India - Chambal Command Area Development Project

CIRCULATING COPY FILE coryO BE REURND TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1462-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE GOVERNMENT OF INDIA FOR THE CHAMBAL COMMAND AREA DEVELOPMENT PROJECT ( RAJASTHAN ) June 6, 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 It may not be published, quoted or cited without Bank Group authorization.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 May 25, 1974) US$1.00 3 Rs. 7.88 Rs. 1.00 - US$0.127 Rs. 1 million = US$126,904 (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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE GOVERNMENT OF INDIA FOR THE CHAMBAL COMMAND AREA DEVELOPMENT PROJECT (RAJASTHAN) 1. I submit the following report and recommendation on a proposed loan to the Government of India for the equivalent of US$52 million to help finance a project for command area development in the Chambal region of Rajasthan. The loan would have a term of 30 years, including 7 years of grace, with interest at 7.25% per annum. The proceeds of the loan - except for part of the on-farm development (US$6.5 million), fertilizer (US$6.1 mil- lion), and interest during construction (US$11 million) - would be channelled to the Government of Rajasthan in accordance with the Government of India's standard terms and arrangements for the financing of State development proj- ects. For on-farm development, the Government of India would relend the proceeds of the loan to the Agricultural Refinance Corporation (ARC) for 9 to 15 years at 6.25% and 6.75% annual interest, respectively. ARC would in turn on-lend the funds to the Rajasthan State Cooperative Land Development Bank (LDB) and to participating commercial banks in the project area at not less than 7% annual interest. LDB and the commercial banks would relend the funds to farmers at an interest rate of not less than 9-1/2% per annum. 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 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 Government. Governing a country divided into more than 20 States with a population of some 580 million and over 60 major languages is an extra- ordinary 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 per- formance must take these underlying circumstances into account. So, also, must account be taken of two massive uncertainties which overhang 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 tncertainty is the availability of external assistance. The vast majority of bilateral aid  is comnaitted annually, usually several months after the start of the fiscal year, and with considerable uncertainties about the level of commitments and disbursements of particular donors. Any delay in IDA replenishment has an enormous impact on aid flows. Together, these considerations severely complicate planting 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. 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 nevertheless 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 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 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 42% of national product in the early 1970. 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 composi- tion of industrial production, with consumer, intermediate, and capital goods now contributing about one-third each compared with an overwhelming prepon- derance of consumer goods production 25 years ago. 7. One of India's most impressive achievements since the mid-1960s has been the doubling of the average gratath rate of productivity in foodgrain production. This has been achieved primarily through the introduction of new, high-yielding seed varieties and through complementary improvements 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 productivity in- crease. Irrigation has played a major part in agricultural growth and, by reducing dependence on the monsoon, has reduced variability in performance. For instance, the drought-induced decline in foodgrain output in 1972/73 was only some 6Z, compared with a fall of almost 20% due to the drought in the mid-1960s. At present only about half of the potentially irrigable areas has been developed. Better utilization of the existing irrigation system and the extension of the irrigated a&reas 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% 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 growth averaged about 7% a year in the 1950s, rose to 9% in the first half of the 1960s, but declined to some 5% through 1972 and in the past three years has been negligible. The slow growth since the mid-1960s is especially worrying. To some 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 fur:her import substitution which had from the outset been at the center of the industrialization strategy; the recurring and at times acute bottlenecks in the production of a number of key intermediate goods such as power, steel, and cement; shortages of imported raw materials; and cumbersome administrative procedures. In the past year, the Government has made a number of important changes in the regulations and administration of the industrial licensing system, and in the recent budget for 1974/75 has made several tax concessions in order to stimulate the private sector. There are one or two promising signs that these measures may be having some effect, but it is too early to form a balanced overall judgment. 9. The gross domestic savings rate has been in the region of 14% 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% in only a few years. More recently, at a time of generally sluggish economic activity and also because of a decline in foreign assistance, the gross investment rate has been only about 14-15%. 