India - Jammu - Kashmir Horticulture Project

FILE Copy Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2251-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE JAMMU-KASHMIR HORTICULTURE PROJECT May 3, 1978 This d_cueut ba a redsrtoel distbnit NW my be m! by reciplens only In the performnee of their ofcial duties. Its contents my no odherwis e disclsed witot World ank authorIztIon.  CURRENCY EQUIVALENTS:-, US$1.00 3 Rs 8.75 Rs 1.00 US$0.114 Rs 1,000 - US$114,285 Rs 1,000,000 - US$114,285.714 WEIGHTS AND MEASURES Metrc System ABBREVIATIONS ARDC - Agricuit4ra1 Ref iance and Development Corporation DA - Department of Agriculture DH - Department of Horticulture DHPM - Department of Horticulture, Planning and Marketing GOI - Government of o ndfa, GOJK - Government of Jammu and Kashmir HP - Himachal Pradesh- J&K - Jammu and Kashmir JKHPMC - Jammu-Kashmir.Horticultural Produce Marketing and Processing Corporation RBI - Reserve Bank of India UP - Uttar Pradesh GOI and GOJK.FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY INDIA JAMMU-KASHMIR HORTICULTURE PROJECT Credit and Project Summary Borrower: India, acting by its President. Beneficiary: The State of Jammu-Kashmir. Amount: US$14 million. Terms: Standard. Relending Terms: GOI (i) to ARDC: For loans to be repaid 9 years from withdrawal at 6.75% per annum; and for loans to be repaid 15 years from withdrawal at 7.25% per annum, less 0.25% for prompt payment; and (ii) to GOJK in accordance with standard terms of GOI for development assistance to state governments. ARDC (i) to Participating Banks: Annual interest rate of 8%; with repayments to coincide, approximately, with expected collections from ultimate borrowers; (ii) Participating Banks to JKHPMC for marketing facil- ities at annual interest rate of 11% with a maximum repayment period of 15 years, including a grace period of 3 years; and (iii) ARDC to JKHPMC (for the juice concentrate plant) on terms and conditions to be deter- mined and satisfactory to the Association. Project The purpose of the project is to improve marketing and Description: production of apples, walnuts, and mushrooms in Jammu and Kashmir by providing improved marketing facilities, credit for crop production and technical assistance to help pro- ject implementation. About 40,000 mostly small growers would benefit from the project. The project entails no unusual risks. The development of the managerial capabil- ity of the Jammu-Kashmir Horticultural Produce Marketing and Development Corporation (JKHPMC) - a new entity - will be critical for successful project implementation. Appropriate safeguards have been provided in the project to ensure that the management capability of JKHPMC is built up as quickly as possible. It will also be import- ant to formulate proper marketing arrangements for the apple juice concentrate component of the project. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii3 - Estimated Cost: US$ Million Local Foreign Total JKHPMC Investments Apple Handling Facilities 5.4 0.4 5.8 Walnut Handling Facilities 2.3 - 2.3 Apple Juice Concentrate Plant 1.9 0.6 2.5 Sub-total 9.6 1.0 10.6 Crop Loans 2.3 - 2.3 Research and Technical Assistance Fruit and Mushroom Research and Technical Assistance 0.9 1.0 1.9 Working Capital 5.5 - 5.5 Sub-total 18.3 2.0 20.3 Physical Contingencies 1.0 0.1 1.1 Price Contingencies 5.8 0.4 6.2 Total Project Cost 25.1 2.5 27.6 Financing Plan: US$ Million Foreign Local Total IDA Credit 2.5 11.5 14.0 Local Financing: GOI/GOJK 6.6 6.6 GOJK 0.5 0.5 ARDC/Banks 5.8 5.8 Fruit Growers 0.5 0.5 Total 2.5 25.1 27.6 Estimated US$ Million Disbursement: FY79 PY80 FY81 FY82 FY83 Annual 0.3 1.1 3.9 4.3 4.4 Cumulative 0.3 1.4 5.3 9.6 14.0 Rate of Return: 21% Appraisal Report: No. 1890-IN, Dated April 25, 1978  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE JAMMU-KASHMIR HORTICULTURE PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$14 million on standard IDA terms to help finance a project for improving marketing and production of apples, walnuts, and mushrooms, and the construction of an apple juice concentrate plant in the State of Jammu-Kashmir (J&K). The major portion of the proceeds of the credit - US$12 million equivalent - would be channelled through the Government of India to the Agricultural Refinance and Development Corporation (ARDC). ARDC would on-lend the funds to participating banks and the J&K State Cooperative Bank for relending to apple, walnut and mushroom growers for crop production, and to the Jammu Kashmir Horticultural Produce and Marketing Corporation for the construction and equipping of an apple juice concentrate plant and for facilities for grading, packing, storing, processing and transshipping. The remaining funds - US$2 million equivalent - would be channelled through the Government of India to J&K to help pay the cost of the research, technical assistance, studies and staff training. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (2008-IN dated April 17, 1978), was distributed to the Executive Directors on April 18, 1978. Country data sheets are attached as Annex I. Background 3. India is a vast, continental country with over twenty States divided on linguistic and ethnic grounds with a population of over 620 million people, almost as many as live in Africa and Latin America combined. It has a dual economy. While 79% of its population lives in rural areas their productivity is low. Agriculture's share in value added declined only gradually from about 50% to 43% over the last twenty years. The share of manufacturing has in- creased slowly and, since the late 1960s, has remained approximately constant at about 16%. Industry has a highly diversified structure with import substi- tution and self-sufficiency pushed to the point where India has the capacity to produce virtually every type of consumer and capital good required for a modern economy. As in the case of maniy other large economies, the foreign sector plays a relatively minor role; both exports and imports represent about 7% of GDP; foreign saving has supplied only about 5% of gross investment in the recent past. 4. Even though growth has been slow in the past, the economy enjoys many of the prerequisites for sustaining faster growth and development. Although literacy is far from universal, India has large resources of well trained administrative, scientific and technical manpower and a dynamic entrepreneural class. Per capita consumption of commercial energy is low by international  - 2 - comparison and power shortages are a way of life; but India is relatively well- placed with regard to primary fuel sources. There are very large reserves of coal and nuclear ores, and considerable hydro-electric potential. Recent petroleum and gas discoveries have begun to be exploited and prospects are bright for further discoveries. The basic elements of the infrastructure needed to serve the economy have been established; in absolute terms the irrigation, railway, telecommunication, road and power systems are each among the largest in the developing, and in some cases the developed, world. However, considerable gaps remain as the situation varies greatly from state to state. 5. Given the size of India's population, its annual increase of 13 mil- lion people is such as to absorb a large portion of any provision to increase standards of living. It is not possible to discern any significant increase in the incomes of the vast mass of the rural and urban poor, who number 200 million with a per capita income of US$70 per annum or less. Although food- grain production may be persistently underestimated, there has been no perma- nent increase in per capita foodgrain consumption recorded in aggregate statistics since 1960/61. Many years after the initial target, primary educa- tion is still not universal. The labor force has grown faster than employment and a considerable backlog of unemployed exist. Nevertheless, there has been progress, with per capita income increasing on trend 1%-1.5% per annum; birth rates falling to below 37 per thousand from levels of 45-50 per thousand at the start of the 1950's; life expectancy increasing from about 32 years in the 1940's to 45-50 years in the 1970's; school enrollment rising from 32% to 65% of children in primary school ages and from 5% to 29% of children in secondary school ages since 1950/51. 