India - Thirteenth Railway Project

CIRCULATING COPY TO BE- RETURNED TO REPORTS -DESK FLE CDPIRCULAT[NG COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1683-IN REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE,DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE THIRTEENTH RAILWAY PROJECT August 6, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 at June 30, 1975) Rs 1.00 = Paise 100 US$1.00 = Rs 8.35 Rs 1.00 = US$0.120 Rs 1 million = US$119,760 (The Rupee is officially valued at a fixed Pound Sterling rate. As the Pound is now floating relative to the US Dollar, the US Dollar/Rupee exchange rate is subject to change. Conversions in the appraisal report were made at US$1 to Rs. 7.85, which was close to short term average at the time of pre- paration). FISCAL YEAR April 1- March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE THIRTEENTH RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Government of India (GOI) for the equivalent of US$110 million on standard IDA terms to help finance a thirteenth railway project. 1/ PART I - THE ECONOMY-` 2. An economic report, "Economic Situation and Prospects of India" (691a-IN dated May 1, 1975), was distributed to the Executive Directors on May 20, 1975. Country data sheets are attached as Annex I. 3. India is exceptional among the Bank Group's member countries for its size, diversity, and the difficulty of its economic conditions. While India's economic policies and performance have their shortcomings, the sheer magnitude of the task facing the Government must be recognized. Governing a country divided into more than 20 states with a population of some 600 million and over 60 languages is an extraordinary responsibility. The country's poverty, and inadequate domestic savings together with a net transfer of external resources averaging in recent years only about US$1 per head per annum, have imposed sharp limitations on the rate of growth. Account must be taken, also, of the uncertainties imposed by the erratic availability of water. A bad monsoon, which is inevitable from time to time, has a per- vasive influence over the entire economy and wipes out the results of years of efforts. Thus, the annual growth of national income has averaged a modest 4% during the past 25 years, but only about 1% during the last four years (1971/72-1974/75), which have included two consecutive monsoon failures -- i.e., an actual decline in per capita terms. 4. Since independence, 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 socioeconomic 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 1/ Parts I and II in this report are identical to the corresponding parts in the President's Report on the proposed Uttar Pradesh Water Supply and Sewerage Project.  - 2 - in many other parts of the wcrld, but in other regions there has been stagnation and possibly even decline. Despite these improvements and al- tlhough the di'stribution of income in India is relatively even by comparison with most developing countries, there has been little impact upon the living standards of the vast masses of the urban and rural population. The Govern- ment has become increasingly concerned about the plight of the lower income strata, which - conservativel.y eicasured - 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. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 45% 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 composition of industrial production, with consumer, intermediate, and capital goods nowT contributing about one third each, compared with an overwhelming preponderance of consumer goods production 25 years ago. 6. Despite the slow pace of change and despite the undeniable magnitude of the problems confronting her, India has the potential in a number of important fields to mount a development effort which has a reasonable chance of success in the longer run. In agriculture, as discussed in the economic report of May 1975, the particular opportunities of substantial promise for improving the food situation over the next decade are: (a) Rejuvenation of the green revolution in wheat which has taken place in recent years in the N1orthwest and to a lesser extent in Bihar and West: Bengal, but which has been losing momentum since about 1970. This is the resu:Lt of deficiencies which can be corrected -- most importantly seed deterioration and lagging irrigation development. (b) Better use of the vast potentials that have been created by surface irrigation through more expedlitious project completion and complementary land and on-farm improve- ments to ensure better management and higher productivity of water. (c) Acceleration of groundwater development,, especially in the Eastern regions, which are figuratively described as "floating on water," where the untapped potential is large and where consequently there are large opportunities for multiple cropping, better water management and greater crop security. (d) Promotion of increased production of monsoon rice, based on improved varieties which as yet have had only modest  - 3 - success but which are expected, on the basis of current research, to open the way to much greater productivity over India's vast rain-fed rice producing areas during the next few years. (e) Pursuit of the promising, although somewhat less definite, potential for greater productivity in dryland cultivation and for extensive introduction of higher yielding varieties of coarse grains. Because of the difficulties likely to be encountered in the effective devel- opment of these potentials, their realization is likely to follow uneven time patterns, probably coming in bursts of expanded production as in the case of the green revolution. And, along with administrative concentration and effectiveness, they will all require provision of the supplies and services, especially fertilizer and power for irrigation, which are essential complements of the necessary technical and environmental changes. 