est) Population per hospital bed (1968/69) 1,826 Infant MIortality (per 1,000 live birtha) 120-140 (eat) !NCOMii DIUTRIBUTIuN (1967/68) DISTRIBUTION OF LAND OWNERSHIP (1954/5) y2 of consumption, loweet quintile rural 8% (eBt) urban 7% (eat) % owned by top 7% owners 527% (est) G af coneumption, highest quintile rural 41% (eat) urban 44% (eat) 9iJ owned by semalleat 25,4 of oners 176 (est) A(CCESS TO PIPED WATER (1971) ACCESS TO ELECTRICITY (1971) o population - urban 70% (eat) % of population - urban 100 (est) of' population - rural 57 (eat) % of population - rural 25 eat) NRTIO- (1960 - 69) EDUCATION Caj.irie intake as % of requirements 83 (eat) Adult literacy rate p (1971) 36 ' Per capita pr6tein intake (gr. per day) 55 (eat) Primary achool enrollment 7 (1969/70) 79 GNP PER CAPITA IN 1970 a US 2 110 GROSIS 6ATIONAL PRODUCT IN 1972/73 ANNUAL RATE OF GROWTH (%. conetant prices) US 8 Bln. 6 1961/62-1965/66 1965/66-1969/70 1970/71-1972/71 GNM' at Mrket Prices 63.6 100.0 3.3 4.7 2.0 zroos Domestic Investment 9.3 14.6 Grcoj N.tional Saving 8.6 13.5 Cuzrent Account Balance 0.7 1.1 Resaurce Gap 0.5 0.8 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 VleAdd(at fa&ct2r ooet) Labor For V.A. Pe, Worker USSBlln. 7 oUS4 f Ntional Average AgrIculture 19.4 42.6 129.9 72.0 149 47 lnduetry 15.3 23.3 20.2 11.2 658 208 Ser,!ices 24.3 34.1 30.2 16.8 805 255 Total/average 57.0 100.0 103 100.03 GOVatNICi2T FINANCE !/ General Government Central Government (Ra. Bln) 9~ of GDP (Re. Blni of G DP 1971/72 1971/72 1968-71 1971/72 1971 72 1968_71 Current Receipte 70.30 16.4 14.9 40.28 9.4 8.5 Current hExpendituree 71.64 16.7 14.6 41.28 9.6 8.1 Current Surplue/Deficit - 1.34 - 0.3 0.3 - 1.00 - 0.2 0.4 Capital Expenditures 35.66 8.3 7.8 29.23 6.8 6.o External Aesletance (net) 3.25 0.8 1.1 3.25 0.8 1.1 I/ Population of 10 yeara and over; extracted from 1% sample data of the 1971 Censue. ,/ Official eatimates probably overeatimates actual enrollment of age group 6 - 11 by one-fifth. S/ The per oupita GNP estimate ie at 1970 mrarket prices, calculated by the same oonversion technique as the 1972 World Atlae. All other conversions to dollare in this table are at the average exchange rate prevailing during the period covered. g,/ stimatea. i Transfers between Center and Statee have been netted out.  ANNEX I Page 2 COUNTRY DATA - INDIA MONEY, CREDiT AND PNICIS 1965/66 1969/70 1970/71 1971/72 October 1971 October 1972 Billion RB outstanding at end of period) Money and luasi Money 61.4 933 105.6 122.3 113.7 130.4 Bank Credit to Public Sector 40.8 52.4 56.9 69.o 64.0 77.5 Bank Credit to Private Sector 28.1 48.3 56.7 64.4 59.9 64.3 (Percentages or Index Numbers) 1965/66 1969/70 1970/71 1971/72 Februarv 1972 February 1973 Money and Wuasi Money as % of GDP 24.2 24.3 24.8 26.5 Wholesale Price Index (1961/62-100) 137.5 175.7 180.6 192.2 191.2 217.2 Annual percentage changes in: Wholesale Price Inde2 12.4 6.4 2.8 6.4 13.6 Bank Credit