6. The rate of growth of GDP has been 3.5% per annum over the period since Independence and 2.8% per annum over the period 1969/70 to 1976/77. These low rates of growth are only partly due to low availability of inves- tible resources, although there have been times that foreign exchange was a severe bottleneck. The net transfer of resources from abroad has never been above 3% of GDP and fell to as little as 0.8% between 1969/70 and 1973/74. India's saving effort has grown steadily since the beginning of planning in 1951, when it was 9% of GDP, to its recent level of 20% of GDP, which compares well with other countries' saving performance at the same level of per capita incomes. Despite a doubling in the rate of investment, from about 10% of GDP in the early 1950's to about 20% at present, the trend rate of GDP growth has not increased. This marks a decline in the efficiency of capital use which transcends fluctuations due to weather, war or international terms of trade shifts. Recent Trends 7. In many respects economic conditions during the last three years have been significantly different from those prevailing in previous years. In the late 1960's and early 1970's, the economy faced several shortages-- foodgrains, agricultural and industrial inputs and foreign exchange--which retarded production and investment and often led to price increases. An adverse shift in terms of trade starting with the oil price hike in 1973 and continuing with the foodgrain and fertilizer price rises in the following  - 3 - year greatly increased the cost of acquiring these essential commodities abroad. These external shocks combined with a spate of bad weather played havoc with the economy through 1974/75, causing slow growth in production and investment and a record level of inflation. 8. Since the excellent monsoon in the summer of 1975, a new situation has arisen. The period 1975 to 1978 has been characterized by much greater price stability, enhanced agricultural and industrial output and comfortable foodgrain and foreign exchange reserves. The new situation was a combined result of domestic policies and fortuitous circumstances. The increase in foodgrain stocks was only in part due to improved policies and programs. The more decisive factor has been the three good-to-excellent monsoons coming on top of substantial foodgrain imports in 1975 and 1976. Industrial output increased on average by 7% a year in 1975-1978 compared to 3% in 1970-75, due to greater power availability, better management in the public sector, improved labor relations, better transport and some increase in demand derived from increased incomes due to improved harvests, greater exports and higher levels of public investment. The most dramatic turnaround ocurred in the balance of payments, with a sharp real reduction in the import bill helped by good harvests and increased domestic production in iron and steel, fertilizer and oil, which reduced demand for imports The supply of foreign exchange was also greatly increased by a significant step-up in the volume of exports, an increase in foreign aid and a substantial jump in remittances from Indians working in the Middle East, Europe and America. 9. In 1977/78, the growth of GDP was about 5%, a recovery over the rate of 1.6% in 1976/77 but less than the 8.5% reached two years earlier. Prices, which had been rising during 1976/77 after a decline in 1975/76, were stabilized; wholesale prices at the end of March 1978 stood at about the same level as in March 1977, and the yearly average was only 5.4% above that of the previous year. Exports in 1977/78 are estimated at US$6.4 billion and imports at US$6.6 billion. The inflow of invisibles from abroad at US$1.4 billion and net aid disbursements of US$1.2 billion more than offset the small trade deficit of US$200 million and IMF repurchases of US$330 million to in- crease reserves by US$2.1 billion to US$5.8 billion by end of March 1978. 10. The 1977/78 foodgrain crop may exceed the 1975/76 record level of 121 million tons due to very good weather and increased input use. Support purchases could result in peak foodgrain stocks as high or even higher than in 1977, when they were 21 million tons. In addition to ample and evenly distributed rainfall, more intensive and widespread use of three crucial inputs--irrigation water, fertilizer and extension advice--contributed to the bumper harvest. Fertilizer consumption surged 30% in 1977/78, continuing its recovery from the depressed level of 1974/75. Annual additions to irri- gated area have been on average of 2 million hectares since 1975/76 compared with 1.3 million hectares per annum achieved from 1969 to 1975. An improved extension system, which has been getting heartening results, has been intro- duced in several states and is slated for further coverage.  -4- Development Prospects 11. India faces the future with large stocks of foodgrains, high and rising external reserves, excellent rabi crop expectations, price stability and good prospects for sustaining the improved supply of foreign exchange. The circumstances present a great opportunity for further promoting the devel- opment of the Indian economy. The Draft Five Year Plan for 1978-83, discussed though not yet approved by the National Development Council, responds to this challenge by projecting a rapid growth in real terms of both overall investment and public plan expenditures. Investment is to rise on average by 10.7% per annum and the economy is expected to grow on average by 4.7% per annum during the years 1978-83. 12. The new Draft Plan reveals an intention to reorient the country's development towards improving the living conditions of the poor. This is reflected in its principal objectives: (i) the removal of unemployment and significant underemployment; (ii) an appreciable rise in the standard of living of the poorest sections; and (iii) the provision of basic needs to low income groups. To achieve these objectives, the Government proposes to emphasize agricultural development, cottage and small scale industries, area planning for integrated rural development and the provision of minimum needs. As a first step towards complete removal of unemployment, the Plan envisages the creation of a large number of new jobs through a considerable expansion of construction activity as well as a boost in the consumption levels of the poor--which in turn would require the production of the necessary wage goods,. largely in small-scale, labor-intensive units. Specific programs to achieve these objectives are still in the making. 13. In order to achieve a sizable rise in the income of the poorest classes of society, the Draft Plan--in conformity with the Janata Party policy-- places prime emphasis on the development of rural areas. A major impulse for agricultural development will be provided by the expansion of irrigation and related agricultural inputs, such as fertilizers and better farming techniques. The Draft Plan argues that efforts to increase productivity should be sup- plemented by measures with a redistributive impact such as supporting small farmers and small industry with institutional credit and material supplies and assistance for marketing. The Draft Plan also intends to complement the creation of employment and the increase in rural productivity by providing basic services to those groups which have so far been unaffected. For this purpose, the minimum needs program launched at the onset of the Fifth Plan is being revitalized and accelerated. 14. The allocation of the Draft Plan outlay for the next five years reflects these priorities. Out of a total expected spending of US$81 billion, US$35 billion--43%--have been earmarked for rural development programs includ- ing agriculture, irrigation, fertilizer and social infrastructure expenditures directly benefitting the rural areas. The share of these sectors amounted to 37% during the Fifth Plan period and to 40% in the Annual Plan for 1978-79. It can thus be expected to rise further during the next four years. Similarly, spending on the minimum needs program in 1978-83 will absorb 6% of the plan resources, as compared to less than 3% in the Fifth plan. On the other hand, the shares of industry and of transport and communication have been reduced.  - 5 - 15. There is considerable scope for stepping up growth in agriculture. The most promising development is the sharp increase in government outlays and improved project implementation for irrigation. There are also indica- tions that private investment in tubewells is picking up again after a slump in the early 1970's. Other favorable indicators include the spread of an improved system of extension of more states and the recovery of fertilizer demand. With regard to more productive use of existing capacity, there is an increased awareness in the Government that the benefits of irrigation projects can be much increased not only through command area development, but also through improved design standards in major surface irrigation infrastructure. Nevertheless, comprehensive improvement in water management remains a distant goal, particularly in existing systems and where farms are small and frag- mented. The bulk of the increase in private tubewell development in the last few years has come from the Eastern Region, where more and more farmers are sinking wells to enable them to grow a winter crop of wheat in addition to providing better water control for the summer rice crop. Improved water man- agement would make such investments even more productive. Increased farmer incomes from the recent good harvests, somewhat lower fertilizer prices and grain prices supported at incentive levels have encouraged farmers to apply considerably more fertilizer. Finally, the reorganized and improved extension and research system which has been introduced recently in several states in northern and eastern India holds out the hope that sound advice will reach many more farmers in both irrigated and rainfed areas and will raise their productivity significantly. The improved extension system is an excellent example of how the growth effort can and must be structured so as to increase the incomes of small and marginal farmers, who work 25% of the cultivated land and account for somewhat more than 25% of production; more importantly, these farmers make up about 70% of the rural population and constitute the majority of those living below the poverty level in India. 16. Industrial prospects are somewhat more difficult to discern. Moderate growth in 1977/78 after an excellent year in 1976/77 suggests the persistence of problems plaguing the sector since the mid 1960's--large unutilized capacity, stagnant capital formation in the private sector and low productivity growth. Lower investment than expected, of course, is one of the reasons for low capacity utilization in capital goods industries, which make up a significant portion of the sector. Low buoyancy of demand for industrial products from all sources--not only from investments but also from agriculture, exports and import substitution--has been a basic constraint. Further import substitution cannot be a major source of growth for manufac- tured goods in the future because most opportunities for efficient import substitution have been exploited. Higher effective demand from increased growth of real incomes from greater productivity in both agriculture and manufacturing, sustained increases in exports and increased investment, particularly from the public sector, all can raise demand for industrial production. 17. The new industrial policy of the Janta government and the orienta- tion of the Draft Five-Year Plan emphasize small scale industry over heavy industry and have accordingly promoted such measures as product reservation, credit rationing, and, within the small scale sector, plans to initiate special efforts for the growth of the "tiny" sector. While the priority accorded to  the small scale sector is laudable, there are doubts about the efficacy of the policy measures chosen. Past experience indicates that other factors are also crucial to its development, particularly effective demand, quality control, prices and marketing techniques. Some small scale industry is cap- ital intensive and not well suited to as rapid employment generation as is hoped; nor can all goods be efficiently produced using small scale technology. 18. India's population growth rate of about 2% is not high in comparison with that of most developing countries. Moreover, the rate is on the decline, after growing steadily census to census from 1920 through 1970, both because the birth rate continues to fall and because mortality will not fall as steeply as in the past. Family planning acceptor rates slowed down in the wake of the abandonment of the 1976 population policy after the 1977 general elections and the momentum of the program has yet to be recaptured, particu- larly in Northern India. However, the new Government has reaffirmed its commitment to a voluntary family planning program and has budgeted the re- sources to carry it out. Over the longer term, with a sustained family planning effort, it should be possible to bring the birth rate down from its 1970-75 level of about 37 per thousand to about 23 thousand to the end of the century, implying a population growth rate somewhat under 1.1%. Our "best guess" projection of India's population in the year 2000 is 885 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century; the decline in fertility will, however, bring about an earlier change in the age structure of the population. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and secondary education systems. However, the labor force will continue to grow at a faster rate -- 2.5% per annum -- until well into the 1990's, resulting in an increasing proportion of the population in the labor force from 40.8% to 45% in 1991. 19. The government's goal to eliminate unemployment in 10 years implies an expansion of the number of jobs at the rate of 9 million per annum -- 7 million new entrants to the labor force and the asborption of 2 million or so formerly unemployed. The majority of these will have to continue to be absorbed -- judging from the prevailing composition of the labor force -- in agriculture and the unorganized small scale sector. The absorptive capacity of the modern organized sector is unfortunately low; its employment elasticity is expected to be no more than 0.5. Given its low current share of output, even rapid growth of this sector would not make much of a dent in the backlog of the unemployed. Employment in the organized sector has been growing at about 2.2% per annum in the past ten years, less than the labor force growth rate, and all of this in the public sector. Private sector employment has not grown at all since 1966. While the labor absorption elasticities of the small scale sector may be higher in some cases than that of the large scale sector, a major effort to expand production must succeed before an appreciable employ- ment impact will materialize. 20. In the short run India's balance of payments should not be a con- straint on growth and development in the next few years. With good medium- term prospects for India's exports, the expected continuation of growth in invisible receipts and the potential for an increase in net aid disbursments, the net availability of foreign exchange to finance merchandise imports is projected to rise over the next five years, in current prices, from US$8.7  - 7 - billion in 1977/78 to US$16.7 billion in 1982/83, an average of 14% per annum. Given the unlikely need to increase rapidly imports of some traditionally important items -- e.g., petroleum, fertilizer, foodgrains, edible oil and cotton -- other imports can increase at the rate of 20% a year over the next five years. 21. Altogether, these currently favorable circumstances present the opportunity to double India's trend rate of growth of per capita income from the average annual rate of 1.5% that prevailed for the last thirty years to 3% over the next five, and thereafter. This requires a continued fall in the rate of population growth below 2% per annum and a rise in the growth of GDP from the historical rate of 3.5% to 5.0% per annum. Both of these targets are within reach. The first should be achieved barring a total abandonment of the family planning program. The second requires improved efficiency and increased investment by both the public and private sectors; it also means more fully harnessing the gains from trade through international specializa- tion implying a strong export effort and continued easier access to imports. In addition to enabling a faster rate of per capita income, the present situation allows for increasing the coverage of the population's minimum needs. This requires formulating and administering effective, efficient programs of public investment and, of course, requires larger public outlays. 22. With the enhanced resources at India's disposal, the economy is poised for a higher rate of economic growth. The Government is moving to take advantage of this opportunity with increased public expenditure envisioned over the next five years, and the liberalized trade policies recently announced. It is yet too early to know whether the moves made so far will be sufficient to achieve the desired targets or whether additional steps will be necessary. Assured international support for India's development effort will be an im- portant factor in moving the Government to take greater risks in pursuing a dynamic development program directed at meeting the huge needs of its large and impoverished population. PART II - BANK GROUP OPERATIONS IN INDIA 1/ 23. Since 1949, the Bank Group has made 53 loans and 97 development credits to India totalling US$2,015 million and US$4,934 million (both net of cancellation), respectively. Of these amounts, US$881 million has been repaid, and US$2,031 million was still undisbursed as of January 31, 1978. Annex II contains a summary statement of disbursements as of January 31, 1978, and notes on the execution of ongoing projects. 