7. Greater agricultural success would also make an important contribu- tion to India's perenially difficult balance of payments situation, which is frequently aggravated by the need for large food imports. From the balance of payments viewpoint, another essential ingredient for a resumption of modest growth is sustained export volume growth at considerably higher rates than have been achieved historically. In view of the composition of Indian exports, the momentum for such growth would have to be provided primarily by the rapid expansion of industrial exports which, in addition to easing the foreign exchange constraint, would act as an important stimulant to industrial growth -- notably absent since the mid-sixties. In the field of energy, too, there is considerable potential in the development of recent- ly discovered oil resources and in the continued expansion of coal production. 8. It is hard, however, to conceive of the timely and effective exploitation of these various potentials unless administrative capabilities, which are overtaxed and diffused in an attempt to guide and control most economic activities, are focused on these areas. The requirement for industrial export stimulation would appear to be more generous and expeditious incentives, sufficiently attractive and reliable to induce domestic producers to venture into the competitive pressures of world markets. Finally, realization of India's potential will undoubtedly also require a considerable infusion of external assistance, both to ease the payments constraints and to supplement the limited domestic resources available for development. 9. While there is thus potential for resuming the interrupted process of growth, there remains the formidable obstacle of the current difficulties facing India. The short-term problem is much the same as it appeared last year, with the important exception that the efforts made to adjust to changed circumstances and the responsiveness of aid givers to India's needs should mitigate the hardships that lie ahead. Last year began with deficient winter rains and a poor spring harvest, with one of the worst Government wheat procurement experiences on record, with a prospective balance of payments deficit of US$2.5 billion or twice as much as in the preceding year, with  -4 inflation running at an annual rate of 30% and a fiscal situation seemingly out of hand, and with serious energy and material shortages and little prospect for alleviating them through imports witlhin the severe constraints of the balance of payments. It was hardly surprising in this situation that adjustment to immediate difficulties was the prime economic preoccupation. Growth had necessarily to take a second place to short-run exigencies in the emphasis of economic policy in this first year of the Fifth Five-Year Plan period. 10. Monetary expansion, which had been running at a rate of 15% in 1973/74, was reduced through tight credit restrictions. The burden of these restrictions was borne largely by private and Government commercial activities, without a significant reduction in the rate of increase in net bank financing of the Government Budget. To this curtailment of credit to the commercial sector, there was added the deflationary influence arising from the net use of reserves and as a result the rate of monetary expansion in 1974/75 was reduced to about 6%, or less than half that of the previous year. This, in combination with some improvements in physical supply, relieved the upward pressure on prices, and there was even a small price reduction in the second half of the fiscal year. 1With continuing tight monetary policies, prospects are for greater price stability this year than last. 11. The food problem was probably the single most threatening element on the economic scene last year. A poor harvest and low procurement in the spring was only the start of agricultural adversities. Next was failure of the mid-year monsoon in many key agricultural areas and a monsoon (kharif) crop which fell below that of 1973 by about 5 mil:Lion tons. The result was a severe shortage of domestic foodgrains for the public distribution system, with availabilities only about half of an austere level of requirements. A real food crisis was avoided, however, by imports of more than 6 million tons of foodgrains during the year ending in March 1975; this was almost twice as much as the imports of 1973/74. With these imports and with relative empha- sis on food distribution in the cities rather than the countryside, where supply conditions were presumed to be not quite so unmanageable, the threat- ening food situation was weathered, although not without hunger and priva- tion for a great many of t'he rural poor who were unable to afford much of what food was available. 12. The oil situation was managed, although at double the cost for a reduced import level, by curbs on consumption and by substitution. Mlotor spirits were heavily taxed to reduce consumption by about 20%; factories and power plants were converted from fuel oil to coal wherever possible and supplies of fuel oil were reduced by more than 15%; coal production, after years of stagnation, was increased by about 13%, and, after a poor start, transport managed to keep up with the additional coal in spite of serious labor troubles on the railways. There was also some improvement in the operationof the deficient power system through special efforts to raise the low capacity utilization of thermal plants and by a more systematic allo- cation of available power, with special priority for requirements of agri- cultural irrigation and fertilizer production. Power shortage has remained, nevertheless, a severe constraint on the economies of many regions. Among  -5- other critical shortages, the supply situation eased in the course of the year, especially for fertilizer, steel and non-ferrous metals. The fertilizer situation was brought into better balance by a combination of substantial imports and some lag in demand attributable largely to poor weather and sharply increased prices. Steel and other metal supplies also improved during the year, with some increase in domestic production in the case of steel and also because of price resistance and uncertainty in a sluggish industrial situation. 