to Public Seotor 12.9 1.5 8.6 21.3 Bank Credit to Private Sector 12.8 15.1 17.4 13.6 BEiACE OF PAYMENTS 1969/70 1970/71 1971/72 ) CHANDCISC R (Million US S) US S M1n. 7 ihaport of Goods 1,884 1,950 2,106 Jute Manufactures 291 15 Imports of Goods -,109 2,179 2,436 Tea 188 9 'Trade Balance _ 225 - 229 - 330 Cotton Textiles 161 a XFS (net) 13 - 7 n.a. lIon Ore 139 7 Resource Gap - 212 - 236 nEn. Bogineering Gooda 136 7 Others .6 Interest Payments (net) - 192 - 214 n.a. Ot&l I,980 100 Other Factor Payments (net) - 15 - 20 Tu.s. rX X Net Transfers 79 83 n. Balance on Current Account 340 - 387 n.a. :XT3 NAL DEBT, Mrch '1. 197, US $ MIn. Official Aid (incl. grants) Repeyable in fureign ourrency 7,)71 Disbur,emente 1,168 1.096 1,089 Repayable through export of Amortization - 357 - 387 goode 782 Direct Foreign Investment ) - 288 - 558 nos. Total Outstandiag 3,553 Other Capital (net) All Other lItems ) DUST SERVICE RATIO FOR 1971/72 30.6 percent Increase in Reserves (-) 03' 237/ 39 Gross Reserves (end year) 1,095 1,052 1,277 liet Reserves (end year) 912 1,052 1,277 IBHD/IDA LENDING, March 31. 1973 (US$ Mln-) RATE OF EXCHANGE Prior to roid-December 1971 2 CS S 1.00 - Re. 7.5 I8RD IDA Re. 1.00 - UIS S 0.133333 Outstanding and Disbursed 541 2,105 Mdi-December 1971 to a US t 1.00 - Re. 7.27927 Undisbursed 66 755 end June 1972 Rs. 1.00 - US t0.137376 Outstand-Lro incl. Undosb,nsed 607 2,960 After end june 1972 j Floating Rate S.pot Rate (Marci: 31, 1975) a approx. US t 1.00 - Rs. 7.59 approx. Rs. 1.00 - US 50.13 a/ Ailocations of SDR's and valuation changes resulting solely from changes in exchange rates and tF. goid parity of the US dollar are tre,ted here as exogenous to the balance of payments. p/ Amortization and interest payments as a percentage of merchandise exports.  Annex II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN INDIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1973) Loan or Undis- Credit No. Year Borrower Purpose BANK IDA bursed 33 Loans/ 24 Credits fully disbursed (net of Cancellation) 876.4 1143.1 307-IN 1961 IISCO Coal Mining 19.5 - 1.7 414-Im 1965 ICICI Industry DFC VI 48.3 - 1.1 89-IN 1966 India Beas Equipment - 23.0 3.3 515-IN 1967 ICICI Industry DFC VlI 24.6 - 1.0 614-IN 1969 India Tarai Seeds 13.0 _ 10.0 615-IN 1969 India Telecommunications III 27.5 - 2.0 176-IN 1970 India Kadana Irrigation - 35.0 23.3 683-IN 1970 ICICI Industries DFC VIII 40.0 - 7.3 191-IN 1970 India Gujarat Agricultural Credit - 35-0 8.2 203-IN 1970 India Punjab Agricultural Credit - 27.5 27.5 226-IN 1971 India Andhra Pradesh Agri. Credit - 24.4 14.1 230-IN 1971 India Agro-Aviation - 6.o 6.o 241-IN 1971 India Telecommunications IV - 78.0 70.9 242-IN 1971 India Power Transmission II - 75.0 74.9 249-IN 1971 India Haryanad Agricultural Credit - 25.0 20.5 250-IN 1971 India Tamil Nadu Agricultural Credit - 35.0 30.3 264-IN 1971 India Cochin II Fertilizer - 20.0 19.0 267-IN 1971 India Wheat Storage - 5.0 5.