24. Since 1957, IFC has made 14 commitments in India totalling US$58.4 million, of which US$13.8 million has been repaid, US$7.6 million sold and 1/ This part of the report is substantially the same as Part II of the President's Report for the Korba Thermal Power Project (Report No. P-2186-IN), dated March 29, 1978.  US$6.9 million cancelled. Of the balance of US$30.1 million, US$23.6 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of January 31, 1978, is also included in Annex II (page 2). 25. 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 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 institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capac- ity utilization in industry. The Bank Group has also been active in support- ing infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 26. 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, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefiting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 27. 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. Thanks in large part to the response of the aid community, India has successfully adjusted to the changed world price situation. However, the basic need for readily usable foreign exchange assistance to augment domestic resources, assure effective utilization of existing capacity, stimulate investment and accel- erate economic growth, remains. 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. 28. It is clear from the review of the Indian economy that as much as possible of India's external capital requirements should be provided on  - 9 - concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and some Bank lending to India, for which the country is creditworthy, is appropriate. As of January 31, 1978, outstanding loans to India totaled US$1,168 million, of which US$662 million remained to be disbursed, leaving a net amount out- standing of US$506 million. 29. 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 58%, 24% and 29%, respectively, in 1975/76. On March 31, 1976, India's outstanding and dis- bursed external public debt was US$13.1 billion, of which the Bank Group's share was 25%. The Bank Group's share is expected to remain around this level in the future. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1976/77 about 14% of India's total debt service payments were to the Bank Group. PART III - HORTICULTURE IN JAMMU-KASHMIR (J&K) Horticulture in Jammu-Kashmir (J&K) 30. J&K, in the foothills of the Himalayan mountairns, lies between Tibet and Pakistan. Per capita income in J&K of Rs 835 is well below the national average of Rs 1,022. Agriculture is the dominant occupation of the 5 million people of J&K and two-thirds derive their livelihood from cultivating the land. Due to the rugged topography, however, only about 6 percent of the area of J&K is cultivated and there is little scope for increasing agricultural production by extending the cropped area. Rice, maize and wheat are the main food grain crops. Apples and walnuts are also important. Rice and apples are the main- stay of Kashmir's economy at present. There are about 100,000 apple and wal- nut growers in the State, the majority of whom plant about 1 ha or less with trees which constitute their principal source of cash income. 31. J&K is the leading apple producing State in India, with an annual turnover of about US$60 million equivalent. Last year, the State produced over 0.3 million tons of apples, output is expected to triple within ten years. Walnut production is estimated at about 23,000 tons per annum and should reach about 30,000 tons in ten years. About 60% of all the nuts are exported, resulting in annual foreign exchange earnings of US$0.7 million equivalent. The walnut timber, which is priced at over US$500 equivalent per tree, is used for the intricate woodwork for which Kashmir is famous. Mushroom cul- tivation was introduced in the valley on an experimental basis ten years ago. Presently, there are about 500 farmers producing 95 tons of mushrooms, mostly for canning by local processors.  - 10 - 32. There is good potential for expanding apple production provided technical problems, which hinder higher yields, can be overcome. The main apple production problem in J&K is apple scab disease and the possibility of codling moth infestation. GOI and GOJK are taking adequate measures to con- trol these diseases and the project would provide further technical assistance and study tours to allow local experts to evaluate work on scab control. The main problem with walnut production is that trees have been derived from un- selected seed. Consequently walnuts lack uniformity of size, shape, color and kernel and are, therefore, difficult to market. The Department of Horti- culture (DH) has selected 32 strains for propagation by seed and budding to produce a more homogenous walnut. There are no major walnut pest or disease problems but 25% of production is lost by inadequate hulling practices which cause staining of shells and discoloration and molding of kernels. The pro- posed project would help alleviate these problems. 33. With regard to mushrooms, the main problem is low yields, attribut- able to variable spawn quality and inadequate cultivation methods. Failure to maintain sterile conditions in mushroom houses causes yield reduction from pests and diseases. These difficulties could be overcome by modern spawn production facilities and expansion of research efforts, to introduce low-cost methods of germfree mushroom cultivation. The project would help GOJK to provide appropriate services and facilities to develop a mushroom industry. 34. Apple and walnut processing, marketing and transport facilities in J&K are inadequate to handle efficiently the quantities of fruits and nuts being produced. The expected increases in apple production made the need for improvement urgent. Marketing in J&K is unregulated. There is no uniform grading system and the quality of fruit marketed varies widely. Consequently there are inordinate delays in marketing because apples have to be unpacked from crates to allow for inspection by prospective wholesale buyers. Cold storage facilities are very limited and therefore apples must be marketed immediately irrespective of prevailing market conditions and prices. Poor quality apples - cull fruit - account for almost 20% total production. Market- ing costs are too high to make it financially attractive to offer such fruit in fresh fruit markets and most of it is left to rot in orchards. Processing for juice would provide an outlet for culls and would enhance growers' incomes. The Ministry of Agriculture, through its Department of Horticulture, Planning and Marketing (DHPM) has begun, on a limited scale, to address some of the problems of apple and walnut growers. The formation of fruit growers coopera- tives has been a particularly encouraging development. These societies con- sist almost entirely of small growers. The cooperatives provide credit to their members for growing and harvesting expenses, and arrange fruit transport and sale of fuit by commission agents. Starting in 1972 with two societies handling 25,000 boxes of apples, the number of societies increased to 42 by 1976 and their turnover, 470,000 boxes (a market share of 4%) that year, was expected to double during 1977 to about 8% of total out-of-state sales. Aver- age income per member per unit marketed has been 15-20% above that of growers using pre-harvest contractors. However, societies have no packing or cold store facilities. These cooperatives would be major beneficiaries of the centralized marketing services to be provided through the project.  - 11 - Previous Bank Group Experience 35. The Himachal Pradesh Apple Processing and Marketing Project (Credit No. 456-IN) was the first project supported by the Bank Group in the horti- cultural sector in India. It became effective in late 1974 and its purpose is to solve the same type of apple marketing and processing problems in HP that confront growers in Kashmir. The project is financing apple packing and grading centers, cold storage, a juice plant and construction of roads and cableways, to enable a state corporation to help growers market apples by outright purchase from them, by marketing fruit on a commission basis, or by providing grading, packing and forwarding services. Initial delays were caused by difficulties in establishing the corporation and hiring of key staff. These problems have been overcome and the marketing corporation is now func- tioning well, key staff appointed and a growing number of horticulturalists in HP are turning to the corporation for marketing assistance. PART IV - THE PROJECT 36. The project was prepared by GOJK with the assistance of the Agri- cultural Finance Corporation Limited. It was appraised by IDA in September/ October 1977. The Staff Appraisal Report No. 1890-IN, dated April 25, 1978, is being distributed separately. Negotiations were held in Washington from April 4 to April 12, 1978. The negotiating delegation for India was headed by Mr. D.K. Chatterjee, Director, Department of Economic Affairs. A Supple- mentary Project Data Sheet is attached as Annex III. Also attached is a project map. Project Description 37. The project would be carried out over six years and would help to finance construction of a plant to produce apple juice concentrate and facil- ities for apple and walnut grading, packing, processing and marketing for the Jammu-Kashmir Horticultural Produce Marketing and Processing Corporation (JKHPMC). Financing is also provided for mushroom development and fruit re- search to be carried out by the Departments of Agriculture and Horticulture respectively. In addition, the project provides credit for a pilot mushroom production scheme. Funds for the above-mentioned marketing facilities and the juice plant for JKHPMC would be channelled through the Agricultural Refinance and Development Corporation (ARDC) and participating banks. For the market- ing components, execution of an ARDC subsidiary agreement satisfactory to IDA and drawing-up of a banking plan would be conditions of credit effectiveness (Section 5.01 (c) and (e) of the Credit Agreement). Execution of an ARDC subsidiary agreement, satisfactory to IDA, for financing of the juice plant would be a condition of disbursement for this component (Schedule 1 para 4(c)(i) of the Credit Agreement). Finally, the project includes marketing and project evaluation studies and technical assistance. Following is a brief description of project components.  - 12 - 38. Apple Grading and Packing Centers. A total of 25 grading/packing centers would be constructed under the project. The centers would be part of several complexes containing cold storage and sawmill facilities also to be financed by the project. The grading and packing centers would operate for about eight weeks. During the peak harvest period double shift work would be required for about five weeks. During the off season some staff would work in the saw mills as explained below. 39. Cold Storage. A total of ten cold storage facilities would be constructed under the project with a combined capacity of 17,000 tons. Devel- opment of cold storage capacity would be phased to match the throughput at each grading and packing center and at full development JKHPMC would operate seven centers each with 2,000 tons cold storage capacity and three units with 1,000 tons each. 40. Saw Mills. A total of ten sawmills would be constructed under the project to meet part of JKHPMC's needs for fruit boxes. JKHPMC would require about three million boxes per year for packing apples, excluding wooden bins for collecting fruit from growers and for transporting culls. Each sawmill would have a capacity for making some 125,000 boxes per season and would be attached to one of the ten 6,000 ton packing/grading centers. In addition to ensuring a supply of boxes, the sawmills would allow JKHPMC to cut costs and provide off-season employment for packing center staff. With increasing pressure for raw materials for packing boxes, JKHPMC would ensure timber supplies by placing bulk orders with GOJK's Forestry Department. Bulk orders would also reduce JKHPMC's costs. The Department would give priority to meet- ing JKHPMC's requirement for timber supplies (Section 2.08 of Project Agreement). 41. Transshipment Center. Road transport is well developed between Kashmir and Delhi but, for onward transportation to other urban centers, goods have to be transshipped to a second group of transporters operating from Delhi to other major cities. At present most J&K fruit goes to the Delhi wholesale market where it is repacked and reloaded causing congestion, waste of time and extra expense. Costs would be reduced and fruit deliveries speeded up if the transfer could take place outside the city boundaries. The project would there- fore finance a transshipment center at Kundli, at the Haryana Delhi border. The center would have storage capacity for 10,000 fruit boxes and would handle apples and walnuts for JKHPMC and, on a fee basis, for traders. Other produce would also be handled and the center is expected to operate for about eight months in the year. 42. Walnut Hulling and Drying Centers and one Export Center. The project would finance fourteen walnut hulling and drying centers to process 9,000 tons of unshelled walnuts. At full development, JKHPMC expects to purchase 60% of the throughput, handle 20% on consignment and 20% on a custom service basis. About half the unshelled nuts would be sold to traders and high grade nuts would be sent to JKHPMC's export processing center for further treatment. The center would prepare and pack unshelled nuts and kernels for export. 43. Apple Juice Concentrate Plant. There are an estimated 60,000 tons of non-fancy grade apples largely wasted in J&K at present and, in ten years  - 13 - time, the amount could double. The major potential use for these apples is as juice concentrate for the soft drink market. Present planning in India envisages construction of one apple juice plant in HP being financed by the Association (Himachal Pradesh Apple Processing and Marketing Project - Cr. No. 456-IN), and, probably, a second plant in Uttar Pradesh. Kashmir has enough cull apples to keep at least four to five apple juice concentrate plants working full time; marketing of the juice, however, is a problem. The Indian soft drink market, despite the size of the country, is a thin one, and past experience has shown it to be both volatile and highly price sensitive. Fruit juices at present constitute a very small proportion of the market and their prices are not competitive with the various colas and carbonated drinks. Be- cause of the market constraints, the project would finance only one apple juice plant in J&K, with capacity to process 12,000 tons of cull apples per year. To ensure that the proposed investment in the plant is viable, the completion of a satisfactory feasiblity study and appropriate arrangements for bottling and marketing of juice would be conditions of disbursement for this component (Schedule 1, Para 4(c)(ii) and Part II.2 of Schedule 3 of the Credit Agreement). 44. Mushroom Development. The project would help the mushroom section in the Department of Agriculture (DA) to improve mushroom cultivation in Kashmir by providing 13 man-months of internationally recruited experts, 13 man- months of study-tours, a modern spawn production unit and additional research facilities. 45. Crop Production Loans. Advance payment soon after harvest is a major incentive offered to growers by preharvest contractors. To attract customers JKHPMC would have to provide, or help its clients obtain, similar financial assistance. For this purpose, the project would provide Rs 20 mil- lion production credit for growers who would contract with JKHPMC to sell or market their fruit. A small amount, not exceeding Rs 400,000, would be avail- able also to farmers participating in a mushroom pilot scheme. Commercial banks and viable cooperative banks would channel the credit to growers either directly or through fruit growers' cooperatives and would be refinanced by ARDC. 46. Fruit Research. The Horticultural Research Station in Kashmir lacks laboratory space and equipment to conduct research on cold storage of fruits and the existing library is inadequate. Therefore, the project would help to finance cold storage units and a library annex needed for carrying out fruit research in the State. In addition, the project would finance purchase of three refrigerated trucks to test the technical and economic viability of transporting fruit over long distances under controlled temperatures. Indian Railways operate about eight refrigerated railvans for the Ministry of Agricul- ture which would be made available for trials under the project. Such trials would be conducted by JKHPMC in collaboration with the Department of Horti- culture (DH) and the Department of Horticulture Planning and Marketing DHPM). 