India - Andhra Pradesh Irrigation and Command Area Development (CAD) Composite Project

Document of FILE COPY The World Bank FOR OMCIAL USE ONLY Report No. P-1818-IN REPORT AND RECOMMENDATIONS OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE ANDHRA PRADESH IRRIGATION AND COMMAND AREA DEVELOPMENT COMPOSITE PROJECT April 22, 1976 This document has a restricted diBtrlbution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as at April 20, 1976) Rs 1.00 = Paise 100 US$1.00 = Rs 9.01 Rs 1.00 = US$0.1110 Rs 1 million US$111,000 (Prior to September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then, it has been fixed relative to a "basket" of currencies. As these curren- cies are now floating, the US Dollar/Rupee exchange rate is subject to change. Con- versions in the appraisal report were made at US$1 to Rs. 9.00, which was the short-term average at the time of preparation.) FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOM4MENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE ANDHRA PRADESH IRRIGATION AND COMMAND AREA DEVELOPMENT COMPOSITE PROJECT 1. I submit the following report and recommendation on a proposed loan to India in an amount equivalent to US$145 million to help finance irrigation infrastructure and comnand area development in major irrigation systems of Andhra Pradesh. The loan would be on standard Third Window terms of 25 years, including 7 years of grace, with interest of 4-1/2% per annum. T'he proceeds of the loan - except for part of on-farm development works (US$9.1 million) and for a special project preparation and evaluation group in the Government of India (GOI) (US$50,000) - would be channelled to the Government of Andhra Pradesh in accordance with the Government of India's standard terms and ar- rangements for the financing of State development projects. For on-farm development works, GOI would relend US$9.1 million of the loan to the Agri- cultural Refinance and Development Corporation (ARDC, formerly ARC) for 9 and 15 years at not less than 6.75% and 7.25% per annum respectively. ARDC would in turn on-lend the funds to the participating agricultural development banks and commercial banks in the project area at annual interest of riot less than 7.5%. The participating banks would relend the funds to farmers with repay- ment periods of 12 years for normal lending and 15 years for lending to small farmers, commencing after 2 years of grace, at 10.5% interest per annum for secured loans and 1% to 4% higher for Special Land Development Loans. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (1073-IN dated March 29, 1976), was distributed to the Executive Directors on April 2, 1976. Country data sheets are attached as Annex I. Background 3. India is exceptional among the Bank Group's member countries for its size and diversity; the country is divided into more than 20 states with a population of some 600 million and over 60 languages. The country's poverty and inadequate domestic savings, together with a net transfer of external resources averaging over the past five years only about: US$1.20 per person 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 likely to occur almost two years out of every five, has a pervasive influence over the entire economy and can wipe out the results of years of efforts. Thus, the annual growth of national income over the last five years (1971/72 - 1975/76), which included two consecutive monsoon failures, has averaged only 2% per annum, less than the rate of population increase. 4. Since independence, progress has been impressive on many fronts, but disappointing on others, and generally has fallen short of India's massive This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  needs. The growth of the socio-economic infrastructure (transport, education, health services, etc.) has been impressive, 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. [n 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. Although national income has increased in most years, there has been in general little impact upon the living standards of the vast masses of the urban and rural population. In recent years, the Government has initiated a variety of programs specifically directed toward helping the lower income strata, which - conservatively measured - consist of some 200 million people with incomes of less than US$60 per head per year. 5. The structure of the economy has been slow to change. Agricul- ture remains the dominant sector, with its share of national product declining only gradually from about 50% to 42% over the last twenty years. The share of industry has increased only slowly and, since the late 1960s, has remained approximately constant at about 23%. There has, however, been a shift in the composition of industrial production, with consumer, intermediate, and capital goods now contributing about one third each, compared with an overwhelming preponderance of consumer goods 25 years ago. Recent Trends 6. India entered 1975/76 having been through one of the most difficult periods since Independence. Progress in dealing with long-term development problems had been limited by poor crops, the dramatic shifts against India in the terms of trade, and inflation. Adjustments to these immediate difficul- ties thus became the principal preoccupation in economic management. However, with the support of favorable weather and additional foreign assistance, it now appears that India has successfully weathered the problems of the recent past; once again there is hope for an upturn in the growth rate of the economy. 7. Most important among the favorable factors in 1975/76 was a bumper harvest which followed years of poor or modest agricultural output. Foodgrain production last year, estimated at around 114 million tons, exceed the pre- vious record of 1970/71 by 6%. Oilseeds, sugarcane and cotton also reached new production peaks, and provided ample supplies for the agro-industries. Secondly, deficiencies in the supply of basic commodities and of infrastruc- tural inputs such as energy and transport, which had been prevalent in the past, have been eased. Electricity generation and domestic production of coal, oil, cement and steel all increased by over 10% during 1975/76. Finally, the increased supply of agricultural and industrial products and of services, together with the demand restraint imposed by the Government since mid-1974, put a stop to inflation. In 1974/75 the Wholesale Price Index had risen by 23%; in 1975/76 it remained unchanged.  - 3 - 8. On the balance of payments front in 1975/76, some of the basic problems of the previous two years remained. In particular, the terms of trade, which had deteriorated significantly over the previous two years, did not improve and most probably moved even further against India. Nevertheless, there were a number of encouraging developments. Firstlv, the build-up of foodgrain stocks during the year will provide a buffer against the impact of a future crop failure on the balance of payments. Secondly, although export earnings rose only 6%, with high volume growth being offset by falling prices, import growth was also less than expected. The value of petrole!um imports was stabilized despite price increases during the vear, and steel imports were substantially reduced due to increased domestic production. As a result, the value of India's imports rose only 2% during 1975/76 and the trade deficit was reduced to US$1.45 billion, US$150 million less than in 1974/75. Thirdly, the net transfer of aid was 20% higher than in 1974/75 and India also received substantial inflows of private remittances from abroad. As a result of these favorable developments, India was able to add over $870 million to foreign exchange reserves. These reserves will give India added flexibility in adjustirng to a higher rate of economic growth during 1976/77. Development Prospects 9. While many cif the most acute problems were eased during 1975/76, longer-term constraint:s to growth remain. Many of these have existed for some time, but their importance had been temporarily overshadowed by the more overwhelming limitations imposed by supply shortages and balance of payments problems. One such constraint is the deficiency of demand for a large segment of the manufacturing i:ndustry. Consequently, in the midst of adequate supplies during 1975/76, the use of manufacturing capacity - especially for consumer durables - remained low. In the short and medium term, the two most promising ways of stimulating demand are to boost public investment and expand exports. Both avenues are currently being pursued by the Government. During 1975/76, real Plan outlay rose by 18-20%, after having fallen during each of the previous two years. The 1976/77 Budget proposes a further increase of 16% in real terms and introduces new measures to stimulate investment in the private sector. Investment priorities remain the same as last year, namely agricul- tural development and increased production of critical industrial inputs, such as power, coal, oil, and iron and steel. The Budget also stresses the import- ance of exports as an essential condition for sustained stability in the balance of payments. 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76, the long-term growth rate of foodgrain production in India has been unacceptably low, at about 2.3% per annum over the last 15 years. This is about the same as the rate of-population increase. Starting from a situation of deficit, this has meant that only in good years has there been a significant margin of production to cater to any per capita growth in consumption, and even in normal years it has been necessary to rely on stocks or imports to meet any growth in demand. With a major effort to expand the irrigated area and provide complementary inputs, the average growth rate of foodgrain production could be substantially increased. This is essential, not only because of the necessity to meet food requirements without unmanage- able consequences for the balance of payments but also because of the strong  - 4 - influence of agriculture on the levels of activity in other sectors of the economy. Even with a higher growth rate of foodgrain production, imports will still be required. However, in relation to India's total consumption of foodgrains, the dependence on imports has been and will remain small. In the past, domestic production has accounted for almost 100% of supplies in good weather vears and about 90% when harvests were poor. 11. The energy sector in India was headed for its own crisis before the international oil crisis developed. The dramatic hike in oil prices, coin- _iding as it did with the accentuation of electric power shortages - caused in part bv low hydroelectric generation due to poor monsoons - led to an acceleration of measures to improve performance of existing facilities and to a much higher priority for investments in the energy sector. The effects of these measures, aided bv the good monsoon, are now starting to be felt. Coai production has increased by 10% or more in each of the last two years, and, partly as a result of this, power shortages and restrictions have been greatly reduced. The medium-term prospects for oil and natural gas have improved with the delineation of the offshore Bombay High field. Crude produc- tion from this field is expected to be 1 million tons in 1976/77 and to reach 6 million tons by the end of the Plan period. On this basis, petroleum imports are projected to start declining in 1978/79, as increased crude production and expanded refinery output more than offset increases in demand. 12. In the past, export growth was affected in varying degrees by inade- quate profitability, lack of access to imported inputs, poor quality, insta- bility of the policy environment and vulnerability to ad hoc decision. In addition, for agricultural commodities export taxes were significant. For some homogeneous commodities, such as iron ore and tea, inadequate supplies or limited world demand have been important constraints. In recent years, mainly because of the large trade deficit, the Government's emphasis on export promotion has intensified. As a result, although the fundamental orientation of India's industrial and trade policy and the specific instru- ments of the export regime have, by and large, remained the same, a signi- ficant shift in emphasis and in the way these policies are operated has occurred. These are important both because they are likely to lead to a better utilization of current export potential and as an indication of the willingness to make policy adjustments, when necessary, to expand exports. 