India - Rajasthan Dairy Development Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1524-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE RAJASTHAN DAIRY DEVELOPMENT PROJECT November 15, 1974 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 It may not be published, quoted or cited without Bank Group authorization.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 (As of November 8, 1974) US$1.00 = Rs. 8.11 Rs. 1.00 = US$0.123 Rs. 1 million = US$122,956 (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. 8.00, which was the rate at the time of the report's completion.) 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 GO'ERNME OF INDIA FOR THE RAJASTHAN DAIRY DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$27.7 million on standard IDA terms, to help finance a project for providing dairy processing facili- ties and developing an integrated dairying system in the State of Rajasthan. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (402-IN, dated May 7, 1974) was distributed to the Executive Directors on May 20, 1974. 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 the extreme difficulty of its economic conditions. India's economic policies and performance have their shortcomings, many of which are attributable to the open political system, where the reconciliation of conflicting political views tends to favor less than optimal economic solutions; others are due to the sheer magnitude of the task facing the Govern- ment. Governing a country divided into more than 20 states with a population of some 580 million and over 60 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 cir- cumstances into account. So, also, must account be taken of the uncertainties imposed by the uncertain availability of water. A bad monsoon, which is in- evitable from time to time, has a pervasive influence over the entire economy and wipes out the results of years of effort. 4. In the past 25 years, national income has grown at nearly 4% per annum, which compares very favorably with the average annual growth rate of less than 1% during the preceding 50 years. Population has also grown faster in the past two decades than previously, but per capita income has neverthe- less risen from. a more or less stagnant level in the first half of this century to achieve an average growth of roughly 1% a year since independence. 5. Progress has been impressive on many fronts but disappointing on others and has all too often fallen short of India's massive needs. The growth of the socia-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 agri- cultural 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 concerned 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, and has initiated in recent years a variety of programs specifically designed to alleviate poverty. 6. In broad terms, the structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 43% of national product in the early 1970s compared with around 49% twenty years previously. The share of output contributed by the industrial sector has increased only slowly and since the late 1960s has remained approximately constant at a level of 23%. There has, however, been a shift in the com- position of industrial production, with consumer, intermediate, and capital goods now contributing about one-third each compared with an overwhelming preponderence of consumer goods production 25 years ago. 7. The economic report contained a review of the immense difficulties confronting the Indian economy as the Fourth Plan period drew to a close. The final year of the Plan, 1973/74, witnessed a severe deterioration in India's terms of trade which was led by, but by no means restricted to, the dramatic increase in oil prices. The resulting balance of payments difficul- ties were compounded by the need for food imports following the drought of 1972/73, in order to sustain the public distribution system on which the poorest section of society is particularly dependent. Giveiu India's perva- sively agricultural economy, the cdrought also had the effect of causing a general slow-down in economic activity which was further aggravated bv infrastructure constraints, particularly widespread power shortages and labor problems of Indian Railways. Food shortages and other scarcities touclied off an Lnprecedented inflationary spiral fueled by large budgetary deficits whicil were at least partly attributable to mounting expenditures for drought relief. The inflation in turn contributed to labor unrest while efforts to cope witlh it through budgetary cuts affected, among other things, the level of real expenditures for development programs. 8. Thus, at the commencement of the Fifth Plan period (1974/75-1978/79) the most urgent Lasks facing policy makers were: to get agricultural pro- duction moving again; to bring inflation under control; to reduce India's dependence on oil imports by compressing energy consumption and by formulating and implementing, programs to develop domestic energy sources; to boost export earnings and to tap additional sources of aid in order to sustain imports; ancl, finally, to maintain a minimum investment program so as to avoid economic standstill in the longer run. Even in the best of times, it would have been nxtremely difficult to pursue simultaneously such a variety of potentially inconsistent objectives.  -3- 9. Events since the preparation of the last economic report provide little encouragement. For the second time in the last three years, the weather has let down India's farmers with the result that the kharif (fall) crop recently harvested is believed to be considerably below last year's (about 60 million tons as compared with 67 million tons). The outlook for the next rabi (spring) crop is uncertain in view of continuing shortages of power for irrigation pumps and possible fertilizer shortages. The reduced avail- ability of foodgrains, the depletion of official food stocks, India's balance of payments difficulties, the inflationary setting and frequent changes in the Government's food procurement policy have led to hoarding for both speculative and insurance purposes. Procurement for public distribution has become extremely difficult. The public kitchens established in some of the worst-affected areas (Bihar, Bengal, Orissa) bear evidence of the serious- ness of the situation as well as of the Government's determination to prevent extreme hardship. 10. The spectre of massive food import requirements hangs over an already very difficult balance of payments situation in the current year. The need for six to seven million tons of foodgrains imports appears evident, and considerably more than half this amount either has been delivered already or has been purchased. There is little evidence of a major break in the prices of other commodities imported in substantial quantities by India (e.g. oil, fertilizers, steel, non-ferrous metals, rock phosphate). 11. One of the few bright spots in the balance of payments picture has been the growth of export earnings. In 1973/74 export earnings recorded an unprecedented increase of about 30% and there are indications of a similar increase in the current year. While these increases - particularly that in 1973/74 - are primarily attributable to unit value increases caused by worldwide inflation, there is greater willingness to take advantage of export opportunities, as illustrated most dramatically by the recent diversion of sugar from domestic consumption to exports. 12. Nevertheless, despite the increase in export earnings, India is expected to run a massive trade deficit this year - probably of the order of US$1,600 million as compared with US$795 million in 1973/74 and a negli- gible one the previous year. Moreover, despite the magnitude of the current deficit, it is unlikely that India's imports, excluding foodgrains, will be as large in volume as in 1972/73. In addition to financing a trade deficit of this order, India will have to meet debt service payments of about US$730 million. These financing requirements will be partly offset through Consortium assistance and USSR aid, which are together expected to reach disbursement levels of about US$1,550 million in 1974/75 compared with about US$1,270 million in 1973/74. The deferred payment arrangements for part of her oil requirements that India is understood to have reached with Iran and Iraq will also provide welcome relief. Nevertheless, these various sources of financing hardly measure up to India's current requirements. India will have to draw on her foreign exchange reserves, which, at about US$1,300 million, are currently equivalent to less than three months of imports. India has also drawn US$375 million on the IMF in the current year. The Government  - 4 - also intends to make use of the DIF oil facility, and a drawing on this facility of about US$240 million has been recently approved for use in calendar year 1974. 13. On the domestic front, the Government's present efforts are con- centrated primarily on maximizing production in key sectors through a system of priorities in the allocation of scarce resources and through careful monitoring of developments and performance. In agriculture this entails provision of power on a priority basis for minor irrigation and fertilizer production and allocation of adequate foreign exchange for as much fertilizer as can be imported from the limited world supplies. Similarly, efforts are made to identify production bottlenecks in such sectors as fertilizer pro- duction, coal mining and power generation; and special arrangements exist for meeting expeditiously the foreign exchange requirements of these sectors for such items as captive power units where appropriate, spares and replace- ment parts. The railways are also tied into this system and accord priority to the movement of goods required by these sectors. In the fertilizer, coal and power sectors, senior officials are provided on a continuing basis with detailed production figures along with explanations for production shortfalls. Attempts are also being made to rationalize the administrative machinery of the Government in these sectors, as evidenced by the October 1974 decision to bring irrigation under the wing of the Food and Agriculture Ministry and to regroup power generation and coal mining under an Energy Ministry. 14. In the short term, however, there are limits to the extent to wbich India's dependence on oil imports can be reduced and production of domestic sources of energy can be stepped up. Insofar as the compression of demand for oil products is concerned, these limits are determined, on the one hand, bv the relatively small proportion of oil products used for private con- sumption (possibly one-sixth) and, on the other hand, by tile limited avail- ability of domestic substitutes (i.e. coal and power). The 13 miiillion tons of crude oil plus 3 million tons of product imports planned for the current year probably represent the lower limit beyond which these imports cannot be curbed without serious repercussions on domestic production. Had colsuTaption been allowed to grow in line with recent trends, the present level of crude and product imports taken together would probably be of the order of at least 18 million tons. 15. A major effort is being made to use existing capacity as fully as possible throughout the economy. To this end, despite the serious balance of