47. Technical Assistance. To ensure that JKHPMC gets off to a successful start, engineering consultants, technical assistance and training have been provided in the project. A total of 90 man-months of internationally recruited experts at an estimated average cost of about US$6,000 per man-month would be  - 14 - provided. Consultants would assist JKHPMC in selecting sites, drawing up tender documents, preparing construction and equipment purchase contracts, and evaluating bids for the cold storage units and the juice concentrate plant. One management consultant would also be hired to assist JKHPMC's Managing Director. In addition to the management expert, the technical assistance includes two specialists for walnut operations, two for apple juice manufac- ture, two for cold storage research, five for mushroom research and spawn production and one for codling moth control. Assurances have been obtained that GOJK would appoint the consultants for the technical assistance program under the project (Section 2.02 of Project Agreement). 48. Studies and Training. The project would finance studies on apple products and walnut by-products development, foreign market evaluation for apple concentrate, and technological aspects of local apple marketing. Terms of Reference satisfactory to the Association would be prepared for the studies by GOJK's Department of Horticulture (Section 3.03 of the Credit Agreement). A project evaluation study to be undertaken by GOJK would also be financed to provide feedback about the effect of JKHPMC operations on existing marketing and market behavior and the benefits accruing to fruit growers from the pro- ject. The evaluation study would be initiated by December 31, 1978 and an inception report would be submitted to the Association by March 31, 1979 (Section 2.13 of Project Agreement). 49. The marketing and production technology to be introduced under the project would necessitate considerable staff training, both local and over- seas. The project would finance 62 man-months to cover training needs of twenty GOJK and JKHPMC staff. Assurances have been obtained that GOJK would prepare a plan by December 31, 1978 to arrange the study-tours, subject to the approval of the Association (Section 2.15 of Project Agreement). Apart from training new staff there would be a need for periodic refresher training. The apple grading, packing and cold storage training program would benefit considerably from a similar program underway in the HP Apple project. The HP program would be in operation up to one or two years before the first JKHPMC centers would be completed and would explore the most appropriate grading, packing and cold storage techniques, which would be applied in the training courses under the proposed project. Project Implementation 50. Apple and Walnut Components. The executing agency, JKHPMC, would construct, own and operate the apple juice concentrate plant and all facil- ities for grading, packing, processing and marketing of apples and walnuts. JKHPMC would establish offices in main consumption centers to promote and conduct sales of its produce. It would also maintain field services at grading and packing centers to form close links with growers, coordinate harvesting and fruit deliveries and, in close cooperation with DH, provide technical advice. In order to ensure that JKHPMC would concentrate all its manpower and financial resources on project activities, assurances have been obtained that during project implementation the Corporation would inform the Association prior to undertaking any activity not included in the project (Section 2.18 of the Project Agreement).  - 15 - 51. Organization and Management. JKHPMC was formed in April 1978 and its Managing Director was appointed in February 1978. The Corporation expects to have full time staff of about 800 and, in addition, to provide seasonal employment to 1,900 people. The appointment of qualified Department Heads for Operations and Finance would be a condition of credit effectiveness and assur- ances have been obtained that qualified persons would be appointed to head the Marketing and Administration Departments by March 31, 1979 (Section 5.01 (f) of the Credit Agreement and Section 2.06 of Project Agreement). Also, assurances have been obtained that the above mentioned senior staff would be recruited nationwide, and that every effort would be made to retain senior staff to ensure continuity of JKHPMC management (Section 3.02 of the Project Agreement). 52. JKHPMC's Managing Director is accountable to the Board which would include, in addition to himself, representatives of GOI, GOJK, ARDC and share- holder-growers. The Board would deal with major policy issues and a small executive committee of the Board would assist the Managing Director in the day- to-day operations. The Corporation's authorized share capital is Rs 50 mil- lion. The shareholders of the Corporation would be GOJK (50%), GOI (40%), and fruit growers (10%) (Section 3.03 of the Credit Agreement). To encourage greater growers' participation in JKHPMC, GOJK would allow fruit growers to increase their shareholding in the Corporation. The payment of Rs 1 million of JKHPMC's initial share capital would be a condition of credit effectiveness (Section 5.01 (d) of the Credit Agreement). Also, to strengthen JKHPMC's financial position, GOI and GOJK have agreed to purchase additional shares so that JKHPMC's share capital would be Rs 5 million by June 1979 and, thereafter, at the beginning of each financial year as shown to be necessary by the Corpo- ration's financial plan 'to maintain the debt/equity at no more than 2:1 (Section 3.02 (b) and (c) of the Credit Agreement). Cash flow projections show that JKHPMC would be able to generate sufficient revenue to finance work- ing capital requirements for full operations, estimated to be over Rs 55 mil- lion, and for future investment programs. The Corporation's estimated finan- cial rate of return would be 22%. 53. Field activities of the Corporation would be conducted by its Operations Department which would include an Apple, a Walnut and an Engineer- ing Section, each headed by a manager. The Engineering Section would be re- sponsible for supervising construction and for the maintenance of both apple and walnut centers. Each center would, in addition to operating staff, have field staff to contact farmers, provide horticultural advice, coordinate fruit deliveries to centers and help farmers obtain advances or crop loans. HD staff would cooperate closely with JKHPMC staff particularly to improve apple quality by pest and disease control and to ensure that apples and walnuts are harvested on time. 54. The Marketing Department would be mainly concerned with apple mar- keting - particularly in development of direct sales to wholesale merchants in major consumption areas throughout India, and in promoting sales to smaller towns and rural areas. For this purpose, it would open at least ten sales offices in the most important consumption areas, in coordination with DHPM staff who gather market intelligence in Delhi, Bombay, Calcutta, Madras,  - 16 - Hyderabad and Ahmadabad. Also, the Department would be responsible for pro- curing cull apples for the juice plant to be constructed under the project. The apple juice plant would be owned and operated by JKHPMC. Initially, the Walnut Section would sell its crop directly to wholesalers and exporters but, after gaining experience, may attempt direct wholesaling and exporting. The Corporation is expected to handle about 75,000 tons apples and 9,000 tons walnuts, about 12% and 30% respectively of projected 1987 production in J&K. 55. DA - Mushroom Development. As discussed in paragraphs 37 and 38 above, the mushroom component includes a small amount of credit for pilot production of mushrooms and financing of staff and research facilities for development of the mushroom industry in Kashmir under the guidance of DA. The research program would look into ways of improving mushroom yields, includ- ing mushroom growing on pasteurized compost in polyethylene bags. The re- search program has yet to be developed and assurances have been obtained that DA would draw up research plans and an implementation timetable satisfactory to IDA by June 30, 1979, (Section 2.09 of Project Agreement). To conduct the research and spawn production programs DA would need to appoint one senior mushroom scientist, four junior (graduate) scientists and three non-graduate laboratory technicians. Assurances have been obtained that the senior scien- tist and two junior scientists would be appointed by December 31, 1978, and the other new staff by December 31, 1979 (Section 2.10 of Project Agreement). 