10. The economy has been passing through an unusually difficult period in the past two years. On top of the stagnation of the industrial sector, agricultural production was severely set back by the drought in 1972/73. Foodstocks have been. depleted and there have been severe food shortages in many parts of the country. Prices have risen to very high levels and there has been considerable political unrest. Despite the  favorable monsoon in 1973 and the consequently good autumn harvest, as well as large imports in 1973/74, the food position has remained tight. The situation has been greatly aggravated by the vithholding of grain from the market for speculative and insurance reasons, reduced by the prevailing climate of inflation and shortage, and by the growing realization that the 1974 spring harvest would fall short of earlier expectations. The crop shortfall has been the result of acute shortages of fertilizer and of electric power and diesel -or irrigation pumping as well as poor winiter rains. All these difficulLies have meant that performance in the Fourth Plan (1969/70-1973/74) has turned out well below the targets: an aggregate growth rate of 3% per amnum compared with the aim of 5.7%, with capacity and production achievements in all the major sectors falling far short of the original goals. The growth rate of 5.5% in 1973/74 represented no more than a recovery from the negative growth the previous year. 11. Shortfalls in agricultural production, both of food crops and crops used for industrial raw materials, have been a prime cause of the inflation which has beset the country for the past two years. Prices have gone up as a direct result of the imbalance between supply and demand, and also indirectly because of the massive budgetary outlays, and consequent deficit financing, needed for drought relief, food subsidies, and crash production programs. The acute shortages of many intermediate and industrial commodities and, more recently, the surge in import prices have also contri- buted to the inflationary situation. Inflation is now running at an annual rate of around 25%, compared with only 4-5% a few years previously. The Government has made several attempts to reduce the rate of inflation, so far with little success. 12. The domestic economic difficulties together with the recent surge in world commodity prices have severely upset the development program. The Fifth Plan, which was published in draft last December and was due for im- plementation starting in 1974/75, is currently under revision, and in the interim the Government is proceeding with a substantially scaled-down pro- gram. Capital expenditure is being held down to a level which in real terms is likely to be below that of last year. The thrust of the investment pro- gram is on the key sectors whose output is in critically short supply: coal, electric power, oil, non-ferrous metals, fertilizer, steel, and transport. Within the tight budget, allocations to the social sectors, most particularly education, have been cut below previous levels. In line with the Government's aim to relieve the pervasive commodity shortages and to stimulate industrial production, the 1974/75 budget has also made a number of tax and other con- cessions to private industry. But the budget has also introduced additional taxation as well as increases in rates on transport and other public serv- ices, in order to hold down the budget deficit, 13. Ever since the balance of payments crisis of the late 1950s, a shortage of foreign exchange has constituted one of the most critical con- straints on development of the economy. The recent increases in world commodity prices have added to these problems, at a time when the economy is singularly ill-placed to deal with them. Petroleum has become a very  - 5 - prominent item in the import bill. In 1972/73 imports of crude oil and petroleum products amounted to US$265 million, equivalent to 10% of merchan- dise imports; estimates of the corresponding figures for 1973/74 are US$625 million and 18% and for 1974/75, depending on the availability of external financing and other factors, US$1,300 and 26%. In the Draft Fifth Plan the Goverament had already set out ambitious program of indigenous energy devel- opmenl: in order to reduce dependence on imported oil, but these have had to be supplemented by a variety of other measures. The short-term focus is on reduced consumption, by increasing the prices of petroleum products and, more important, by converting oil-burning equipment to coal wherever possible. But there are only limited opportunities for immediately reducing petroleum consumption, and some cutback in supplies appears inevitable. Since the bulk of petroleum consumption is concentrated in such vital sectors as agri- culture (as feedstock for fertilizer production, and as fuel for irrigation pumping and mechanised farming), goods transport, and industry, with final private consumption accounting for no more than 10% of total consumption, reduced oil supplies are bound to depress overall economic production. Another emphasis of short-term policy is to remove the immediate bottlenecks on coal production and transport. For the longer term, programs are already under way to raise the efficiency of oil utilization and to step up the pace of development of coal-based fertilizer technology, of oil exploration, and of exploitation of the considerable hydroelectric resources. None of these energy adjustment measures will be easy or quick of attainment and it will be several years before results of appreciable quantitative significance will be realized. 