13. Last year's balance of payments turned out to be manageable in spite of a 45% jump in the import bill. Economies in import volume helped. More importantly, there was also an increase of 22% in the value of exports. The main payments support, however, was an increase of about US$1 billion in external financing, made up of large drawings on the International Mone- tary Fund including the Fund's Oil Facility, larger aid from the India Consortium including the World Bank Group, oil purchases on credit, a mil- lion tons of wheat on loan from the USSR, and additional food aid from several other countries. With all this, in 1974/75, India had to draw on its gross reserves (US$1,416 million as of March 31, 1974) by only about US$50 million, but external debt service requirements in the medium term were increased, as were obligations to the IMF. 14. This year (1975/76), the economic situation has started more favor- ably than last year, with the expectation of a better harvest and larger procurement from the spring (rabi) crop, with easier conditions in other material supplies, and with much less inflation. However, the payments situation is no less critical. 15. The 1975/76 trade deficit is projected at about US$2,025 million. This compares with about US$1,815 million last year, but with hardly any trade deficit at all in 1972/73, which was before India's terms of trade worsened sharply as prices of imported oil, grain, fertilizer and other essential goods went up. Adding to the 1975/76 trade deficit another US$800 million of payments on external obligations, and taking account also of probable net invisible receipts, this year's overall balance of payments deficit seems likely to come to about US$2,635 million, or about US$160 million more than last year. These enormous deficits persist in any reasonable calculation of minimum import requirements of fuel, food, fertilizer and other essentials, for which further compression seems hardly feasible, even at the low level at which the economy is functioning. 16. Fortunately, nearly half of this year's prospective deficit (about US$1,135 million) can be covered from gross disbursements of previously committed foreign aid, including just over a billion dollars of Consortium aid about evenly divided between bilateral and World Bank Group sources. Eastern Europe is expected to provide perhaps US$100 million, which is down considerably from last year in the absence of further food assistance from the USSR. All this leaves a balance of US$1,500 million to be financed from disbursements out of new aid commitments in the current year and to some extent by an inevitable drawdown of foreign exchange reserves which stood at US$1,365 million at March 31, 1975.  - 6 - 17. To highlight the crucial variables in India's longer-term payments outlook, the May 1975 economic report contains some projections, for the 10 years following 1975/76, illustrating India's debt management problem. Broadly speaking, the conclusion which emerges is that a modest increase in India's import capability -- an average of 5.2% per annum after allowing for inflation - could be achieved, provided: (i) new aid commitments in real tenrs (including IMF facilities and the aid provided by oil producers) remain approximately at 1974/75 levels, (ii) India's exports attain an average volume growth of about 8% between 1976/77 and 1985/86, and (iii) the bulk of new aid continues to be provided on concessiona.l terms. Given the above assumptions, the debt service ratio (expressed as a percentage of export earnings) would rise from about 19% in 1974/75 to 23% in 1979/80 and then decline slowly. India's external public debt outstanding and disbursed on March 31, 1974, stood at US$10.2 billion. 18. A considerably improved export performance, which will require policy measures to improve incentives, is crucial to a successful development effort. To the degree thal exports fall short of the 8% growth target, India's creditworthiness will be reduced, and she will face greater dif- ficulty in borrowing to meet a larger balance of payments deficit; the re- sult would be slower growth throughout the economy. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 44 loans and 73 development credits to India totaling US$1,437 million and US'i3,428 million (both net of cancellation), respectively. Of these amounts,, US$692 million has been repaid, and US$1,538 million was still undisburse(I as of 1975. Annex II contains a summary statement of disbursements as of June 30, 1975, and notes on the execution of ongoin,g projects. 