payments problem described above, the Government is pursuing a relatively liberal policy toward imports of raw materials required by industry. Never- theless, it is hard to get away from the current infrastructure constraints and particularly the shortage and unreliability of power supplies which, though somewhat eased, continue to affect production. Fiscal and monetary policies, including the cutback in budgetary expenditures and limitations on bank credit, are also restraining industrial output; and there is some evidence that, due to rapidly rising food prices and the consequent erosion of real purchasing power, the demand for some consumer items and industrial projects is being affected. Given the various constraints, there is likely  -5- to be little or no industrial growth in the current year which, in combination with the current agricultural situation, makes it unlikely that there will be anv GNP growth either. In regard to inflation, the Government has made impressive efforts to curb budgetary expenditures and to tap additional sources of revenue. However, not surprisingly, in view of continuing food shortages and other scarcities, inflation has not abated. The wholesale price index, which in 1973/74 had recorded an increase of 29% over the pre- vious year, has risen by a further 14% during the first five months of this fiscal year. 16. In present circumstances the Draft Fifth Plan, published in late 1973, has not been finalized. In real terms investment in the current Annual Plan is about 30% below the annual level implicit in the Draft Fifth Plan, and even this is unlikely to be reached. To adjust to reduced resource availability a number of investments are being postponed. Expenditures on some of the social sectors such as education and family planning are un- fortunately also affected. The focus once again is primarily on investments in key sectors such as fertilizer, coal, power, and steel, and quite rightly within these sectors the emphasis is on completing ongoing investments before committing resources to new schemes. 17. In the long run, given her groundwater, coal, hydroelectric, iron ore, non-ferrous metals and human resources, India undoubtedly has the capability to overcome her present difficulties. It is, however, clear that to overcome them and to resume the interrupted process of economic development, India will require substantially larger capital inflows than foreseen by the authors of the Draft Fifth Plan. It is equally clear that as large as pos- sible a proportion of these requirements should be provided on concessional terms. However, even on very optimistic assumptions regarding India's suc- cess in narrowing her resource gap and the response of both Consortium and other donors, a gap will remain between external financing requirements and the availability of concessional aid. 18. India's external public debt outstanding on March 31, 1973, stood at US$9.9 billion. As a consequence of world-wide inflation and its effects on India's export earnings, service payments of about US$730 million due on this debt in 1974/75 are expected to be equivalent to about 17% of merchan- dise exports as compared with about 26% in 1972/73. However, substantial additional debt will have to be incurred as a result of increases in the prices of India's imports. In the future, therefore, the debt service ratio is likely to rise, given the magnitude of India's requirements and the un- avoidability of having to finance part of these on non-concessional terms. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 42 loans and 63 development credits to India totalling US$1,229 million and US$2,880 million (both net of cancellation), respectively. Of these amounts, US$655 million has been  -6- repaid, and US$1,112 million was still undisbursed as of October 31, 1974. Annex II contains a summary statement of disbursements as of October 31, 1974, and notes on the execution of ongoing projects. 20. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million, of which US$7.6 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$20.8 million, US$13.7 million represents loans and US$7.1 million equity. A summary statment of IFC operations as of October 31, 1974 is also included in Annex II (page 2). 21. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit operations. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and through its sizeable assistance to development finance institu- tions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and com- ponents for selected priority sectors has been instrumental in facilitating better capacity utilization in industry. The Bank Group has also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and related urban investments have also received Bank Group support in recent years. 22. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, and transport remains highly relevant. The priority of the agricultural sector has been further endanced by the present world commodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs such as credit and on-farm investments, command area development of existing irriga- tion schemes, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given LO projects benefitting small farmers and landless laborers as does rhs -resent diairv project. Lending in support of infrastructure and industrial .r:et- ments will focus on energy-related projects. Repeater credits for p2';!r and railways have high priority in this context, and discussions are under way with the Government in an effort to identify and prepare project3 specifically designed to facilitate coal production and coal transport. Lending for fertilizer projects, which has been an important feature in recent years, is expected to occupy an even more prominent place in tne future program; the use of coal-based technology will receive oarti-culcr attention. 