13. While it is difficult to assess the impact of the new measures in an area where policy is already very complex, some improvement has already taken place and further improvement in medium-term performance seems likely. An annual real export growth rate of about 7% should be feasible, compared to an average of 5% over the last five years. however, to achieve a higher export growth over the long run, more far-reaching policy measures will be required, including the introduction of a more uniform and more stable system of export incentives. Even so, the export drive might be impeded by controls in some developed markets.  - 5 - 14. India's balance of payments problems should be manageable over the next few years, even with the repayment obligations resulting from re- cent short-term OPEC and IMF borrowings. The worldwide inflation has bene- fitted India bv reducing the proportion of export earnings that have to be devoted to debt service. India's debt service ratio has come down from 31% in 1970/71 to 19% in 1975/76. Provided the real growth of exports remains at about 7% per annum, the debt service ratio is unlikely to rise much above 20% in the foreseeable future. On the import side, given the adequate level of stocks on hand at the end of 1975/76 and assuming normal weather conditions, annual foodgrain imports could be kept to 5-6 million tons during the next three years. Within the general category of non-food Lmports, India has substantial medLum-term import substitution opportunities for three major items -- petroleum, f'ertilizer and steel -- which constituted more than b0% of imports last year. If the medium-term targets for production in these areas are achieved, the total expenditure on these three import items in 1978/79 need not be any higher than in 1975/76 and could quite conceivably be less. Provided the Covernment is willing to liberalize imports and donors continue to respond to India's needs, the easing in the external payments situation presents an opportunity to raise the level of investment (complemented by larger imports of capital goods, components, and raw materials), and conse- quentlv, reach a more satisfactory level of long-term growth. PART II - BAN4K GROUP OPERATIONS IN INDIA 15. Since 1949, the Bank Group has made 44 loans and 80 development credits to India totalling US$1,436 million and USS4,112 million (both net of cancellations), respectively. Of these amounts, USS743 million has been repaid, and US$1,825.9 million was still undisbursed as of March 31, 1976. Annex II contains a summary statement of disbursements as of March 31, 1976, and notes on thie execution of ongoing projects. 16. Since 1957., TFC has made 14 commitments in India totaling US$51.8 million, of which USS1O.2 million has been repaid, US$7.6 miLlion sold and US$6.9 million cancelled. Of the balance of US$27.1 billion, US$20.6 million represents loans and US$6.5 million equity. A summary statement of IFC opera- tions as of March 31, 1976, is also included in Annex II (page 2). 17. In recent vears, 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 opera- tions. 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 corn.- ponents for selected'priority sectors has been instrumental in facilitating better capacity utilization in industry. The Bank Group has also been active in supporting infrastructure development for power, telecommunica- tions, and railways. Family planning, education, water supply development, and urban investments have also received Bank (Grn'!p support in recent ve.1rs.  - 6 - 18. 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. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, com- mand area development of existing irrigation 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 benefiting small farmers. Lend- ing in support of infrastructure and industrial investments will focus on energy-related projects. Credits for power and railways have high priority in this context. 19. 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 com- ponent of projects tends to be especially low in such high-priority areas as agriculture, 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. In view of India's poverty and the strains upon India's creditworthiness arising out of its balance of payments and external debt position, and taking into account the country's performance in economic development, India is considered eligible for Third Window loans from the Bank. 20. 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 41%, 24% and 30%, respectively, in 1974/75, and the contribution of the Bank Group is expected to continue growing. On March 31, 1975, India's outstanding and disbursed external public debt was US$11.8 billion of which the Bank Group's share was 24%. It is likely to grow, but not very rapidly. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will also rise slowly. In 1974/75, about 14%o of India's total debt service payments were to the Bank Group. PART III - AGRICULTURE AND IRRIGATION IN INDIA General 21. Agriculture is the most important sector in India; it engages 70%' of the labor force, has recently contributed an average of about 45% of GNP,  - 7 - and accounts for a major share of exports. Consequently, investments in agriculture have been given priority by GOI and the State Governments, espe- cially since the mid-1960s, and deserve continued emphasis in the future. 22. Since independence, the overall growth rate of agricultural produc- tion 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 and 1974. At the same time, the success of high yielding varieties of wheat pro- duced 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 success, as the introduction of high yielding varieties has encountered dif- ficulties arising from local climatic and ecological conditions. The effects of the green revolution, which primarily affected wheat, have been concen- trated in northwestern India, very largely on account of the availability of irrigation in that area. 23. Despite the progress made in many aspects of food production, India's agriculture remains heavily dependent upon the weather. A major factor in reducing this dependence will be the rehabilitation and expansioIn of irrigation and the more effective use of existing investment in irriga- tion facilities. The Government is also placing emphasis on the improved supply of inputs such as seeds and fertilizer, agricultural credit, and extension services. Irrigation 24. Over the first half of the twentieth century, the area under irri- gation in India increased by only about 1% p.a. to reach sliglhtly more than 20 million hectares in 1950/51, or about one-seventh of India's cultivated land (142 million ha out of an ultimate potential of 175 million ha). Out of these 20 million hectares, about half was served by major and medium irrig- ation works. 