20. Since 1957, IFC has made 14 commitments in India totaling US$51.8 million, of which US$8.4 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$29.5 million, US$22.4 million represents loans and US$7.1 million equity. A sumrmary statement of IFC operations as of June 30, 1975, 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  - 7 - in supporting infrastructure development for power, teleconununications, and railways. Family planning, education, water supply development, and 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 enhanced by the present world commodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs such as credit for 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 years. Special emphasis will be given to projects bene- fitting small farmers. Lending in support of infrastructure and industrial investments will focus on energy-related projects. Repeater credits for power and railways have high priority in this context, and discussions are under way with the Government in an effort to identify and prepare projects specifically designed to facilitate coal transport. Lending for fertilizer projects, which has been an important feature in recent years, is expected to continue to occupy a prominent place in the future program. 23. The need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic reports 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. 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%, respectively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. Whereas on March 31, 1974, the Bank Group's share of India's outstanding external public debt was 23%; 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 1974/75, about 14% of India's total debt service payments were to the Bank Group.  -8- PART IlI - THE TRANSPORT SECTOR 25. Over much of India, especially in the rural areas, the bullock cart remains the principal form of transport. The balance of India's transportation needs is met; almost entirely by rail and road transport with a relatively small amount of traffic being carried by shipping, coastal and inland waterways, airlines and pipelines. 26. A marked shift has gradually been taking place in the shares of traffic between rail and road. In the early 1950s, the railways accounted for 90% of the freight and 75% of the passengers carried by motorized transport while by the early 1970s Indian Railways's (IR) share was about 63% and 50% respectively, with a corresponding increase in the share of road transport. This shift: is partly accounted for by the economic advantages of road transport over rail for certain types of traffic. The exploitation of this advantage has been facilitated by the improvement and expansion of the road network together with increasing availability of commercial vehicles. 27. The economic advantage of road over rail for shorter hauls, particularly with high value traffic, has led IR to specialize more in long haul and bulk traffic. However, the growth in transportation of bulk commodities has been adversely affected by slow growth in the economy and in particular by the shortf-all in domestic output of the important bulk commodities, such as steel, coal and iron ore. At: the same time, IR's capability has been affected by industrial disputes culminating in the nationwide 20-day strike in May 1974 and serious power shortages. 28. The outlook for the immediate future is somewhat better. In- dustrial strikes have virtually ceased since May 1974, and industrial rela- tions and union discipline appear to have improved. In addition, power availability has increased and so IR's ability to carry more freight has increased just as the high price of petroleum is reinforcing the economic advantage of rail for many categories of freight. At the same time, rising domestic production of bulk commodities, in particular steel and coal, led to an increase of 3.8% in rail freight movement in 1974 despite the May 1974 strike. Especially noteworthy is the speedy manner in which IR restored operations in Eastern India after the strike and succeeded in moving 12% more coal in 1974/75 than in the previous year. Further freight traffic growth of an average of 3.4% per annum is projected for the next four years. 29. The rise in petroleum prices has begun to force some readjustments in priorities for the transport sector. Even so, the coordination of pricing and investment policies remains of concern as this has been an area of weakness in the Government's management of this sector. The dif- ficulties of achieving adequate coordination have been highlighted during the preparation of earlier projects. In part, the difficulties in coordina- tion stem from the division of responsibility for the sector between the Central and State Governments for various modes. For instance, railways are a Central responsibility while most roads and inland waterways are a  -9- State responsibility. At the same time, there are also divisions of responsibility at the Center as three ministries exercise authority over different modes. Transport Policy Coordination 30. GOI carried out a transport sector review in 1973/74 in accordance with a program agreed during negotiation of the Eleventh Railway Project. A Bank Group mission visited India in April 1974 to discuss the results of this review. As a result, proposals were made to improve project preparation by strengthening planning cells in each of the transport ministries; proposals were also made to improve project implementation, but so far progress has been slow except in the case of IR. Since 1973, IR has been working on the development of a 15-year corporate plan which will be revised on a continuing basis and which will provide a long-term perspective on which the five-year plans will be based. The initial version of the plan was completed in January 1974. Planning cells have been established in each of the nine zonal regions of IR to enable the initial plan to be updated and revised as appropriate. GOI is still reviewing the proposal to centralize in one Government agency the various functions relating to overall transport sector management and planning. This would support the Cabinet subcommittee on transport which is concerned with recommending general policy to the Cabinet. GOI is also