23. The need for a substantial net transfer of external resources ir support of India's economy has been a recurrent theme of Bank econoadc re- ports and of the discussions within the India Consortium. The nee_d for read- ily usable foreign exchange assistance is especially pressing at a Lime when output and investment have to be adjusted to a radically differenc price situation. Consequently, Bank Group lending for critical indusltrial rav  -7- materials and components continues to be an essential element within the overall program of assistance. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. The import component of projects tends to be especially low in such high-priority areas as agricul- ture, education, and family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures. 24. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70 the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 35%, 28% and 42%, respec- tively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. Whereas on March 31, 1973, the Bank Group's share of India's outstanding external public debt was 21%, by 1979 it is likely to account for about 25%. Because Bank Group assistance to India is predomi- nantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1972/73 about 13% of India's total debt service payments were to the Bank Group. PART III - DAIRYING IN INDIA 25. This project in Rajasthan will contribute to the development of Indian agriculture, which accounts for about 43% of Indian GNP and employs 70% of the total work force. Although Government of India's (GOI) emphasis in the sector in recent years has been to increase the output of foodgrains, it is attempting to diversify where appropriate, with special attention to the dairy sub-sector. Over the past two decades there has been a marked decline in per capita consumption of milk, a primary source of animal protein for the bulk of the population. Efforts are now being made to increase milk production from 21 million tons in 1972 to 30 million by 1979. The project, as in the case of the Karnataka Dairy Development Project approved on June 13, 1974 and the Madhya Pradesh Dairy Development Project being presented today, is designed to make a significant contribution towards this target. 26. A large proportion of the world's bovine population is in India. It has 17% of the world's cattle and 50% of its buffalo. However, indigenous varieties produce very low milk yields. Their main contribution has been to provide draft power and to support a small livestock industry accounting for 14% of the total agricultural sector's share of GNP and about 5% of total exports. To increase milk production significantly, a large-scale effort to develop higher yielding animals and expansion of animal health care and breeding facilities is required. 27. Crossbreeding of indigenous cattle with exotic varieties to pro- duce higher yielding dairy cattle has been conducted in India for many years,  -8- so far with only limited success. With one rather notable exception, dairy development has not been accompanied by adequate institutional support, effec- tive organization of small and marginal farmers (who produce most of the milk) into economically viable units, nor by development of adequate facilities for milk collection, processing and marketing. Nor has there been adequate provision of animal health care and technical services to farmers. Few farmers use their land principally for dairy production, which remains essentially a subsidiary farm activity. There is also a shortage of animal feed in the country. If a significant increase in milk production is to be achieved, additional feed must be made available or more of the available feed must be reserved for high yielding animals. The demand for cereal grains as human food and the favorable export position of oilseeds and oilcake preclude any significant increase in the supply of concentrate feed for livestock. It is, therefore, important to encourage small farmers to develop animal production systems which will result in more efficient use of available supplies and development of higher quality forages. It is being demonstrated in India that by integrating leguminous fodder into the existing farming systems, higher overall crop yields result which largely compensate for some diversion of land to fodder. 28. A notable bright spot in the Indian dairy picture is the successful experience of the Kaira District Cooperative Mlilk Producers Union Ltd. (AMUL). AMUL is centered on the formation and operation of hundreds of village milk producers cooperatives (a typical member owns two buffalo and tills less than 1 hia). The village cooperatives are welded together into a cooperative union which owns and operates facilities for milk and feed processing, collection and distribution and provides its members with a full range of technical services. The union is responsible for setting milk prices and obligated to buy milk in any quantity from members. Thus, the farmer is assured of year- round outlet for his milk at fair prices. Members are provided with a package of services which includes artificial insemination (AI) and routine veterinary health coverage, sale of concentrate feed and fodder seed, and training. The oustanding success of AMUL has encouraged GOI and a number of other states to foster the establishment of similar programs in other parts of the country. Status of Dairy Development in Rajasthan 29. Rajasthan, land-locked in the northwest of India, is the country's second largest state in