25. Irrigation development has appropriately received increased atten- tion since independence, and substantial resources were devoted to it through- out the four Five-Year Plans. While minor surface irrigation increased only slightly from 6.4 million ha to 7.5 million ha, the area covered by major and medium systems and by groundwater utilization more than doubled to 19.6 mil- lion hectares and 16.0 million hectares, respectively, compared with an esti- mated ultimate potential for irrigation of 57 million hectares from major and medium schemes, 15 million hectares from minor surface irrigation and 35 million hectares from groundwater utilization. But of the new additional acreage of about 10 million ha under major and medium schemes, only 80% was being utilized, and much of that inefficiently. 26. The Second Irrigation Commission-of 1972 and the National Commis- sion on Agriculture, which reported in 1973, found that the under-utiliza- tion of irrigation potential was attributable to the lack of [ntegrated development in the irrigation areas, insufficient farmer training and  - 8 - extension service, and lack of administrative coordination. It has been estimated that the majority of recently completed irrigation projects require additional investments of up to US$600 per ha before they can become fully productive. Accordingly, for the Fifth Plan period (1974-79) various measures have been designed to improve utilization, and a Command Area Development Department has been set up in the Ministry of Food and Agriculture to coordinate work on a list of high priority projects. 27. In view of the emergence of farm technologies dependent on effec- tive water control - and given the substantial investment India has already made in major irrigation - the economic return on improved water delivery systems is high. Consequently, command area development has been given high priority under the Fifth Plan proposals, and a relatively large pro- portion of public sector investment in irrigation has been allocated for this purpose. Further funds, doubling this allocation, will be made available from the resources of agricultural and commercial banks participating in financing command area development programs. In addition, major institutional changes have been proposed affecting the coordination of services in command areas and the administration of credit. 28. While emphasizing the need to improve water utilization through command area development, the Government is at the same time pursuing the objective of increasing the area under irrigation, in particular where only incremental investments are required. Thus, completion of on-going irri- gation developments is given equa:Lly high priority as command area devel- opment. Agriculture and Irrigation in Andhra Preadesh 29. Andhra Pradesh, with an area of 275,000 square kilometers and a population of about 43 million, is one of the largest States in India. In terms of size and population it compares with Italy. It is a predominantly agricultural State, 82 percent of its population being rural. About 40 per- cent of the total area of the State is cultivated. Rice, millet, pulses, and groundnuts are the major crops. A quarter of the total cultivated area is under irrigation. The rest depends upon rainfall, which ranges from 500 mm annually in the southwest to 1100 mm in the northeast. About one third of the State is classified as "drought-affected." 3Q. The main source of irrigation in the State are two major rivers, the Godavari and the Krishna, and their tributaries. Numerous irrigation canals branch from these rivers. The upland areas use rainfed tanks and groundwater for irrigation. 31. During the past 25 years, Andhra Pradesh State has invested heavily in irrigation projects. However, the returns have been rather low, mainly because the available resources have been spread over too many projects, resulting in long construction and gestation periods and delayed benefits. In recent years, the development program of Andhra Pradesh for irrigatLon has focused on the completion of three major schemes (Nagarjunasagar, Pochampad, Tungabhadra) and the reconstruction of the Codavari Barrage. The Bank Group has assisted two of these projects (Pochampad, Godavari  - 9 - Barrage, see paras 32 and 33). The Godavari Barrage project will, by replacing an ancient weit, secure irrigation water to the 400,000 ha com- mand area in the Godavari delta. Nagarjunasagar and Pochampad, when com- pleted, would bring abouit 1 million ha of previously rainfed land under irrigation. 32. Progress of the Pochampad Project, for which IDA lent US$39 mil- lion in 1971 (Cr. 268-IN), was satisfactory during the first two years of project implementation, and both construction work and credit disburse- ments were ahead of schedule. However, as a result-of acute shortages of building materials and explosives, which occurred in 1973 and lasted until early 1975, and because Df technical difficulties with the lining of the main canal completion of the project is being delayed. By June 1977 all project components except those lining works will be completed. Completion of the lining, according to the revised schedule, will be one year later. Dam con- struction is progressing satisfactorily and water has been impounded for the first time. Command area development was originally expected to be carried out under the separate Andhra Pradesh Agricultural Credit Project (Credit 226-IN of January 8, 1971). However, command area development requires an integrated plan for all farm holdings supplied from an irrigation outlet with construction work carried out on all holdings at the same time. Such an approach calls for a competent administrative and technical organization for planning and implementation, to be supplemented by suitable financial and legal frameworks. Command area development of the Pochampad area along these lines is included in the proposed project. 