examining the suggestion that capital expenditures of IR should fall within the purview of the Public Investment Board. This Board is responsible to the Minister of Finance for ensuring that capital expenditure provisions appearing in the Central Budget are consistent with the Government's priorities. GOI has also initiated some changes affecting overall economic planning by establishing in the Planning Commission two new units, one for project appraisal and one for project monitoring. While these units serve the economy as a whole, their establishment and terns of reference mean that there is now machinery for the evaluation of IR invest- ments within the context of the transport sector and the even broader context of the economy. These various changes have complemented the Government's efforts to move away from predominantly railway-oriented trans- port planning towards examining the use of other modes to solve capacity problems. An example of this is a proposal for a project, which is being prepared for possible IDA financing, to move coal from Bihar/Bengal to South India through the use of coastal shipping. Bank Group Lending to Transport Sector 31. The first Bank loan to India (Loan 17-IN of 1949) was for IR and since then the transport sector has received direct assistance totaling just over US$1,000 million. Substantial indirect support has also been provided, through Industrial Imports Credits under which imports of com- ponents and materials fo. the manufacture of commercial vehicles have been financed. From the late 1950s to the mid-1960s, Bank Group lending included finance for three of India's major ports (Bombay, Madras, and Calcutta) and for a highway project serving Eastern India. Oil tankers for coastal and international service have also been financed. There was also, in the 1960s, an aviation project for purchase of aircraft for Air India. Lending  - 10 -- to IR, wh'ich has so far amoun!: d to USS786.5 million, has dominated Bank Group assistance to the sector. PART lTV - 'I_E PROJECT 32. The project was appraised in March/April 1975 and the Appraisal Report (No. 787a-IN, dated July 28, 1975) is being circulated separately to the Executive Directors. Negotiations were held in Washington from July 7, 1975, to July 18, 1975. The borrower was represented by Mir. M. N. Bery, Chairman of the Indian Railways; H-lr. K. S. Ehandari, Financial Commissioner, Indian Railways; iMr. M. Menieizes, Director, Plannin, of the Indian Railways; llr. S. V. Sastry, Joint Director, Finiance, Indian Railways; and Mr. V. N. Rajagopalan, Director, Department of Economic Affairs, Government of India. A credit and project summary is attached as Anrnex III. Past Experiences With IR 33. The Bank Group has long been closely associated with the Indian Railways. The first Bank loan to India in 1949 was; one of US$34 million equivalent for IR. The proposed credit would bring the total amount of loans and credits for IR to US$896.5 million equivalent. Previous lending operations have been satisfactorily completed and the disbursements under the Twelfth Railway credit are virtually complete. These have assisted the IR to triple the volume of freight carried and to more than double its passenger traffic between 1951 and 1974. IR has been able to maintain an operating ratio of around 80% over most of this period, although there has been some deterioration in the earnings position during the last two years because of stagnant traffic and a sluggish economy. Even during the recent difficult period, IR's financial performance compared favorably with most other railway systems. IR's tarif's are steadily moving toward a cost based structulre (para. 46); IR has, at the request of the Bank Group, prepared an action program and targets to improve wagon turnaround (para. 42); and IR is preparing a 15-year Corporate Plan (para. 40) to improve its perspective planning in which the Bank Group has financed services of a consultant. IR's Investment Program 34. The draft Fifth Flive-Year Plan (1974/75-'1978/79) envisaged an investment program of Rs. 23.5 billion based on an estimated 32% increase in freight traffic (from 21.5 million tons in 1974/75 to 280 million tons by 197O/79) and a nearly 20% increase in passenger traffic (from 2.6 bil- lion to 3.0 billion passengers). Due to price increases, to realize these physical targets, a substantial increase in outlay would have been required. fIowever, these targets were subsequently found to be overly ambitious because of reduced demand for freight traffic resulting from adverse economic devel- opments - escalation of prices of fuel and other essential commodities, a stagnant economy and strained industrial relations. Consequently, while price increases have made it necessary to maintain the originally planned investment level of Rs 23.5 billion, this will now support a more realistic  - 11 - freight traffic capacity of 250 million tons in 1978/79. The outlay required to handle this revised target also would have been much higher were it not for expected improvements in operating efficiency (see para. 42). The Project 35. The project consists of new and ongoing works to improve efficiency and reduce costs, including modernization of equipment over the project period 1975/76 and 1976/77 and to meet the projected increase in demand for freight and passenger services. The main elements of the project are the construction and putting into service of about 350 locomotives, about 300 electric multiple units (electric trains for passengers), about 1,500 coaches and about 20,000 wagons (four-wheeler equivalent). The project also includes electrification, track works, bridge works and modernization of workshops and sheds, and nec- essary spare parts for maintenance of