size but among the smallest six in population. It is almost the size of Spain and its population of 27 million is slightly less than that of Burma. About 73% of the population is engaged in agricul- ture, which in 1971/72 accounted for 40% of the total state income. Of the 14.5 million ha under cultivation, about 2.5 million ha are irrigated. The average annual 1962/63-1971/72 rate of agricultural growth during the period was 2.8%. The average size of holdings is 6.8 ha; 60% are 2 ha or less. 30. In this agricultural environment, dairying, although a subsidiary activity, provides many farmers with their only source of cash income. Dairy animals are mainly low yielding nondescript native types. Crossbreeding of cattle through artificial insemination (AI) was initiated in the mid-sixties,  -9- but the effectiveness of the AI and health services has been limited due to shortage of qualified personnel and facilities. 31. The feed situation in the state is comparatively better than aver- age for India, but there is, nevertheless, a shortage. There is a consider- able scope for increasing production of high quality leguminous forages by small farmers through the integration of these crops into existing farming systems. 32. Total Rajasthan milk production is about 5 million liters per day or about 190 grams per capita, well above the national average of 112 grams per capita per day. However, dairy processing and marketing are largely undeveloped. Only about 40% of milk is consumed in fluid form. At present the State Government dairy supplies about 4% of the urban milk market in the project area which is concentrated in Jaipur, the state capital. Of the re- maining 96% of the urban milk market, up to 30% is supplied by the small city producers who maintain herds of up to 20 cows in the city; the remain- der and bulk of milk supply comes from village producers. 33. A dairy cooperative movement promoted by Government and based on the AMUL pattern was started in 1970 to assure milk supply to the Govern- ment-owned milk plants. The movement is slowly picking up momentum and societies with by-laws similar to AMUL's would be included in the proposed project, which is designed to build on the foundations already laid, and to further develop the dairy industry in the state using AMUL as a model. PART IV - THE PROJECT 34. The project was prepared by the staff of the Animal Husbandry and Veterinary Services Department of Rajasthan along guidelines from the GOI Animal Husbandrv Division of the Ministry of Agriculture. Two Bank Group missions assisted with preparation in February/March and April/May 1973. The project was appraised in March/April 1974. Negotiations were held in Washington from October 14, 1974 to October 21, 1974. The Borrower was repre- sented by Mr. T.P. Singh, Secretary, Ministry of Agriculture, and Mr. S.N. Saigal, Director, Department of Economic Affairs. The State of Rajasthan was represented by Mr. B.N. Malhan, Commissioner, Dairy Development and Special Schemes, and Mr. N.R. Bhasin, Deputy Secretary. ARC was represented by Mr. M.A. Chidambaram, Managing Director. A report entitled "Appraisal of Rajasthan Dairy Development Project" (Report No. 523a-IN dated November 4, 1974) is being circulated to the Executive Directors separately. A credit and project summary is attached as Annex III. The Project Description 35. The proposed IDA credit of US$27.7 million would assist in the development of an integrated program for increasing milk production in rural areas, involving about 240,000 farm families, most of whom farm  - 10 - less than 2 ha or are landless, tlhrough a six-year program focusing on quality crossbreeding, animal health, increased fodder production and the development of milk collection, processing and marketing facilities. Village cattle owners would form Dairy Cooperative Societies (DCS), which would itn turn be grouped into five milk producers' unions of about four or five hiundred DCS per union following the AMUL pattern in Gujarat. Each union would own and operate dairy and feed plants and would be capable of providing AI, animal health, training and extension, milk collection and marketing services to the DCS. In addition to the establishment of about 1,800 DCS and the five unions, a Rajasthan Dairy Development Corporation (RDDC) would also be formed to coordinate project implementation and produce exotic breeding stock. Under the project, the State Department of Animal Husbandry would be provided with a new Biological Veterinary Vaccine Institute (BVVI) for the production of animal vaccines. The College of Veterinary and Animal Sciences, (CVAS) would be provided with a diagnostic field laboratory for animal health services. An extensive training program for unions and DCS would also be provided. Finally, about 50 farms of progressive owners would be improved for demonstration purposes in fodder production, crossbred rear- ing, and milking hygiene. 36. At the village level, the DCS would be the focal point for the project. It would be the center for milk collection and regular payments to producers as well as sell balanced feed and provide artificial insemina- tion services to members. It would also be instrumental in communicating cooperative and technical information to members. 