33. The Godavari Barrage project, for which an IDA credit of US$45 million was approved in 1975 (Credit 532-IN), is on schedule. 34. Such concentration of Bank Group activity on irrigation in Andhra Pradesh is justified by the State's very considerable potential in foodgrain production. If the "green revolution" in wheat in Punjab and Haryana is to be repeated in rice, Andhra Pradesh stands out as one of the major prospects. Even with presently low yields, the State is one of the most important pro- ducers of agricultural goods in India and, in fact, one of the few food sur- plus States. It is India's third largest rice producer, after West Bengal and Tamil Nadu, and contributes also a large share of the country's sorghum, oilseeds, chillies, tobacco and sugarcane production. PART IV - THE PROJECT 35. The project ccntains five major components: completion of infra- structure for the on-going Nagarjunasagar Irrigation Project (NSP) and initial command area development, for four major irrigation commands, including NSP, all in Andhra Pradesh. The agglomeration of .several irrigation systems in Andhra Pradesh for command area development with Bank Group assistance reflects the recent development, in the Bank, of a composite project approach, under which command area development works are initiated simultaneously in several  - 10 - command areas in a State to achieve optimal demonstration effects on farmers. A major advantage of this approach is that, from the outset, the necessary organization for command area development will be created State-wide rather than in a patchwork fashion for individual projects. 36. The project was prepared with assistance from the FAO/IBRD Coopera- tive Program and appraised by the Bank in August and October 1975. A loan and project summary is given in Annex III. A report entitled "Appraisal of the Andhra Pradesh Irrigation and Command Area Development Composite Project," Report No. lOiQa-IN, dated April 20, 1976,is being circulated separately to the Executive Directors. Negotiations of this project were held in Washington from March 29 to April 2. The Borrower, the Government of Andhra Pradesh, and the Agricultural Refinance and Development Corporation were represented by a delegation headed by Mr. Vineet Nayyar, Director, GOI, Ministry of Finance, Department of Economic Affairs. The Project 37. The proposed Irrigation and Command Area Development (CAD) Com- posite Project would complete infrastructural investment in Andhra Pradesh's largest irrigation project, Nagarjunasagar (NSP), and initiate command area development on 72,000 hectares in four irrigation commands in the State: the NSP Right Bank area, the NSP Left Bank area, the Pochampad command, and the Tungabhadra High Level Canal area. It would also strengthen the exten- sion service in all areas. Construction of NSP, for which planning began in 1930, was initiated in 1955. The dam and the reservoir on the Krishna River at Nandikonda are now complete, apart from the addition of power generating facilities presently under construction. The first stage of the Left and Right Bank Canals is more than one-half completed. Irrigation water has been supplied to an increasing portion of the command area since 1967. The Tungabhadra High level Canal (HLC) is a seasonal canal extending from the Tungabhadra dam and reservoir completed in 1958, which regulate the flow of the Tungabhadra River and provide water for irrigation and power develop- ment in Karnataka and Andhra Pradesh. The status of the IDA financed Pochampad Irrigation Project is described in para 32. 38. The project, besides completing the NSP infrastructure, would be the first step, comprising three years, of a CAD Program ultimately covering an area of more than 1 million hectares in the four project areas. About 3.2 million people live in the four commands. About 120,000 farm families would eventually benefit from the project, including 100,000 in the two NSP commands alone. Farm incomes in the project areas, presently about Rs. 4800 on the average, would triple under the project. The average farm size varies in the four areas. It is 3.4 hectares in NSP, 6 hectares in Tungabhadra and 2.2 hectares in Pochampad. Corresponding median farm sizes are 1.8, 3.9 and 1.0 hectares, respectively. In NSP about 55% and in Pochampad as many as 74% of all farms are 2 hectares or less, which, if unirrigated, do not enable an average sized family to fulfill its basic subsistence needs. Practically all farms are operated by their owners, as land tenancy has been abolished in Andhra Pradesh. Owners of small farms depend on additional off-farm employment for their livelihood. In the NSP area, principal rainfed crops in the wet  - 11 - season are millet, sorghum, pulses, oilseeds, and- some cotton. Pulses, millet and fodder are grown in the dry season. Where irrigation is already available, rice is.the principal crop, with supplementary cotton and groundnuts in the dry season. Cropping patterns are similar in the Pochampad and Tungabhadra areas, with the addition of maize and sesame in the wet season and, where supplementary tubewell irrigation is available, turmeric, chilLies and castor. Agricultural production in those parts of the four project areas that are already receiving water has not met earlier expectations due to deficiencies in CAD, inadequate roads, and lack of drainage in the NSP areas, as well as ineffective agricultural supporting services. 39. The proposEd project would be the beginning of an extended program to correct these deficiencies and to secure corresponding improvements in areas being put under irrigation for the first time. It would include on- farm development for parts of the four command areas. On-farm development on additional parts of the project area is planned under a second phase proj- ect in three to five years time. In a subsequent stage, to be implemented within the next 20 years, the irrigation system of NSP would be improved and modernized to reduce excessive conveyance and operational losses. A detailed monitoring program of system efficiencies forms part of the proposed project (para 40) and would provide data for this subsequent modernization, as well as information for the dlesign of other major irrigation projects in India. 