56. DH - Fruit Research. DH would be responsible for implementing fruit research and its staff would receive technical assistance for post harvest research and overseas training under the project. To operate the research facilities and the refrigerated road trucks mentioned in paragraph 39 above, DH would employ the following additional staff: a refrigeration engineer, two cold store operators, a post-harvest physiologist, an assistant physiologist, a post-harvest pathologist, an assistant pathologist and a food technologist. Assurances have been obtained that the engineer, operators and physiologist would be appointed by December 31, 1978, and all other new staff by June 30, 1979 (Section 2.11 of Project Agreement). 57. Engineering and Supervision of Construction. GOJK's Public Works Department would draw up and evaluate tenders and supervise construction of Project facilities pertaining to DA and DH. The tendering and supervision of construction of the Corporation's would be done either by a firm or by the Public Works Department. Arrangements for this work, on terms and conditions satisfactory to IDA, have been made a condition of disbursement of the rele- vant credit components (Paragraph 4(b) of Schedule 1 of Credit Agreement). JKHPMC'S own engineering staff would, with assistance of internationally recruited consultants (para 40), install and test run the grading, hulling and drying equipment, and supervise installation and testing of cold storage equipment. 58. Project Coordination. The agencies concerned directly with project implementation include JKHPMC, DA, DH, and ARDC. Other agencies would have important supporting roles such as DHPM in marketing, the Forestry Department for fruit boxes, and the J&K Road Transport Corporation for fruit transport.  - 17 - Project implementation would be coordinated by a Project Coordination Com- mittee on which key agencies would be represented. Establishment of the Committee has been made a condition of credit effectiveness (Section 5.01 (g) of the Credit Agreement). 59. Implementation Schedule. Implementation would start in July 1978 and completion of all project facilities is projected for September 1983. The first project year would be devoted mainly to organizing JKHPMC, appointment of design consultants, design of apple and walnut facilities, and placing con- tracts for construction and equipment. The first apple grading and packing centers and walnut hulling and grading centers are projected for completion for the September 1980 harvest season; the first cold store units for the 1981 harvest; and the walnut export center and apple juice plant for the 1981 and 1982 seasons respectively. Project Cost and Financing 60. The estimated cost of the proposed project is US$27.6 million, of which US$2.5 million or 9% of the total would be foreign exchange costs and US$0.9 million would be duties and taxes. Estimates are based on October 1977 prices. A 10% physical contingency has been allowed for civil works and equipment costs. Price contingencies have been applied for foreign equipment at 7.5% for 1978 and 1979 and at 7% thereafter; for local equipment at 7% for each year and for civil works at 7% each year. Total contingencies amount to US$7.3 million or 26% of total project cost. 61. The proposed IDA credit of US$14 million would be made to GOI on standard terms and would meet about 50% of total project cost. GOI and GOJK would contribute US$6.6 million towards equity shares of JKHPMC; GOJK US$0.5 million for shares in JKHPMC and for the project research component costs. ARDC and participating banks would contribute US$5.8 million towards cost of production credit and working capital to construct and equip JKHPMC's facilities. Fruit growers would put up US$0.7 million for equity participa- tion in JKHPMC. GOI would onlend US$12.0 million of IDA's credit to ARDC. ARDC would use the funds to refinance crop production loans to farmers and loans to JKHPMC for the juice concentrate plant and apple and walnut facilities. The balance, US$2 million would be passed on by GOI to GOJK as a grant to help pay the cost of research and technical assistance. Procurement and Disbursement 62. Civil works for the apple, walnut and research facilities costing about US$7.4 million would be carried out at about 45 sites and be phased over five years. As contracts for such-work would not attract foreign bidders, about US$1.5 million of the construction contracts would be carried out by force account and the remainder would be awarded after local competitive bidding, using GOJK procedures, which are satisfactory to IDA. Construction on force account of about 20 apple and walnut centers would be undertaken in remote rural areas of the project where, on the basis of experience, local contractors would not be interested in doing the work. Grading, hulling, cold storage and drying equipment for apple and walnut facilities, machinery  - 18 - and equipment for the juice plant and machinery and equipment for fruit and mushroom research, costing about US$6.5 million, would be procured by interna- tional competitive bidding. A 15% preference on equipment bids based on the CIF price of each item or the actual custom tariff, whichever is lower, would be granted to domestic manufacturers, and it is expected that the bulk of the equipment would be supplied by local manufacturers. 63. Other equipment, including furniture, grading tables, pallets, saw milling equipment and similar items amounting to US$2.3 million would not be suitable for international competitive bidding and would be purchased after local competitive bidding following GOJK procedures. In addition, over a five year period, the project would finance the purchase of 58 trucks and 15 motorcycles costing US$0.6 million equivalent. International competitive bidding would not be practical since only Indian made vehicles are now used in J&K and there are no spare parts and service facilities for imported vehicles. Consequently, Indian vehicles would be purchased after local com- petitive bidding. Items costing less than US$10,000 and required urgently for project execution, would be purchased by prudent shopping through normal commercial channels. Such purchases would be limited to US$200,000 in total. Farmers drawing crop production loans would be free to purchase fertilizer, pesticides and other necessary inputs from local suppliers of their choice. 64. The proceeds of the credit would be disbursed against 100% of the foreign cost for directly imported items; the ex-factory cost for locally manufactured equipment and vehicles; the full cost of technical assistance, overseas study tours and studies; and against 50% of the cost of civil works, of other locally procured items, and of crop loans. No disbursements would be made against working capital needed for JKHPMC, or the cost of land pur- chases. GOJK would be responsible for providing the first six sites for JKHPMC's facilities. Assurances have been obtained that suitable sites would be acquired by GOJK for the project by September 30, 1978 (Section 2.16 of Project Agreement). Economic Benefits and Risks 65. Project benefits would derive from more efficient handling and marketing of apples and walnuts. It is estimated that proper grading and im- proved packing would yield a price premuim of 10% over conventionally graded fruit. Preserving 17,000 tons of apples in cold storage for post-season marketing is expected to yield a price premium of about 40% and should con- tribute to development of new markets throughout India. In addition, over 12,000 tons of previously wasted cull apples would be processed into juice concentrate and other by-products. In the project's walnut component, better processing methods would increase grade quality with an estimated 10% price improvement, and bring into the market about 1,300-1,400 tons of walnuts which would have spoiled under conventional hulling/drying methods. 