locomotives and rolling stock. The total cost is US$1,010 million with a foreign exchange content of US$154.2 million. The proposed credit would finance US$110 million of this amount in addition to US$20 million financed under the current Railway XII Credit. Thus, during the two-year project period, IDA would finance nearly 13% of the total cost or 84% of the foreign exchange content of the project. The balance of the foreign exchange costs will be met either from GOI's own resources or bilateral sources. The local project expenditure will be financed in roughly equal proportions by IR's internally generated funds and Central Government funds. The proposed credit would be channeled through GOI to IR. New in- vestments from the proceeds of the credit will appear in IR's accounts as financed from capital-at-charge and will represent Government's equity in- vestment. The process of the credit which are used to finance replacements will be reimbursed by IR to GOI in local currency as expenditures are in- curred. 36. The principal items to be financed out of the proposed credit are imported components and materials for manufacture of locomotives and rolling stock (US$66.8 million); the construction of track works, bridges and electrical works (US$12.0 million); electrification (US$4.2 million); modernization of workshops and other works (US$11.4 million). In addition, US$15.6 million would be used for the financing of necessary maintenance spare parts. Size of Indian Railways 37. IR operates a system of about 60,000 route-Km, consisting of about 30,000 Km of broad gauge (BG), about 26,000 Km of metre gauge (MG), and a small route length of narrow gauge (NG). IR owns three modern factories which manufacture all its diesel and electric locomotives, most of its passenger vehicles, and a small proportion of its wagons (wagons are largely manufactured by private builders). IR has 41 workshops in addi- tion to many running sheds for inspection, refueling and other services. 38. IR is the second largest railway system in the world under single management, next to the Soviet railway system. It is difficult to compare the IR with other railway systems in the world because of the diversity  - 12 - of the circumstances under which they operate and the needs they fulfill. However, the size of IR's BG network (about 30,000 route-Km), which carries about 80% of IR's traffic, is comparable to the French National Railways (about 35,000 Km) and German Federal Railway (about 29,000 Km). IR is also India's largest employer wi.th a staff of about 1.7 million. Management of Indian Railways 39. The Indian Railways system is owned by the Central Government. Its operations are managed by a Board of five members headed by a chair- man who is an ex-officio Principal Secretary to the GOI reporting to the Minister of Railways. One Board member, the Financial Commissioner, has discretionary power to report directly to the Minister of Finance on financial matters. The Railway Board operates the system through nine Zonal Railways, each of which has a General Manager. The Railway Planning Directorate handles all aspects of railway planning and is directly under the Board. In addition, an Economic Unit, which reports to the Board, was established in 1965 in consultation with the Bank. This Unit, originally created to undertake special economic studies of major railway investments, is now expected to increasingly assist the Planning Directorate in preparing a Corporate Plan and in the studies of investment programs of the zonal railways. The railway budget is separate from the general budget, and control over railway finance and policy is exercised by Parlia- ment through discussions and voting on the railway budget and also through the recommendations made by the Railway Convention Committee and other parliamentary committees. IR's Investment Planning 40. Railway planning in India consists of the drawing up of Five- Year Plans in harmony with the National Five-Year Plans and the preparation of annual investment and work programs within the framework of Five-Year Plans. Projects costing more than Rs 0.5 million are sanctioned by the Railway Board and included in the annual program only after completion of detailed project studies. The evaluation processes and methods are sound. In the past, the evaluation criteria in most cases tended to be technical and financial while economic considerations were taken into account only in the more significant new works such as gauge conversion and electrification schemes and new lines. However, increased emphasis is now being given to development of project evaluation techniques, improving the data base and evaluation of alternatives. This is expected to furthe' improve with the involvement of the Economic Unit of the Railway Board at early stages of project preparation works. In addition, in order to set long-term objectives so that a clear framework exists as a basis for five-year and annual planning, a 15-year Corporate Plan for IR is being prepared. An initial version of IR's Corporate Plan was completed in January 1974, with the help of a consultant provided by the Bank, and work is now proceeding on a revised version of the Plan which should be ready by June 1976.  - 13 - Operating Efficiency 41. IR's operating performance has compared favorably with other railways of similar size. For instance, on recent data, gross freight trailing loads averaged 1,400 tons for IR compared with nearly 900 tons each for the French and German railways; net ton-Km per year per ton of wagon capacity, at 14,000 ton-Km for IR, were about double those attained by the German Federal Railway or the French National Railways; wagon turn- around at 15 days in 1973/74 for IR, on the other hand, compares with 8 and 12 days for the German and French railways respectively. These comparisons are of course only indicative because operating conditions for each of the systems vary; furthermore, IR's turnaround time witnessed a deterioration in 1974 on account of the difficult operating conditions. Nonetheless, even as indicators, these data show that IR operates at a satisfactory level of efficiency. 