40. The proposed first phase project would comprise: completion of the NSP Left Main Canal (about 65 miles) and NSP Right Main Canal (about 29 miles) and construct-ion of irrigation and drainage facilities to serve about 191,000 and 140,000 lhectares, respectively, within the NSP commands; rehabi- litation, upgrading or construction of about 1575 km of village access roads in the NSP area; command area development for 72,000 hectares, comprising pilot or first stage land improvement for 16,000 hectares each in the NSP Left and Right Bank areas, 33,600 hectares in the Pochampad area and 6,400 hectares in the Tungabhadra HLC area; special studies of the NSP irrigation distribution system ro monitor and evaluate system operation and seepage losses, including project modernization studies for improving irrigation efficiencies; a program to monitor crop yields and to define project bene- fits from irrigation and CAD. The project would further include the gradual expansion of the rotational irrigation system (warabandi) throughout the project areas, the strengthening of agricultural extension services, and assistance for a special project preparation and evaluation group in GOI's Ministry of Agriculture and Irrigation. Works to be included in the first stage project were selected on a priority basis, taking into c:onsideration organizational and budgetary constraints of the Government of Andhra Pradesh. Project Implementation 41. Implementation of the NSP infrastructure part of the proposed proj- ect falls within the jurisdiction of the Irrigation Department of the Govern- ment of Andhra Pradesh. The Chief Engineer, NSP, has overall responsibility for design and construction under the general direction of the Secretary for Irrigation and Power. Day-to-day responsibility for project execution rests with the Superintending Engineers in the project areas. Operation and main- tenance of the entire NSP irrigation and drainage system would be controlled  - 12 - by three Circles (administrative units) under the direction of the Chief Engineer. Implementation of command area development in the four project areas would be similar to that of previous CAD projects in India with Bank Group assistance. As in those projects, particular care was given to the institutional and organizational aspects of CAD implementation. Following guidelines issued by GOI, the Government of Andhra Pradesh (GOAP) has already established a CAD Department to expedite command area development in the State. The department is headed by a Secretary, who reports directly to the Chief Minister. The Secretary is Commissioner of CAD in the four project areas. At the project level, the Administrator, with rank and authority of a District Collector as far as the Project is concerned, is the chief executive of the Command Area Authority (CAA) and responsible for planning and implement- ation of the program. Construction and maintenance of the project roads is the responsibility of the Roads and Buildings Division of GOAP's Public Works Department. 42. Engineering designs for NSP canals and structures, including those under the proposed project, follow established Indian practices. Canal and structure surveys, test pit work, and designs and specifications are either completed or are underway and scheduled for completion by 1978, together with surveys and designs for the branch canals and the distribution system. Labor- intensive construction methods would be used, where feasible, for all general project construction work. Mechanical excavating, hauling and compacting equipment would be used only to construct high canal embankments for major aqueducts at valley crossings and for canal excavation in rock for deep cuts. Canal structures, except for span portions, would be constructed of masonry using hand quarried stones from nearby deposits. Completion of the NSP in- frastructure would take five years. Due to an abundance of able contractors and a large experienced labor force in the area, only a minimum start-up time would be required. Irrigation works tendered after January 1, 1976 that meet Bank Group tendering standards (see paras 47 and 48) would be included in the project. 43. Command area development would be carried out to the specifications set by the Command Area Authority (CAA). Land leveling and shaping would be compulsory on all farm holdings. Implementation would be by the farmers themselves or by the CPA through suitable small contracting agencies or farmers owning small tractors. Water-courses (field channels and drains) and simple masonry structures would be constructed by small village contractors. All excavation would be done by manual labor. For on-farm development, financing would be available to all farmers from commercial banks or agricultural devel- lopment banks. Loans for eligible farmers secured by mortgages would be for 12 years, normally and for 15 years in the case of small farmers (farmers whose annual net family income from cultivation does not exceed Rs 2,000 in 1972 prices), at 10.5% annual interest with a grace period of 2 years. Farmers, who are ineligible for such ordinary loans because of defective land title or be- cause of overindebtedness would receive unsecured Special Land Development Loans at the same terms but with a 1% to 4% higher interest rate. Secured loans would be refinanced at the rate of at least 75% by the Agricultural Refinance and Development Corporation (ARDC), to which a portion of the loan proceeds would be relent for this purpose (see para. 45). Unsecured loans would be  - 13 - fully refinanced by a CAD Special Loans Fund (CSLF) to be set up in ARDC, with a 50% contribution by GOI and 25% contributions each by GOAP and ARDC. The establishment of the CSLF would be a condition of disbursement from the proceeds of the loan for command area development. Project Cost and Financing 44. The estimated total cost of the project is US$297 million equiva- lent, including US$64 million in foreign exchange (22%). The principal cost components net of contingencies are: NSP Right Canal infrastructure (US$61.9 million), NSP Left Canal infrastructure (US$81.9 million), command area development (US$17.0 million), NSP road program (US$14.7 million), and vehi- cles and equipment (US$13.8 million). The balance is made up by: extension services (US$2.1 million), monitoring of project performance (US$3.0 million), project preparation and evaluation group in GOI (US$0.1 million), physical contingencies for all items (US$25.6 million) and expected price increases (US$76.9 million). The contingency for price increases is high in absolute terms because of the Large civil works component of the project, for which annual price escalation has been estimated at 9 to 12%, and because of the long implementation period (5 years) of these works. 