37. The unions would in turn provide important services to the DCS. The principal functions and responsibilities of each union would be to: (a) organize and effect the implementation of the DCS; (b) assist the DCS with organization, management, inspection and auditing; (c) establish and supervise milk and cattle feed transportation; (d) process and market the members' milk and operate the feed mills; (e) provide animal health and operate bull farms for AI services; and (f) demonstrate improved mixed farming, crossbred rearing, and fodder production techniques. The Project Implementat ion 38. The RDDC would be responsible for the implementation and coordi- nation of project activities and would play an essential role in the initial establishment of village cooperative societies and milk producers' unions. It would be organized under Articles approved by the Association 1/ with a professional management staff reporting to a 15-member board of directors consisting of representatives of government, banking and dairy farmers. It would be a condition of effectiveness that RDDC had been established, a managing director of suitable qualifications had been appointed, and recruit- ment of the Divisional Managers for Institutional Development, Livestock 1/ See Development Credit Agreement (DCA), Section 5.01(d).  - 11 - Development, and Engineering had been completed. 1/ The RDDC would be responsible for recruiting the nucleus staff for each union as it is formed and the spearhead teams that would organize the DCS for each union. These spearhead teams would concentrate on promotion, organization and operation of the DCS. Once a sufficient number of DCS had been organized, a union would be established as an independent entity; the nucleus union staff and its spearhead team would be transferred from RDDC. Assurances were obtained that GOI and GOR would each invest in RDDC an initial equity contribution of at least Rs. 300,000 and that they would provide additional equity capi- tal as required over the project period to ensure that RDDC qualified for loans from participating banks for project investments. GOR also agreed to provide redeemable equity capital to cover the first year's estimated start up costs. 2/ Assurances were also given that beginning not later than year six (1980) of the project, both GOI and GOR would offer for sale their shares in RDDC to the unions until the unions had attained at least 75% ownership. 3/ 39. To assist in the formation of DCS and unions along AMUL lines, RDDC would utilize the services of the National Dairy Development Board (NDDB), which has over the past several years developed a respected and commanding expertise in Indian dairy development, especially in the appli- cation of the AMUL model. Consultants would also be employed by RDDC to assist the unions in dairy engineering, milk and milk products marketing, dairy plant operations, mass-media communications, and fodder and livestock production. It would be a condition of effectiveness that RDDC had made satisfactory arrangements for training of consultants and executive staff and had recruited the consultants for dairy plant engineering, mass-media communications, and fodder and livestock production. 4/ 40. For each of the five unions, a cadre of trained staff would be assigned within RDDC to concentrate on DCS implementation. Once at least 25 DCS had been registered, expected within the first few months, the union would be legally constituted, staffed and capitalized. GOR agreed that union by-laws would be similar to AMUL's and subject to approval by the Association. 5/ GOI and GOR would together finance as equity 20% of union investments so as to ensure the unions' creditworthiness for participating 1/ See DCA, Sections 5.01(d), (e) and (i). 2/ See DCA, Sections 3.05, 5.01(f) and (g); Rajasthan Agreement (RA), Sections 2.14 and 4.05. 3/ See DCA, Section 3.04; RA, Section 4.04. 4/ See DCA, Sections 5.01(h) and (i). 5/ See RA, Section 2.13(a).  - 12 - bank financing. GOR would also provide additional redeemable equity capital to cover the unions' initial operating deficits. Assurances for these finan- cial commitments were obtained from GOI and GOR. 1/ Assurances were also given that, beginning not later than the sixth project year, GOI and GOR would offer their shares of the unions for sale at par to member DCS, until DCS had attained at least 75% ownership. 2/ 41. Each union would be free to set prices for its products and services, and for milk procurement from members. 3/ Union milk would be sold in the urban centers and its price would be more in line with the free urban market price than the subsidized prices of government dairies. How- ever, average consumer prices are expected to decrease, particularly during the summer, as private vendors no longer would be able to take advantage of a situation of milk scarcity to raise prices. Village producers would be able to earn more for milk sold to DCS and could therefore afford to retain for their own use fodder now sold to urban producers. The present policy of government dairies implies a subsidy of consumer milk prices that would come to an end when the unions determine prices in their members' interest. The only non-recoverable expenditures under the project are government start- up grants to DCS and farmers which are justified to facilitate the establish- ment of new cooperative organizations and the spread of proven crossbreeding technology to rural areas. Loan components are all recoverable at commercial interest rates. Farm income and sale of milk are not taxed, but the Govern- ment would earn sales tax on processed milk products, and income taxes from RDDC and unions. After-tax profits of the unions would be paid back to the DCS in the form of bonuses and dividends. A portion would also be used to help finance dairy and feed plant expansion. 