66. At full project development, the total incremental economic value at the farm level of apples and walnuts handled by the project are estimated at Rs 20 and 21 million, respectively. Income increments would accrue to about 30-40,000 growers, among the poorest in J&K, where the average holding  - 19 - is under 1 hectare. For an average farm family of six members with a one acre orchard yielding 240 boxes of marketable fruit, an income increment of approx- imately Rs 1,500 would result, or about US$25-30 equivalent per capita. The relatively poorer walnut growers, who now sell their crop to pre-harvest con- tractors, would be able to double their current income by marketing under the project, resulting in an increment of approximately Rs 450 per holding of 15 trees. At full development, a total of about 2,700 jobs would be filled by JKHPMC, of which about 1,900 would be seasonal unskilled and semi-skilled positions. Many of the seasonal job opportunities would be available to women, who typically are engaged for walnut processing. Unskilled labor demand is not increased appreciably by the project. It is expected that labor demand from horticultural production in the future will increase faster than growth in the J&K labor force so that the area will attract seasonal unskilled labor through migrat!ion, as in HP. 67. The estimated economic rate of return for the entire project, in- cluding all costs, is 21%. For the juice concentrate plant costing US$3.9 million (inclusive of permanent working capital) or 14% of total project costs, the economic rate of return is estimated to be 26%. For JKHPMC's other operations, which represent US$14.1 million investment or 51% of total project costs, economic rates of return were estimated to be 22% for apple trading at a cost of US$,11.3 million, and 31% for walnut trading at a cost of US$2.8 million. The average weighted economic rate of return on these three compo- nents, which account for 65% of total project costs, is 25%. 68. Perhaps the greatest potential benefit of the proposed project is not included in the above contributions. To the extent that the improvement and more efficient market technologies (e.g. grading, cold storage) are demonstrated to be successful and financially viable, they would be widely adopted by private traders who will continue to handle the major portion of the fruit trade in Jammu-Kashmir. 69. The main risk to project success would stem from JKHPMC management quality. Technical and logistical problems of dealing with 84,000 tons of perishable produce over a three month period would be formidable. Develop- ment of a high level of commercial expertise to enable the Corporation to compete with the established trade channels would be equally crucial. The Corporation would need efficient and highly motivated personnel. As already indicated above (para 44), a suitable recruitment policy would be pursued to attract highly qualified staff for JKHPMC. Technical assistance and study tours to be financed by the project would also play a key role in the inten- sive staff training program for the Corporation. 70. Also, there are uncertainties about the market for apple juice. However, market studies have indicated that with efficient distribution and aggressive promotion the production of apple juice from this project could be sold in India. As is explained in para 36 above, the completion of the feasibility and marketing studies, which are a condition of disbursement for the apple juice concentrate component, should provide the information for making a sound decision about this component.  - 20 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 71. The draft Development Credit Agreement between India and the Asso- ciation, the draft Project Agreement between the Association and the State of Jammu and Kashmir, the draft ARDC Agreement between the Association and the Agricultural Refinance and Development Corporation and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement are being distributed to Executive Directors separately. 72. Special conditions of the project are listed in Section III of Annex III. 73. Additional conditions precedent to credit effectiveness include: (i) the execution of the Project Agreement on behalf of Jammu and Kashmir has been duly authorized or ratified by all necessary governmental actions; (ii) the execution of the ARDC Agreement has been duly authorized or ratified by all necessary corporate action (Section 5.01 (b) of the Development Credit Agreement); (iii) the execution of the First ARDC Subsidiary Loan Agreement on behalf of the Borrower and ARDC haq been duly authorized or ratified by all necessary governmental and corporate action (Section 5.01 (c) of the Development Credit Agreement); (iv) JKHPMC's initial share capital of one million rupees has been paid up (Section 5.01(d) of the Development Credit Agreement); (v) a banking plan satisfactory to the Association has been prepared by ARDC to ensure the relending of the proceeds of the Credit in accordance with Part I of Schedule 3 to the Development Credit Agreement (Section 5.01 (e) of the Development Credit Agreement); (vi) JKHPMC has appointed qualified persons to head its opera- tions, and finance and departments (Section 5.01 (f) of the Development Credit Agreement); (vii) Jammu and Kashmir has established the Project Coordination Committee (Section 5.01 (g) of the Development Credit Agreement). 74. Additional conditions of disbursement include: (i) with respect to expenditures for construction of marketing facilities (excluding the juice plant) the appointment of engineering consultants (Schedule 1, para 4(b) of the Development Credit Agreement);  - 21 - (ii) with respect to expenditure for the apple juice processing plant, the signing of a subsidiary loan agreement and the approval by the Association of the feasibility study includ- ing a marketing plan and distribution arrangements for the products of the plant (para 4(c) of Schedule I of the Devel- opment Credit Agreement). 75. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. 76. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President May 3, 1978   ANNEX I Fage 1 INDIA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) --------------- INDIA REFERENCE COUNTRIES (1970) TOTAL 3280.5 MOST RECENT AGRIC. 1797.5 1960 1970 ESTIMATE INDONESIA PHILIPPINES BRAZIL** GNP PER CAPITA (USS) 60.0 100.0 150.0 130.0 230.0 550.0 POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR. MILLION) 434.9 547.6 620.4 /a 117.6 36.9 92.8 POPULATION DENSITY PER SQUARE KM. 133.0 167.0 189.0 62.0 123.0 11.0 PER SQ. KM. AGRICULTURAL LAND 247.0 308.0 345.0 411.0 375.0 49.0 VITAL STATIStICS CRUDE BIRTH RATE (/THOU, AV) 43.2 41.0 37.0 45.9 44.2 38.4 CRUDE DEATH RATE (/THOU,AV) 23.9 19.0 17.0 20.6 13.2 9.9 INFANT MORTALITY RATE (/THOU) 139.0/a .. 130.0 .. 81.0 110.0 LIFE EXPECTANCY AT BIRTH (YRS) 41.7 47.2 49.5 .. 55.6 59 4 GROSS REPRODUCTION RATE 3.2 2.9 2.8 3.2 3.3 2.6 POPULATION GROWTH RATE (X) TOTAL 2.0 2.3 2.1 2.0 3.0 2.9 URBAN 2.S5 3.2 3.1 3.7/a 4.0 5.0 URBAN POPULATION (X OF TOTAL) 17.9 19.8 20.6 17.5Lb 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 44.0 45.6 42.0 15 TO 64 YEARS 55.9 55.3 56.7 53.5 51.6 55.0 65 YEARS AND OVER 3.1 3.1 3.2 2.5 2.8 3.0 AGE DEPENDENCY RATIO 0 0.8 ECONOMIC DEPENDENCY RATIO o1:,./, I FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14585.0 37658.0 259.3 320.0 250.0 USERS (% OF MARRIED WOMEN) .. .. 18.7 .. 2.0 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 175000.0 218000.0 261000.0/a . 12400.0 29400.0 LABOR FORCE IN AGRICULTURE (%) 71.0 69.0 69.0 .. 55s0La 40.4 UNEMPLOYED (% OF LABOR FORCE) 4.8 Id 4.4 /b 4.4/c,d . . 7.6 7.5 INCOME DISTRIBUTION % OF PRIVATE INCOME REC'D BY- HIGHEST 5% OF HOUSEHOLDS 26.7 25.0 Ic .. .. .. 35.0/a HIGHEST 20% OF HOUSEHOLDS 51.7 53.1 /c .. 5440 B2.07a LOWEST 20% OF HOUSEHOLDS 4.1 4.7 /c .. 3.6 3.01Kr LOWEST 40% Of HOUSEHOLDS 13.6 13,1 3 *- *- 11. DISTRIBUTION OF LANO OWNERSHIP % OWNED BY TOP 10% OF OWNERS .. .. .. .. .. 45.0 % OWNED BY SMALLEST 10% OWNERS .. .. .. .. .. 1.5 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 5840.0.Le 4890.0 4220.0 26370.0 *- 1910.0 POPULATION PER NURSING PERSON S 310.0 5220.0/d 368.0Le 7630.0/c * - 3220.0Lb POPULATION PER HOSPITAL BED 2590.0oh 1610.0 .. 1640.0-- 850.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 95.0 92.0 89.0 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 48.0 43.0 45.0 64.0 -OF WHICH ANIMAL AND PULSE 19.0Li 16.0 12.6 14.0 22.0 39.0 DEATH RATE (/THOU) AGES 1-4 44.0 .. .. .. 6.6 EDUCATION ADJUSTED ENROLLMENT RATIO 41.0 63.0 65.0 75.0 113.0 67.0 SEcoNDARY SCHOOL 23.0 30.0 29.0 15.0 49.0 68.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 11.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 8.0 .- .. 29.0 6.0 /b 17.0 ADULT LITERACY RATE (X) 24.0 33.0 36.04 59.0 *- 64.0 HOUSING PERSONS PER ROOM (URBAN) 2.6 2.8 .. *- 2.1 1.0 OCCUPIED DWELLINGS WITHOUT PIPED WATER (I) .. .. .. .. 76.0 73.0 /c ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) .. .. .. .. 23.0 48.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) .. .. .. .. 7.0 8.0 CONSUMPTION ___________ RADIO RECEIVERS (PER THOU POP) 5.0 21.0 25.0 114.0 39.0 60..o PASSENGER CARS (PER THOU POP) 0.7 1.0 1.0 2.0 8.0 25.0 ELECTRICITY (KWH/YR PER CAP) 46.0 114.0 143.0 20.0 235.0 491.0 NEWSPRINT (KG/YR PER CAP) 0.2 0.3 0.3 0.3 2.0 2.7