42. Improvement in operating efficiency has been receiving increasing attention in recent years. An action program with targets for improved wagon turnaround has been prepared and its effect on IR's total investment requirements was taken into account in determining the need for additional capacity. Financial Performance 43. Government of India requires Indian Railways to pursue a financial policy which will result in the earning of net revenues which are sufficient to meet the dividend payment due to the Government on capital provided to the Railway, and to earn a small surplus out of which minor capital invest- ments can be financed. The two previous IDA credit agreements required that IR earn sufficient revenue to meet all operating expenses and the dividend payable to the Government. Until 1973, IR was able to meet these requirements. However, in 1973 and subsequently, the sharp rise in fuel and wage costs, labor unrest and lagging traffic volume due to slow economic growth, have led to an overall deficit (after meeting dividend payments) of Rs 1.15-billion (US$146.5 million) in 1973/74 and an estimated deficit of Rs 1.28 billion (US$163.1 million) in 1974/75. The deterioration in financial performance has been reflected in the operating ratio (per- centage of operating expenses to operating revenues) which increased from 84.5 in 1972/73 to 93.7 and 94.4 in 1973/74 and 1974/75 respectively, while the return on capital at-charge dropped from an average of 4.6% over the years leading up to 1972/73 to an estimated 1.5% in 1973/74 and 1974/75. 44. Due to the deterioration in financial performance as described above, at the time the Twelfth Railway Project (Credit 448-IN) was negotiated, an agreement was reached to modify the financial covenant required under previous railway credits. Accordingly, IR undertook to meet from revenues all operating expenses and 70% of the dividend payable to Government in 1974/75, and approximately 85% in 1975/76 and 100% thereafter. IR suffered a further setback in 1974/75 due to the nationwide rail strike  in May 1974 and increases in costs, particularly wages. Despite these dif- ficulties not foreseen during the negotiations of the Credit 448-IN, the latest estimates indicate that IR has in fact substantially met the requiremerTE (just over 69% as against 70%). As explained below in para. 46, IR introduced tariff increases _md cost savi-ng measures in 1974. In the absence of uiiforeseeu adverse circumstances, these measures should enable IR to meet the agreed 85%. of Lh-e dividend payment in 1975/76 and 100%' thereafter. (Section 4.02(a) of the Development Credit Agreeenrt.) 45. The depreciation covenant under the Twelfth Credit required appro- priations to the Depreciation Reserve Fund (DRF) in 1974/75 and 1975/76 of Rs 1,200 million and Rs 1,250 million respectively. The DRF functions as a reserve for renewals of capital assets. Appropriations are made annually to DRF. The amounts are determined every five years (subject to annual review) on the basis of an estimate of replacement costs during the following five years. The total appropriation during the Five-Year Plan period (1974/75 to 1978/79) is to be not less than Rs 6,500 million. The Parliament- ary Convention Committee is now re-examining the whole structure and basis of contributions to this fund and, therefore, has recommended that the "interim" contribution to DRF for 1974/75 and 1975/76 should be of the order of Rs 1,150 million each year. Consequently, the IR budgets have appropriztcd Rs 1,150 million for each of these two years. Therefore, at the request of GOI and IR, it has been agreed to modify the requirements of DRF agreed under Credit 448-IN, with a requirement under this proposed credit that the appropriation to the DRF should not be less than Its 6,500 million in aggre- gate for the fiscal years 1974/75 to 1978/79 and not less than Rs 1,300 mil- lion for any of the fiscal years 1976/77 through 1978/79. (Section 4.02(b) of the Development Credit Agreement.) Adjustment to Increase in Petroleum Prices and Other Costs 46. The impact of the rise in oil prices on IR's costs has been partly offset by GOI's decision to reduce taxes on diesel fuel; this reduction applies not only to IR but to all users of diesel fuel. Even so, IR's fuel bill increased by 20% between 1972/73 and 1974/75. IR's adjustment to increases in petroleum prices and other costs, especially wages, has been prompt. In the budget for 1974/75 (March 1974) and in the supplementary budget (September 1974), tariffs were increased overall by about 35%.. The opportunity was taken to raise tariffs selectively on a cost-related basis for certain bulk commodities, most notably coal. A similar cost-based tariff policy has also been followed for passenger fares, but short distance commuter travel still results in considerable losses for IR. Although these tariff changes were necessary and to some extent overdue, nonetheless their introduction on this scale was courageous. In the case of passenger fare increases, IR faces the difficulty of providing a service for an economy with a very low per capita income. As the tariff changes were only in effect for part of 1974/75, the full impact will not be felt until 1975/76.  - 15 - Economic Evaluation 47. The objective of IR's fifth five-year investment program (1974/75- 1978/79) is to provide capacity for increased traffic, to improve efficiency and to reduce costs. The program has been directed towards the transporta- tion of bulk materials such as coal, iron ore, steel, cement, fertilizer and petroleum products, which account for 80% of railway freight. 48. The project includes 209 major sub-projects, each exceeding Rs 5.0 million in cost. These represent about .50% of IR's total investment; most of the balance will be allocated for rolling stock. A sample of 29 major sub-projects was examined by the Association in detail, while the main features of the others were reviewed. IR's project evaluation procedures were found to be sound. In particular, cost estimates were realistic and the return on investments varied between 10% and 25%. The overall economic rate of return on IR's five-year investment program is estimated at about 20%; the program responds to the priority needs of India's economy. Procurement and Disbursement 49. IDA-financed items will be procured through international com- petitive bidding in accordance with the Bank Group's guidelines, except for certain standard components and equipment required in the manufacture of locomotives and for replacements during maintenance. The amount allocated for the imports of such items is limited to US$20 million, which comes to 18.2% of the credit as compared to 23% and 20% in the Eleventh and Twelfth railway projects respectively. A further exception to international bidding would apply, as in previous projects, to contracts of US$50,000 or less, which are too small to warrant the administrative complications and cost of ICB procedures. The total value of such contracts will be less than US$4 million. In Credit Agreement 448-IN, the Association waived the require- ment of prior approval by IDA for awards of contracts over US$1 mill-ion for the procurement of steel, wheels, tires, axles, wheelsets and nonferrous metals on account of the difficult market conditions which prevailed during the Twelfth Credit period. Since market conditions have improved, there is no need to continue this exemption, although it has been agreed that if the validity periods of bids for steel are less than 21 days, the Borrower may proceed to evaluation and award, after advising the Association. Non- ferrous metals will be procured in the international market in accordance with procedures similar to those agreed with India under the Tenth Indus- trial Imports Program Credit. Under this procedure, Minerals and Metals Trading Corporation Limited (MDITC) will invite bids from not less than tlhree suppliers from among the member countries of the Bank and Switzerland. (Schedule 3 of the Development Credit Agreement.) 50. The proposed credit would be disbursed against the foreign exchange cost of imported equipment, components and materials. The credit is expected to be fully disbursed by March 31, 1977.  - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 51. The draft Development Credit Agreement between India and the Association, the Recommendation of the Committee provided for in Articles V, Section 1(d) of the Articles of Agreement, and the text of a draft Resolu- tion approving the proposed development credit are being distributed to the Executive Directors separately. 52. Features of the draft agreement of special interest are referred to in paragraphs 44, 45, and 49 of this report. 53. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMIIENDATION 54. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments August 6, 1975  ANNEX I pmgel WOIUTRT DATA - INDIA AREA POPULATION DENSITI 3,280,883 k- 577.0 mTIlion (mid-1973)35 Pe ofarbeln SOCIAL IDMICATORS $f.rence Coutries I.ndia Tod.. I. M14lne U,K 00P PER CAPITA 98$ (ATLAS RASIS) Li . 1.10 La90 L 220 /a 2,600 L DE89GFRAPHIC CrWud.brth rate (Per thousand) 38 LA 3 Id4 88, LA 5 4A 13.93 trde deth rota (Per thouand) 137 161d 12O7~ 12.0/7 Inatmortality rota (per thousand lies births) 139 a 1010cd ..0 1757 Lie sopeotmony at birth (years) Li 50 88 58 72 Gross reprduction iteL 2.7 /h.1 2.9 3.2 3.3 1.3 Populatio''ngrwh rote if 2.3 2.3 7,, 2.0 7) 3.07) 0.5/ Population growth rate - urban 3 /hk L k. 5/Io"L 0.5j Age enruour,e (per__t) 0-11. h1i/ 8 a 1 L 3L 15-6). 56 1577 33L i A 6.77 65 and use 3ti 3f 3/3u 13.6/ Age dependeuny ato7 0.8 08 77E.97 0.9 110.67 u.ennunic dependenc ratio 7110 1. A 15 . 0. c Urbas Ppopuation as percent of totma18k 20l 118 /1 32 /.0 70 /0 Pantly planing: u. ofanpos ,ntv (th-u.) i,oo La .. - 175 / 1097 No. Of users (% Of sarried -rau . O 175. 89 T1ta'bor force (thousands) 189,000 L 221,000 77 o 80100 3 13200n 25,700 / Penetgenployod in agriculture 73 71 71 A#d 62 L 56 13 PsrueIegto9 -usplnyod .3/au 2778 77 3.6 /e0 Per_oat of uatioual Iocose rnin..o1d by blgh-t 5% 27 71 25 /. ..25 Z,~ 15 /c,t Pecn fntional inco re.sivad by high.ot 20% 52 /r 53 r, . 58 7 3 r Percent of national -in ross rnamd by lnooat 20% r. 5 a L, 69 /,t Pe-nAt of national in-oon r-oi-nd by Iouset 40% 4. 1 61 1 WISTR1TIO.N IF LAND OIILRSHWL131 9 rt I aos by top iON of owner 9 csnd by moalleet 10% of .r HEALTH AND NURTION Population per physionan ~~~~~~~~~5,800 LA 1,00 27,300 c 2,730 , 73/ Population Per nuosinga peboa,d.0L 5,110 0.720 Z1 1,270 / 321 Population pee hospital bed ~~~~~2,600 Li 1,620 Lp,3 ,10 1 85o Laz no aud Per capits al-rim suPPly ee 9 of reqsirsonts / 95 93 93 85 125 Per nepit. protein eupply, total (gross per dsy )7 55 53 53 15 90 Of fth'ichnnimal and pulse 19 77m 16 lab 1.7 Death rete 1-8 Years /7 U. lOnd 2 071 EDUCATION Aduetd 79 prieay sohool ... Ollant ratio 879/n 71 112 ~ ad 110 AdJusted 79ecnayebn neetrto10 2864 12 15 74/7 72 Ters of ~sling provided, first snd ocod level 12 12 12 10 1 Voca.tioInal enolmn as I f eon, school rolluesnt 8 6 of 2113R4c Adult literacy rats % 78 LU 3~~~~ ~ ~ ~~~~~6 (