42. The most significant risk facing the project is the task of creating DCS and unions to establish a new cooperative-controlled production and marketing channlel for the increased supplies of rurally produced milk. NDDB's experience in replicating the MfUL pattern in Gujarat and other parts of the country indicates that human responses to such a program are varied but that the obstacles, though many, are surmountable. Training and extension are .he kevs to success. Under the project an intensive program of staff devel- opment, training and extension would be provided. Five Union Training Centers (UTC) would be established to train dairy farmers, DCS staff, union staff, and board members in AMUL concepts. Instruction to DCS staff would also in- clude artificial insemination, milk testing, basic record keeping, and coopera- tive principles. About 50 village extension workers for each union would 1/ See DCA, Section 3.05; RA, Sections 2.12(b) and 4.05. 2/ See DCA, Section 3.04; RA, Section 4.04. 3/ See RA, Section 4.08.  - 13 be provided under the project. Their function would be to conduct an in- tensive extension effort to assist dairy farmers in the application of basic principles of animal husbandry, milk hygiene, crossbred feeding, fodder production and mixed farm management. Assurances were obtained from GOR that project funds for training and extension activities would be channelled through RDDC to the unions quarterly based upon plans prepared by the unions. 1/ 43. The DCS, the basic organizational unit to be established under the project, would each be managed by a committee of nine members, headed by an elected chairman who would also be eligible to be elected to the Union Board of Directors. The committee would appoint a secretary who would be responsi- ble for day to day running of the DCS. Each DCS would also have one to four helpers to assist the secretary. 44. Each DCS would be capitalized by share purchases by members and entrance fees. For each newly formed DCS, GOR agreed to contribute as grants initial equipment for milk testing, first-aid, and artificial insemination and estimated operating deficits in the initial operating period. 2/ These grants are available elsewhere in India where GOI promotes producers co- operatives, including the AMUL scheme, and are essential in bringing about the rapid transformation in the rural institutional farming and dairying system that the AMUL approach implies. The typical DCS should break even within three years and earn surpluses thereafter which would be used to pay milk bonuses to farmers and to purchase shares in the union. 45. The animal health activities financed under the project would be carried out by the unions, the Rajasthan College of Veterinary and Animal Sciences (CVAS) and the Biological Veterinary Vaccine Institute (BVVI). Each union would be provided with one mobile veterinary unit staffed by a veterinarian and trained assistant for every 35 societies, which would visit the DCS weekly without charge. The CVAS would be provided with a fully equipped diagnostic laboratory, located in the project area, to support the animal health program. A new facility would be provided to enable BVVI to meet the state's requirements for veterinary vaccines; at present the supply is inadequate. Although the BVVI would function as a government agency under the GOR Department of Animal Husbandry, a BVVI Board of Management would be established to ensure fuller representation of the organizations involved in animal disease control. This Board would be responsible for major policy matters including the integration of disease control programs with production of appropriate vaccines. The Board would include, inter alia, members from RDDC and CVAS. Project funds for CVAS and BVVI would be provided on an annual basis in accordance with annually prepared plans which would be approved by GOR. 3/ 1/ See RA, Section 2.11. 2/ See RA, Section 2.12(b). 3/ See Ra, Section 2.10.  - 14 - Project Cost and Financig 46. The total project cost is about US$52 million equivalent (including duties and taxes) of which the foreign exchange component is about 24% or US$12.7 million. Included in the project costs are initial operating defi- cits, working capital, and calf rearing subsidies. These costs, of approxi- mately US$10 million, would be borne by GOI and GOR and are necessary to assure a sound financial start for the project and to provide incentive for participation by farmers. A breakdown of the cost components is in Annex III. 47. The proposed IDA credit of US$27.7 million would cover 52% of total project costs including all of foreign exchange expenditures and 37% of lo- cal costs. The remaining 48% would be financed by GOI (16%), GOR (19%), ARC and participating banks (12%) and farmers (1%). 48. The IDA proceeds under the project would be applied as follows: (a) US$8.65 million - Equipment for feed mills and dairy processing plants. (b) US$14.1 million - Other equipment and civil works for unions, DCS and RDDC. (c) US$0.15 million - Exotic purebred cattle and frozen semen for RDDC and unions. (d) US$1.4 million - Facilities and equipment for produc- tion of animal vaccines (BVVI); a fully equipped, diagnostic field laboratory (CVAS). (e) US$2.4 million - Union Training Centers and extension programs. (f) US$1.0 million - Consultant's services. 49. IDA funds for the investments in dairy plants, feed mills and RDDC (except for imported cattle and semen), would be channelled from GOI to ARC and local banks. ARC would refinance loans by banks to RDDC and unions for project investments. The IDA proceeds for the animal health facilities, imported pulrebred cattle and semen, consultants and training wcultd be channelled by GOI through GOR to RDDC. Relending arrangements and terms are specified in Annex III. The lending rates under the project would be in line with prevailing interest rates, and the interest spreads are reasonable in relation to the risk elexrent involved, and the cost of appraisal and supervision of individual loans. 