14. The increase in oil prices is only one element in a large widening of the trade deficit. The need for large imports of food and fertilizers, at the exceptionally high prices of the past year, and the price increases in oil, steel, non-ferrous metals, and other vital imports increased the import bill by 37% in 1973/74. This increase was partly offset by a 14% increase in exports, several export items benefiting from the commodities boom, but the estimated trade gap was about US$650 million compared with about US$50 million the year before. The outlook for 1974/75 is bleak, as the full effect of the deterioration in the terms of trade comes to be felt. Even with a severe compression of food, fertilizer, and petroleum imports and a probable decline in general maintenance imports in real terms, the total import bill could rise by a further 40% if prices continue at their present level. Exports promise to continue doing well, which should reduce the impact of the enlarged import bill. Nevertheless, there is a critical need for external assistance at a much higher level than the US$1,300 mil- lion estimated for 1973/74, which was itself US$400 million (or 45%) higher than the previous year. The Government secured two million tons of food aid from the USSR last year, half of which remains to be disbursed this year, and has negotiated credits from several oil-producing countries. The Gov- ernment has also drawn its gold tranche and first credit tranche from the IMF. In addition, the Consortium is discussing what action is possible to help India overcome its difficulties, and several members have already announced large increases in their aid programs for 1974/75.  -6- 15. As a result of substan-.ial past borrowings, India's external public debt (diAbursed only) stood at US$9.9 billion on March 31, 1973. Debt serv- ice in 19O73/74 is estimated at US$700 million, equivalent to around 24% of export receipts. This compares with a level of debt service of about US$200 million in 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 for- eign exchange crisis, from 1968/69 onwards the Consortium has extended debt relief to India. In 1973/74, the most recent year in which this action was taken, the amount of debt relief was about US$185 million. On the assumption that India can obtain its large, new financing requirements on appropriately soft terms, debt servLce is expected to grow more slowly over the rest of this decade than it did in the 1960s and should be equivalent to around 20% of export receipts by 1980. PART II - BANK GROUP OPERATIONS IN INDIA 16. Since 1949, the Bank Group has made 41 loans and 60 development credits to India totalling US$1,177 million and US$2,723 million (both net of cancellation), respectively. Of these amounts, US$627 milliou has been repaid, and US$959 million was still undisbursed as of April 30, 1974, Annex II contains a summary statement of disbursements as of April 30, 1974, and notes on the execution of ongoing projects. 17. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million, of which US$6.8 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$21.6 million, US$14.6 mil- lion represents loans and US$7.0 million equity. A summary statement of IFC operations as of April 30, 1974 is also included in Annex II (page 2). 18. 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, and seed development are other agricultural activities supported by the Bank Group. In recognition of the importance of industrialization for India's future development, the Bank Group has been active in financing the expansion of output in the fertilizer sector and also, through its sizeable assistance to development finance ins- titutions, in a wide range of geographically scattered medium- and small- scale enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capacity utilization in these sectors. 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. 19. 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 remiais highly relevant. The priority of the agricultural sector has been furt'her enhanced  -7- in the present world commodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs such as credit and on7farm 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 year. Specia:' emphasis will be given to projects bene- fiting small farmers and landless laborers. Lending in support of infrastruc- ture and industrial investments will focus on energy-related projects. Re- peater credits for power and railways have high priority in this context, and disicussions are under way with the Government in an effort to identify and prepare projects specifically designed to facilitate coal production and coal transport. Lending for fertilizer projects, which has been an important fea- ture in recent years, is expected to occupy an even more praminent place in the future program; the use of coal-based technology will receive particular attention. 20. The need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic re- ports and of the discussions within the India Consortium. The need for readily usable foreign exchange assistance is especially pressing at a time when output and investment have to be adjusted to a radically different price situation. Consequently, Bank Group lending for critical industrial raw 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. 21. It is clear from the review of the Indian economy that as such as possible of India's external capital requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and some Bank lending to India is appropriate. As of March 31, 1974, the loans to India held by the Bank totalled US$559 million, of which US$97 million reamined to be disbursed, leaving a net amount outstanding of US$462 million. 