45. The proposed loan of US$145 million would cover 49% of project costs including all foreign exchange costs and US$81 million of local costs. The Governments of India and of Andhra Pradesh together would finance 48%. The balance would be contributed by the Agricultural Refinance and Devel- opment Corporation (ARDC) and by the participating agricultural development and commercial banks. Of the proceeds of the loan, GOI would on-lend US$135.85 million to GOAP on the standard terms on which development funds are being provided to state governments by the Center. US$9.1 million would be passed on to ARDC with 9 and 15 years maturity at not less than 6.75% and 7.25% annual interest, respectively. ARDC in turn would refinance at least 75% of the land development loans extended to farmers by the participating banks at not less than 7.5% annual interest, repayable in accordance with the terms of the loans to the farmErs. The exchange risk associated with the proposed loan would be borne by the Government of India. Procurement and Disbursement 46. The proceeds of the proposed loan would be used to finance: civil works (US$133.3 millicn), vehicles and equipment (US$11.5 million), consultancy services (US$0.1 million), and GOI Project Preparation and Evaluation Group (US$0.1 million), all items inclusive of contingencies. 47. The estimated cost of vehicles and equipment for project manage- ment, road construction, 0 & M, and for monitoring the irrigation project, is US$13.8 million (net of contLngencies). Out of this total, an estimated US$7.7 million would be subject to international competitive bidding (ICB) 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  - 14 - US$1.1 million worth of equipment and vehicles, consisting of categories of items costing less than US$100,000 each, which for reasons of efficiency and standardization are not suitable for ICB, would be purchased through normal GOAP procurement procedures, which are satisfactory. The Indian Government has requested that the balance of US$5.0 million, mainly road rollers, jeeps, and trucks, be reserved for local procurement, and hence it would not be eligible for reimbursement out of the proceeds of the Loan. 48. Civil works on the NSP Main Canals (US$43.1 million net of contin- gencies) would be procured under ICB, each tender for a minimum value of US$5.5 million. Tenders may include works on both canals and would be divided into up to ten sub-contracts to encourage the participation of local contrac- tors, who would be entitled to a 7-1/2% preference in bid evaluation. The remaining civil works included in the project are individually small, scattered over wide areas, and would need to be carried out in periods between cropping seasons. Much of the construction work and on-farm development would be carried out intermittently as determined by seasonal weather conditions and by the on-going agricultural activities in the project areas. In these circumstances it would not be feasible or economic to combine these works into contracts sufficiently large to attract international competition. It is therefore proposed that these works be carried out by local contractors, who are mostly small labor contractors. Where this is not practical, because specialized heavy equipment is required that contractors are unlikely to possess, and only in such cases, works would be carried out by force account. Contracts would be awarded in accordance with the procurement procedures of GOAP, which are satisfactory to the Bank. 49. The proceeds of the loan would be disbursed against the cif cost of imported equipment or against the ex-factory price of equipment manufac- tured locally. For imported items procured locally disbursements would be at the rate of 70% of cost. Disbursements for civil works would also be on a percentage basis (60% for NSP infrastructure, including roads, and 66% for on-farm development). The loan would be expected to be fully disbursed by December 1982, about one and one-half years after the completion of the project. Benefits and Economic Justification 50. The project has two major components, the first an improvement in the efficiency with which irrigation infrastructure is used, and the second an extension to the two main irrigation canals. The CAD and extension pro- grams, which make up the first component, are expected to raise average yields by 50%; the CAD program itself will increase farm irrigation effi- ciencies from about 45% to 65% for lands classified as "irrigated/dry", and will, therefore, lead to water savings of about 2,500 m3 per ha; the water that is saved will be used to increase irrigation intensities, each additional cubic meter without additional inputs resulting in a production increase worth about Rs. 0.2 to 0.3. The extensions of the Left Bank and Right Bank Canals involve very heavy capital costs. However, they form the basis for some of the benefits to be derived from the CAD and extension programs, and will provide additional water to 100,000 farm households and additional employment  - 15 - and wages to 1.1 million people. Provision of irrigation water to those not now receiving it is expected to double net farm incomes (before water charges), and the combined effects of CAD and extension would be a further doubling. At ultimate development, annual production in the project area would be increased: of rice, by 327,000 tons to 1,531,000 tons; of cotton, by 105,000 tons to 172,000 tons; of groundnuts, by 193,000 tons to 305,000 tons; of maize, by 70,000 tons to 122,000 tons; and of sorghum, by 756,000 tons to 858,000 tons. 51. The economic rate of return on the total combined package is 20% to 25%. The economic rate of return of the CAD and extension programs, which together account for 10% of total base project costs, is very high - at least 30%. The economic rate of return on the two canal extensions, accounting for 42% and 32% of base project costs, respectively, is 10-13% for the Left Bank Canal and 9-12% for the Right Bank Canal. The main factor causing the spread in estimated return on the major infrastructure investment is uncertainty about conveyance efficiencies, which the proposed monitoring program is designed to ascertain. The main factor causing the relatively low rates of return on the major lnfrastructure investment is the fact that to extend the entire command area, water must be reallocated from some of the existing beneficiaries. However, these rates of return are acceptable, considering the fact that they do not: take full account of the additional potential for highly productive investmenl:s in CAD created by the canal extensions. 