50. Subsequent to project appraisal and pursuant to IDA's suggestion, GOR commenced with the training of project personnel at NDDB. By the time  - 15 - of negotiations a substantial start on the project training program had been achieved, and it is proposed to provide retroactive finance under the credit for such training expenditures from June, 1974 up to a maximum of US$50,000. Procurement and Disbursement 51. Materials and equipment valued at US$18.2 million would be procured on the basis of international competitive bidding in accordance with the Association's Guidelines. Domestic suppliers would be accorded the usual preference of 15% or the rate of customs duty, whichever is lower. Importa- tion of exotic dairy heifers, bulls, and frozen semen (IJS$0.15 million) would be procured on the basis of price quotations from at least three countries free from foot and mouth disease where suitable animals are available. 52. Other equipment items valued at US$11.3 million would be unsuitable for international bidding. These include minor items such as electrical installations, factory fittings, furniture, and farm equipment. They would be purchased as needed over six years to coincide with the phasing of opera- tions and would require service and spare parts to be readily available locally. 53. The equipment, chemicals and glassware for the crossbred health program in the CVAS and for the BVVI (US$1.4 million) would be purchased locally. Bulking of orders for international competitive bidding would be impractical due to small and spaced orders. The world's leading manufac- turers' of scientific equipment are represented in India and are competi- tive, and local maintenance service offered by these established retailers would be needed to maintain much of the equipment to be purchased under the project. 54. Buildings and civil works (valued at about US$9.4 million) for the RDDC, union dairies and health support program would not be attractive to international bidders. These facilities would be dispersed geographically and over time. Contracts would be comparatively small and bulking of them would not be practical. The facilities would be constructed by local contrac- tors. Civil works would be awarded on the basis of competitive bidding advertised locally and in accordance with local procedures, which are satis- factory. 55. The proceeds of the IDA credit would be disbursed against the full c.i.f. costs of imported equipment, cattle and semen, and the ex- factory cost of local equipment bid internationally; against the full costs of expenditures by RDDC for technical and management services and overseas fellowships; against 70% of expenditures on locally procured equipment and civil works, including engineering; and against 80% of expenditures on union training centers and extension programs. Economic Benefits 56. The project would provide important economic and social benefits. The direct economic benefit of the project will be the increased production  - 16 - of milk, estimated at 475,000 tons per year by year ten. Some 240,000 farm- ing households, or approximately 1.3 million people, would benefit by having a raised standard of living and increased cash family income. The project's establishment of 1800 DCS, five unions and RDDC would provide employment for about 8,000 as well as support a milk transport service, consisting largely of owner-operators. The AMUL experience indicates that significant social benefits at the village level would also be derived under the project par- ticularly after the village cooperative dairy societies become firmly estab- lished with a regular net annual surplus of funds. Such funds would most likely be used to augment or initiate village development schemes involving education, health, family planning, minor public works and infrastructure. A further unquantifiable benefit to the village would accrue from improved nutrition which would result from increased intake of milk particularly by children and infants. The benefits which would accrue to consumers would come from an improvement in nutrition as a result of increased availability of whole pasteurized milk in the urban areas. Also, as the share of hygienic pasteurized milk to raw milk increases, the risk of milk born diseases such as TB, brucellosis and gastrointestinal infections (particularly with infants) will decrease greatly. Based on the quantified incremental costs and bene- fits, the economic rate of return to the project is about 31%. A sensitivity analysis to test the effect of slower formation of successful DCS assuming that plant investments are not delayed shows that if successful DCS can only be formed at half the rate envisaged under the project, the expected rate of return is 24%. PART V - LEGAL INSTRUMENTS AND AUTHORITY 57. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the Agricultural Refinance Corporation, the draft Agreement between the Associa- tion and the State of Rajasthan, the Recommendation of the Committee provided for in Article V, Section 1(d), of the Articles of Agreement and the text of a draft Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. 5X. The features of the draft agreements of special interest are described in paragraphs 38 through 45 of this report 59. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association.  - 1 7 - PART VI - RECOMMENDATION 60. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President by: I.P.M. Cargill Attachments November 15, 1974   CUTyDATA - It'l. A Page 1 k.lT'iba 577.Ti331Aon (ald-1973) 350 P., konlof -rablv )and SOCIAL IDIOCATORS In,dia (HInPu FM