22. Of the external assistance received by India, the proportion contributed by the Bank Group has grown significantly. In 1969/70 the Bank Group accounted for 34Z of total commitments, 13% of gross disburse- ments, and 12% of net disbursements as compared with an estimated 35%, 28% and 42%, respectively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. Whereas on March 31, 1973, the Bank Group share of India's outstanding external public debt was 21%, by 1979 it is likely to account for almost 30%. Because Bank Group assistance to India is predominantly 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 pay- ments were to the Bank Group.  - 8 - PART III - AGRICULTURE AND IRRIGATION IN INDIA General 22, Agriculture is the most important sector in India; it engages 70% of the labor force, contributes presently about 45% of GNP, and accounts for a major share of exports. Consequently, investments in agriculture have been given priority, especially since the mid-1960s, and deserve continued emphasis over the next five years. 23. Since independence, the overall growth rate of agricultural pro- duction has averaged about 3% per annum. This low overall rate of growth in the agriculture sector obscures considerable variations over shorter periods of time, between crops, and between regions. The overall rate has been very much affected by the serious droughts in 1965 and 1966 and again in 1972. At the same time, the success of high yielding varieties of wheat produced increases in wheat production of about 20% p.a. between 1967 and 1971. Other foodgrain crops, notably rice, have not enjoyed anything like the same suc- cess, as the introduction of high yielding varieties has encountered diffi- culties arising from local climatic and ecological conditions. The effects of the green revolution, which primarily affected wheat, have been concen- trated in north western India, very largely on account of the advanced state of agriculture in that area and the availability of irrigation. 24. Despite the progress made in many aspects of food production, India's agriculture remains heavily dependent upon the vagaries of thte weather. A major factor in reducing this dependence will be the expansion of irrigation and the more effective use of existing investment in irriga- tion facilities. The Government is also placing emphasis on thie improved supply of inp-uts such as seeds and fertilizer, agricultural credit, anf extension services. Irrigation 25. Over the first half of the twentieth century, the area under irrigation in India increased by only about 1% p.a. to reach, s*lghtly more than 20 million hectares in 1950/51, or about one fifth of ln6iars cultivated land. Out of these 20 million hectares, about half was by major and medium irrigation works. 26. Irrigation development has appropriately received incrersetl attention since independence, and substantial resources were devoeet. it throughout the four Five Year Plans. Outlays for irrigatiorn Lon ment during the first tnree Plans and during the three Annual. Plan '4-A-9 totalled Rs 26.8 billion, and the fourth Plan allocated Rs 16 billion to irrigation. While minor irrigation increased only slightly from 6.4 tm4l lion ha to 7.5 million ha, tele area covered by major and medium svwte-s bad more than doubled to 21.4 million hectares compared with an estimated n1t-. mate potential for irrigation of 57 million hectares. But of the uewv ad.di- tional acreage of about 10 million ha, only 80% was being utilixed, *sd much of that inefficiently.  - 9 - 27. The Second Irrigation Commission and the National Commission on Agriculture found that the under-utilization of irrigation potential was attributable to the lack of integrated development in the irrigated areas, insufficient farmer training and extension service, and lack of administrative coordinatioh. -It has been unofficially estimated that the major part of recently completed irrigation projects require additional investments of between US$:'00 and US$500 per ha before they can become fully productive. Accordingly, for the Fifth Plan period (1974-1979) various measures have been designed to improve utilization, and a Command Area Development Depart- ment has been set up in the Ministry of Food and Agriculture to coordinate work on a list of high priority projects including the proposed project. 28. In view of the substantial investment that has already been made in major irrigation works, the economic return on invest-ent which facili- tates the most effective use of the water provided can be very high. Con- sequently, command area development has been given high priority under the Fifth Plani proposals, and just under 10% of public sector investment in irrigation has been allocated for this purpose. Further funds, doubling this allocation, will be made available from institutional sources for credit. In addition, major institutional changes have been proposed affecting the coordination of services in commaand areas and the administration of credit. These proposals are incorporated in the framework of this project, which will be the Bank Group's first project of this kind in India. 29. Several IDA agricultural credit projects presently include, as one component, financing of land leveling through cooperative and commercial credit institutions. Responsibility for carrying out the works under these projects rests with the farmers, who, with few exceptions, have been unable to organize themselves to construct and maintain the neces- sary works. As a result, the implementation rate of on-farm works under these and other major irrigation projects in India has been slow. In addi- tion, these schemes make no provision for the concurrent improvement and expansion of the irrigation, drainage and road networks, which is essential for the efficient use of available water. An acceleration in the rate of implementation of on-farm works will require a transfer of responsibility for their execution to a project authority. It will also require legisla- tion, under which on-farm works can be associated with minor realignments of farm boundaries and with the compulsory execution of the work. Agriculture in Rajasthan 30. Rajasthan is the second-largest state in India, with an area of 34 million ha; but it has one of the smaller populations, about 27 million, of whom 80% are rural. The northwestern part of the state is arid and drains towards the Indus River. The southeastern part is semi-arid and drains mostly to the Chambal River and thence to the Ganges system. 