52. Since the component to extend the two canals involves reallocation of water among farmers, account must also be taken of the social benefits of income redistribul:ion, which would result from the combined project. It has been assumed thai: the value of an additional Rupee of real income falls in inverse proportion to rises in real income. The effect of this adjustment would be to make the social return on the project higher than the economic return, since the farmers and laborers who receive increased incomes are poorer than those who lose. The social rates of return are actually about 2% higher than the economic rates of return, making justification for the canals component, even stronger. 53. A major issue in the evaluation of the two extensions is that of the optimal scale of the area. It has been shown that, using 10' as the opportunity cost of capital, the proposed scale of the command areas maxi- mizes economic net benefits. 54. Net farm incomes in the project areas, presently about Rs. 1,300/ha on unirrigated land, would double through the provision of irrigation water and quadruple due to the full project (irrigation, CAD and extension services). Irrigation charges, including water rates and betterm,ent levy, presently aver- age Rs. 155/ha and are sufficient to ensure that all O&M expenditures and capital cost of irrigation and drainage infrastructure, including 3% p.a. interest, would be recovered from the beneficiaries of the project within 30 years. Moreover, a bill is pending with the State legislature of Andhra Pradesh, which, if enacted, would further increase considerably the total charges to farmers in the project area and further improve the terms of cost recovery. GOAP has given assurances that it will levy and collect not less than all presently authorized water charges for a period of 30 years and all  - 16 - presently authorized betterment levies (Section 3.06 of the Andhra Pradesh Project Agreement). For on-farm development works, investment costs would be repaid by the farmers as payments on loans. These charges would represent only a small fraction of the benefits farmers would derive from the project. They would leave the farmers with a substantial increase in net income, estimated at Rs 3,500/ha on the average, providing adequate incentives for those participating in the project. Project Risk 55. Investment risk on the CAD portion of the project is limited, given the substantial experience already gained on a pilot scale in the project area. On the other hand, the NSP infrastructure component Involves significant risks. Difficulties may arise, at a later stage, affecting the supply of sufficient irrigation water to the NSP system. The total of 264 thousand million cubic feet (TMC) annually of Krishna water, allocated to NSP Irrigation recently by the Krishna Water Tribunal, is sufficient to serve the total NSP area only if significant improvements are made both to the major infrastructure (lining of main canal and construction of regulators to minimize conveyance losses) and to water management. However, since several major projects ultimately using Krishna water in Karnataka and Maharashtra upstream of Andhra Pradesh are still in the design stage or under construction and will only gradually be completed and ready to use water by about 1995, there is presently, and will be for the next two decades, sufficient water available in the Nagar- junasagar reservoir to serve the NSP commands even with unimproved infra- structure. To secure this excess water, ultimately allocated to the unfin- ished projects in Karnataka and Maharashtra, for NSP irrigation, GOAP has given assurances that additional quantities of water over and above the 264 TMC allocated to NSP, would be made available at the dam site as may be required for irrigating the NSP areas in accordance with the cropping patterns previously worked out between the Bank and GOAP (Section 2.03 of the Andhra Pradesh Project Agreement). The assurance would further provide that the reservoir operation programs for the Nagarjunasagar and Srisailam (immediately upstream of NSP) power stations would be fully coordinated with irrigation needs of NSP. Given these assurances, overall investment risks under the project are acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Loan Agreement between India and the Bank, the draft Andhra Pradesh Agreement between the Bank and the Government of Andhra Pradesh, the draft ARDC Agreement between the Bank and ARDC, 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 distrib- uted to the Executive Directors separately. 57. The draft Loan Agreement provides that no w[thdrawals will be made in respect of command area development until evidence satisfactory to the Bank has been furnished showing that GOAP has been given the legal power to  - 1 7 - to enforce such on-farm development as it considers necessary in the Project Area and recover the cost of such works from the farmers concerned, and until the CSLF (see para 43 above) has been set up. An additional condition for disbursement will be the execution of a Subsidiary Loan Agreement by India and ARDC. 58. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and with the established criteria for Third Window loans. PART VI - RECOMMENDATIONS 59. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments April 22, 1976   COMM79 sntU- INDIA (Mid-1973) ~~350 Per tSaf .rabilanItd SOCIAL DWICAOCIS ON? RI OhPf US$ (TnSt Rallal a1 ..U L. 90 220 ~j 2,6o0oa RE M hrate (per thoOimid? 36 38 d L a I A 1. Crude death rate (pet toasand 1 16LA 19 Id.. 12LL 120 Infant mortality rate (pev thconod live birtha) 139 1 20-1t4cd .. D 017.5 4 Life alaimotn. et bith (leers) 41 50[6 56 72 Picafs ramodactico rate L 2.7 /h 2.9 3.2 3.) 1.3 Population poetS 'Ate