31. About 37% (13 million ha) of the state is desert and is largely uncultivated. However, several large irrigation schemes, notably the Rajasthan Canal Project, are opening up desert lands for cultivation, using  - 10 - water from the upper Indus basin. About 2.1 million ha are irrigated, 55% from dug vells, 35% from public canal systems, and 10% from tanks. Irri- gated crops intlude cotton, wheat, paddy, sugarcane, millet, pulses, oil- seeds, fruit, and vegetables. 32. The Fifth Plan has been designed to achieve an overall annual growth rate of 5% in the state domestic product, including a growth rate of 4.4% in the agricultural sector. Public investment of Rs 6,350 million is en- visaged, of which 40% would go to irrigation projects and a further 10% to other agricultural projects. Major projects in the agricultural sector to be financed under the Plan include the Chambal and Rajasthan Canal Command Area Development Projects, and the Drought Prone Areas Program (all of which are proposed for Bank Group assistance). PART IV - THE PROJECT 33. In November 1972, a Bank Group Irrigation Reconnaissance Mission visited India at the request of the Government of India. It identified several command area development projects, of which two, the Chambal Command Area Development Project (Rajasthan) and the Rajasthan Canal Command Area Development Project, were appraised together in November 1973 after pre- paratory work by the FAO/IBRD Cooperative Program. A loan and project summary is given in Annex III. A report entitled "Appraisal of Chambal Command Area Development Project (Rajasthan)" Report No. 430-IN dated May 29, 1974, is being circulated separately to the Executive Directors. Negotiations of this project were held in Washington in May 1974. The Bor- rower was represented by Mr. G. Veukataramena, Deputy Secretary, Ministry of Finance, Department of Economic Affairs, and by Mr. Hit Prakash, Deputy Secretary, Ministry of Agriculture. The Government of Rajasthan was repre- sented by Mr. S.L. Ihurana, Chief Secretary, Mr. V.C. Pande, Secretary, Water Utilization and Command Area Development Department, and Mr. Hari Siagh Chowdhry, Chairman, Rajasthan Canal Board. The Agricultural Refinance Cor- poration was represented by Nr. M.A. Chidembaram, Managing Director. The Project 34. The proposed project is the development of the command area of the existing Chambal Irrigation Project in Rajasthan. The major works of the Chambal Irrigation Project were essentially completed in 1960. These works include a reservoir and a canal system, designed to serve an irrigable area of 229,000 hectares in the Kota and Bundi districts of Rajasthan, and a similar area in the neighboring State of Madhya Pradesh. -About 60,000 farm families live in the project area. The average farm size is about four hectares and the median size two hectares. About 55% of the farmers in the project area are within the lowest 40% on India's national income scale. The present cropping intensity in the project area is 87%, with only 22% occurring in the short wet season. The principal wet season crops are paddy and sorghum, while whest is grown in the dry season, partly on stored soil  - 11 - moisture. The other major crops are sugarcane, oilseeds and pulses. Agri- cultural production in the project area has not met earlier expectations due to a lack of drainage and on-farm development, inadequate roads, unsatis- factory maintenance, and ineffective supporting services. 35. The proposed project would be the first step in a program to correct these deficiencies and would include: drainage over 167,000 hectares; lining of 14 kilometers of canal, where seepage is excessive; increasing the capacity of 850 kilometers of canals and building or improving 160 control structures and about 4,000 tertiary outlets; on-farm development over 50,000 hectares, including irrigation, drainage ditches, and access to individual farms, boundary realignment and land shaping; construction or improvement of 250 kilometers of roads; afforestat:ion and erosion control on 1,000 hectares; provision of 15,000 nutrient tons cf fertilizer; the strengthening of agri- cultural extension, research, and cooperatives; construction of miscellaneous small works and the purchase of equipment for project administration, sup- porting services, and force accounts portion of the works. The project in- cludes special studies of hydrology, reservoir system operation, water use, drainage design, survey and construction methods for on-farm development, and aquatic weed control. A feasibility study for a second phase project in the Chambal area would also be undertaken. Project Implementation 36. The proposed project is expected to serve as a prototype in India for command area development. Consequently, particular care has been given to the institutional and organizational aspects of the implementation. To ensure full cooperation between all the departments concerned with command area development, the Government of Rajasthan (GOR) has set up a Command Area Development and Water Utilization Department at state level and is es- tablishing a Chambal Command Area Authority (CAM). The CM would be responsi- ble for water utilization and integrated area development in the irrigation command, including modernization of the distribution system, provision of drainage, and maintenance and operation of bosh the distribution and the drainage systems. It would be in charge of implementing and managing the project. Its Board would be headed by an Area Development Commissioner, who would also be the CAA's administrator. The CAA would have four departments: irrigation and land development, agriculture, revenue, and cooperatives. The Commissioner would have authority to coordinate all project related activities. The establishment of the CAA, with organization, board member- ship and powers satisfactory to the Bank, would be a condition of effective- ness for the proposed loan. 1/ 37. On-farm development within the project area would be compulsory to ensure efficient project execution and optimal use of the available land and irrigation facilities. To assist in this objective, the Rajasthan Land Development Corporation (RLDC) would be set up as a statutory corporation by GOR with an authorized share capital of Rs 100 million and a 50% equity participation by the Government of India (GOI). Its Board of Directors would be chaired by the Secretary of the Command Area Development and Water Utilization Department and would comprise representatives of GOI and 1/ See Section 6.01(e) of the draft Loan Agreement.  - 12 - the CAA. RLDC's establishment, with capitalization, board membership and powers satisfactory to the Bank, would be a condition of effectiveness for the proposed lean. 1/ RLDC's functions would be to act as a financial intermediary for on-farm development in the State. It would channel all land development funds to the CAA in line with the progress of on-farm works. RLDC would prepare applications for land development loans on behalf of those farmers who - because of their credit standing - are eligible for such loans from the Rajasthan State Coo?erative Land Development Bank (LDB) or from commercial banks. Other farmers would receive special loans from RLDC, using GOI funds. Subsidies would be available for several categories of disadvantaged farmers under the existing GOI program for small farmer development. 38. The extension service in the project area would be reorganized and would make use of progressive farmers as part-time extension workers. Provision has been made in the project for technical assistance and in- service training, including the engaging of a land development expert. A special group will be created to monitor the progress of the project. GOI is also considering the formation of a national unit to interpret satellite photography which could assist in monitoring the reduction of salinity and waterlogging. 39. On-farm development, in particular land shaping, would disturb the soil profile and result in a temporary loss of fertility. Under the present conditions of fertilizer shortage, GOI allocations are likely to fall short of requirements. In order to ensure the availability of fer- tilizer needed to restore the fertility of disturbed soil, the project provides for the import of 15,000 nutrient tons of fertilizer which would supply the difference between present allocations and recommended levels over a three-year period. Proposed arrangements for the distribution of this fertilizer to the farmers affected by land development are satisfactory. Project Costs and Financing 40. The estimated total cost of the project is US$91.5 million equiv- alent, including US$35.0 million in foreign exchange. The principal cost components net of contingencies are irrigation and drainage works, road construction and afforestation (US$22.8 million), on-farm development ($10.5 million), fertilizer (US$6.4 million), and project administration including the cost of training and technical assistance (US$12.3 million). The balance is made up by physical and price contingencies (US$28.5 mil- lion), and interest during construction (US$11 million). 41. The proposed loan would cover 57% of total project cost. COR would finance 30%, GOI 4%, and the Government of Madhya Pradesh, which will derive some benefits from the project, 6% of the total cost. The balance would be contributed by the Agricultural Refinance Corporation (ARC) and by 1/ See Section 6.01(d) of the draft Loan Agreement.  - 13 - the participating commercial banks and LDB. Of the proceeds of the loan, GOI would use US$6.1 million for the procurement of fertilizer and US$11.0 million for interest during construction, US$28.4 million would be on-lent by the Borrower to GOR on the normal terms on which development funds are being provided to state governments by the center. The remaining US$6.5 million would be passed on to ARC with 9 and 15 years maturity at 6.25% and 6.75% anmual interest respectively. 1/ ARC in turn would refinance about 80% of the land development loans extended to farmers by participating commercial banks and LDB at not less than 7%, repayable in accordance with the terms of the loans to farmers. Farmers would repay a commercial bank or LDB loan over a period of not more than 15 years, including not more than two years of grace, with interest at the rate of not less than 9-1/2%. Farm loans would be secured by mortgages. The exchange risk associated with the pro- posed Bank loan would be borne by the Borrower. Procurement and Disbursement 42. The proceeds of the proposed loan would be used to finance: equip- ment and materials (US$10.5 million), civil works, including on-farm devel- opment (US$26.6 million), technical assistance (US$0.1 million), interest during construction (US$11 million), and contingencies (US$3.8 million). 43. The estimated cost of vehicles and equipment for project manage- ment, force account construction and for hire to contractors, is US$8.0 mil- lion. Out of this total, US$5.4 million would be subject to international competitive bidding in accordance with Bank Group Guidelines. A preference limited to 15% of the cif price of imported goods, or the prevailing customs duty if lower, would be extended to local manufacturers in the evaluation of bids. About US$1.0 million worth of equipment and vehicles, consisting of categories of items costing less than US$100,000 each, which for reasons of efficiency are not suitable for international tendering, would be purchased through normal GOR procurement procedures, which are satisfactory. The balance of US$1.6 million would be reserved for local procurement and would not be eligible for reimbursement out of the proceeds of the Loan. Fertil- izer (US$6.4 million, 'includin& local handling and transportation) would be procured by the Government of India for reasons of economy and efficiency as part of the regular bulk purchases in the world market. Fertilizer procurement by GOI is based on international competition. However, because of the tight supply situation in the world market and the limited number of suppliers, formal advertisement would not lead to an adequate response. Instead, the Government seeks price quotations from potential suppliers followed by price negotiations to obtain the lowest price. This procedure is in accordance with international practice now common in the fertilizer trade and would be acceptable to the Bank, provided at least three quotations are invited. 1/ This amount of US$6.5 million on-lent to ARC beomes part of the overall funding provided to ARC by GOI at the terms mentioned in the text. Consequently, it cannot be defined which of the terms mentioned apply to the funds stemming from the proposed loan.  - 14 - 44. The civil works included in the project are individually small, scattered over the entire project area, and scheduled for construction over a five-year period. Much of the construction work and on-farm development would be carried out intermittently as determined by seasonal weather con- ditions and by the ongoing agricultural activities in the project area. In these circumstances it would not be feasible or economic to combine any of the categories of civil works into contracts sufficiently large to attract international competition. It. is therefore proposed that the civil works be carried out by local contractors, which are mostly small labor contractors, following local tendering, or, where the use of machinery is required, through force account. 45. The proceeds of the loan would be disbursed against the c.i.f. cost of imported equipment or against the ex-factory price of equipment manufactured locally, and at the rate of 70% for imported equipment procured locally. Dis- bursements for civil works and on-farm development expenditures would be on a percentage basis. Loan disbursements for technical assistance would cover the full cost of internationally recruited consultants. Disbursements for fertilizer would be made against c.i.f. cost. GOI intends to procure fertil- izer for the Project as part of its bulk import orders to meet national requirements. GOI plans to purchase the fertilizer financed from the loan in the first year of Project implementation. Since distribution of this quantity of fertilizer will be made by GOI to Rajasthan and by Rajasthan to Project farmers only over the period of the Project, most of the fertilizer would initially be devoted to India's general requirements, but the GOI would be obligated to replace it in later years in order to meet the specific Project needs. These arrangements would in effect introduce a small program loan ele- ment into this operation, but this is considered to be justified by India's acute need for foreign exchange for fertilizer imports following the increase in the oil price last fall (see paragraph 14 above). As indicated in paragraph 39, proposed arrangements for distribution of this fertilizer are satisfactory. The loan would be fully disbursed by June 30, 1981, about one year after Project completion. Benefits and Economic Justification 46. The average cropping intensity in the project area would rise from 87% at present to 111% at full development. In the areas receiving on-farm development, the ultimate cropping intensity would be 150%, of which 135% would be irrigated. The production of foodgrain would increase from 140,000 tons at present to 350,000 tons at full development. Market prospects for all the crops are good. Processing, storage, and marketing facilities are generally satisfactory for the present levels of production and GOR has investment plans which should be adequate to meet requirements at full project development. 47. Farm incomes would increase from an average of Rs 1,800 to between Rs 2,600 and Rs 10,000, depending on farm location and size, over an eight- year period. Irrigation and drainage charges would be raised to cover the full cost of operating and maintaining the project works. These charges, including the service of farm credit, would still leave the farmer with a substantial increase in net income to provide adequate incentives for  - 15 - participating in the project. For capital cost, a committee to be estub- lished by GOR would recommend appropriate recovery arrangements, also taking into account the farmer's incentive and capacity to pay. 1/ 48. The project would provide the equivalent of 20,000 additional jobs over the next decade and would lead to an increase in the net value of production from the project area of Rs 102 million (US$13 million) per year at full development in eight years' time. The economic rate of return on the project investment is estimated at 19% assuming a 30-year life for the project, shadow prices for farm labor at about 75% of the wage for hired labor in peak periods, and treating as sunk cost the investment in the exist- ing Chambal irrigation scheme. The rate of return is very sensitive to var- iations in the pace of agricultural development, a factor which the provi- sion of improved extension services is designed to overcome. PART V - LEGAL INSTRUMENTS AND AUTHORITY 49. The draft Loan Agreement between India and the Bank, the draft Project Agreement between the Bank and the State of Rajasthan, the draft ARC Agreement between the Bank and the Agriculture Refinance Corporation, the Report of the Committee provided for in Article III, Section 4(III) of the Articles of Agreement and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 50. Points of special interest are referred to in paragraphs 37 and 47. The Loan Agreement specifies among additional conditions of effective- ness that a Subsidiary Loan Agreement between the Government of India and the Agricultural Refinance Corporation shall have been executed and ratified, that the Command Area Authority for the Project has been established by the Government of Rajasthan, and that the Rajasthan Land Development Corporation has been established (see Section 6.01(a), (d) and (e)). 51. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 52. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 6, 1974 1/ See Section 2.11(c) of the draft Project Agreement.   ANNEX I Page 1 COUNTRY DATA - INDIA AREA POPULATION DENSITY 21 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2/ 3,268,580 km-/ 577 million (mid-1973) 177 per krm Rate of growth: 2.23% (from 1961 to 1971) 3CO per km of' arable land POPULATION CHARACTERISTICS (1971) HEALTH Crude Birth 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 Mortality (per 1,000 live births) 120-140 (est) INCOME DISTRIBUTION (1967/68) DISTRIBUTION OF LAND OWNERS111P (1954/55) % of consumption, lowest quintile rural 8% (est) urban 7% (eat) % owned by top 7% owners 52% (est) % of consumption, highest quintile rural 41% (est) urban 44% (est) % owned by smallest 25% of owners 1% (est) ACCESS TO PIPED WATER (1971) ACCESS TO ELECTRICITY (1971) % of population - urban n.a. % of population - urban n.a. ' of population - rural n.a. % of population - rural r..a. NUTRITION (1960 - 69) EDUCATION a/ Calorie intake as % of requirements 83 (est) Adult literacy rate % (1971) 36 / Per capita protein intake (gr. per day) 55 (est) Primary school enrollment % (1969/70) 79- c/ GNP PER CAPITA IN 1970 : US $ 110 GROSS NATIONAL PRODUCT IN 1972/73 ANNUAL RATE OF GROWTH (%, constant prices) US $ Bln. , 1961/62-1965/66 1965/66-1969/70 1970/71-1972/73 GNP at Market Prices 57.7 100.0 3.3 h.7 2.0 Gross Domestic Investment 9.7 16.8 Gross National Saving 9.2 15.9 Current Account Balance -0.5 -0.1 Resource Gap 0.7 1.2 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added (at fact Labor Force A Per Worker US $ Bln. US of National Average Agriculture 19,L 42.6 129.9 72.0 149 47 Industry 13.3 23.3 20.2 11.2 658 208 Services 24.3 34.1 30._ 16.8 8 255 Total/average 57,0 100.0 7T5Ti 1 00.0 314 100 GOVERNMENT FINANCE e/ General Government Central Government (Rs. Bl) C fGNP (Rs. Bln) oGNP 1 972/73 1397~Y192/73 970,T97/733 1972/73 1972/73f 197771-19727/73 Current Receipts 78.71 17.0 16.1 h6.Oh 10.0 9.3 Current Expenditures 80.8 17.5 16.2 45.66 10.0 9.2 Current Surplus/Defict5 - 2.07 - 0-0.1 - 0.1 Capital Expenditures - 26.21 5.7 5-5 19.8L 4.3 4.0 External Assistance (net) 3.30 0.7 0.8 3.30 0.7 0.8 a/ Population of 10 years and over; extracted from 1% sample data of the 1971 Census. b/ Official estimate: probably overestimates actual enrollment of age group 6 -.11 by one-fifth. c/ The per capita GNP estimate is at 1970 market prices, calculated by the sams conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. d/ Estimates. e; Transfers between Center and States have been netted out. f/ All loans and advances to third parties have been netted out.  ARNNEX I Page 2 COUNTRY DATA - INDIA MONEY, CREDIT AMD PRICES 1965/66 1969/70 1970/71 1971/72 1972/73 December 1972 December 1973 (Billion Rs. outstanding at end of peri Money and quasi Money 61.4 93.3 105.6 122.3 145.3 135.3 162.0 Baunk Credit to Public Sector 40.8 52.4 56.9 68.9 82.7 78.2 91.2 Bunk Credit to Private Sector 28.1 58.3 56.7 5.5 73.1 71.4 81.6 (Percentages or Index Numbers) 1965/66 1969/70 1970/71 1971/72 1972/73 February 1973 February 1974 'Money and Quasi Money as d of GDP 25.0. 24.1 25.7 26.8 28.5 Whiolesale Price Index (1961/62-100) 131.6 171.6 181.1 188.4 207.0 217.4 274.3 Annual percentage changes in: 'Wholesale Price Index 7.6 3.7 5.5 5.0 9.9 26.2 Bank Credit to Public Sector 12.9 1.5 8.6 21.1 20.0 16.6 Bank Credit to Private Sector 12.8 15.1 17.4 13.6 13.5 14.3 3ALANCE OF PAfl1I,TS 1971/72 1972/73 1973/74 MERCHANDISE EXPORTS (AVERAGE 1970/71 -1972/73) (Million US $) t US $ Mln. Exports '- S,oods 2,160 2,545 2,890 Jute Manufactures 311 l4 Trrports or Goods 2,572 2,590 3,545 Tea 200 9 Trade Balance -412 - 45 -655 Cotton Textiles 170 8 NFS (net) - 48 -146 r. a. Iron Ore 147 6 Resource Oar 460 191 n.a. Engineering Goods 167 7 Interest Payments (niet) -230 -237 -239 Others 1,158 56 other Factor Payments (net) - 7 - 8 n.a. Total 2,253 100 Net Transfers 358 - 50 ci.a. Ralance Don Current Account -339 -486 -806 EXTERNAL DEBT, March 31, 1973 US$ MI1n. Officir;aL Aid Repayable in foreigni currency 9,292 Disbursements 1,089 896 1,305 Repayable through export of goods 560 A,snrttcation -385 -408 -45-9 Total Outstanding and Disbursed 9,852 Transactions wit 1h IMF- - All Other Items -ilo 32 n.pac DEBT SERVICE RATION FOR 1973/74 24.2 percent Increase in Reserves (-) -225 -34 -115 (;rnss Reserves (end year) 1,277 1,311 1,426 Net Reserves (end year) 1,277 1,311 1,426 IBRD/IDA LENDING April 30, 1974 (us$ Min.) Fuel and Related Materials IBRD IDA Imports 262 265 625 of which: Petroleum 2