India - Karnataka Irrigation Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2223-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KARNATAKA IRRIGATION PROJECT March 15, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their oflicial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT (as of March 14, 1978) Rs 1.00 = Paise 100 US$1.00 = Rs 8.24 Rs 1.00 = US$0.1213 Rs 1 million US$121,300 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the U.S. Dollar/Rupee ex- change rate is subject to change. Conversions in the Appraisal Report were made at US$1 to Rs 8.60, which represents the projected exchange rate over the disburse- ment period). FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS ARDC - Agricultural Refinance and Development Corporation CAD - Command Area Development CADA - Command Area Development Authority CB - Commercial Bank GOI - Government of India GOK - Government of Karnataka ICB - International Competitive Bidding LDB - Land Development Bank O&M - Operation and Maintenance UKS - Upper Krishna (Irrigation) Scheme  FOR OFICIAL USE ONLY INDIA KARNATAKA IRRIGATION PROJECT Credit and Project Summary Borrower: India, acting by its President Beneficiary: State of Karnataka for irrigation works and roads; Agricultural Refinance and Development Corporation for refinancing loans made to farmers by partici- pating Land Development Banks (LDBs) and Commercial Banks (CBs) for on-farm works and construction of field drainage channels. Amount: US$126 million. Terms: Standard Relending Terms: (a) India to Karnataka: As part of Central Assist- ance to States for development projects on terms and conditions applicable at the time; (b) India to the Agricultural Refinance and Dev- elopment Corporation (ARDC): At interest rate of not less than 6.75% and 7.25% per annum (with 0.25% per annum rebate for prompt re- payment) for refinancing loans, with terms of 9 and 15 years, respectively; (c) ARDC to LDBs and CBs: Annual interest of not less than 7.5% with maturities according to maturities of loans to be refinanced; (d) LDBs and CBs to farmers: Repayable within not more than 15 years, including 2 years of grace, at not less than 10.5% per annum interest for secured loans. Project Description: The objective of the Project is to increase agri- cultural production, to improve farm incomes, and to provide employment opportunities, primarily for small farmers and landless laborers, within three major irrigation schemes presently under construc- tion in northeastern Karnataka: the Upper Krishna Scheme (UKS) and the Malaprabha and Ghataprabha Systems. The project would comprise a five year phase of development, mainly in UKS. By comple- tion of the Project investment in 1983, about This document has a restricted distribution and may be used by recipients only in the performance of their ofcial duties. Its contents may not otherwise be disclosd without World bank authorization.  - ii - 105,000 ha of the potential UKS cultivable command area of 425,000 ha would be irrigated. Development of irrigation in the full 425,000 ha area, to be achieved by 1993, would optimize returns in all investments in UKS. The project consists of: (i) Within Upper Krishna Scheme: (a) completion of the Almatti and Narayanpur dams, and resettlement of about 13,000 displaced families; (b) completion of the Narayanpur Left Bank Canal from about km 36 to km 78 (including construction of two tunnels) and con- struction of the Shahapur Branch Canal (76 km); (c) provision of irrigation distribution and drainage systems serving about 105,000 ha, and of field irrigation channels for about 80,000 ha; (d) rehabilitation and upgrading of about 70 km of existing village and link roads, and con- struction of about 530 km of new village and link roads; (e) on-farm works and construction of field drainage channels for 25,000 ha; (f) establishment of a Land Development Training Center, of an agricultural development center, of agricultural research stations and of other research facilities; (g) a program to monitor water use efficiencies and to evaluate the economic and social impact of the project; (h) procurement of vehicles and equipment for road construction, operation and maintenance, for agricultural services, for the Land Development Training Center, and for project monitoring. (ii) Within Malaprabha Scheme: On-farm works and construction of field channels on an area of about 26,000 ha.  - iii - (iii) Within Ghataprabha Scheme: On-farm works and construction of field channels on an area of about 5,000 ha. This risks under the proposed project are those normally associated with irrigation projects in India. The fact that the proposed project would cover only a five-year time-slice of the fifteen- year period required to complete the Upper Krishna Scheme would introduce an additional risk for the economic analysis, which is based on the complete UKS. Estimated Cost: (US$ Millions) Local Foreign Total Almatti and Narayanpur Dams 44.7 8.1 52.8 Irrigation and Drainage Systems 71.2 19.7 90.9 Land Development 19.0 3.5 22.5 Village Roads 7.7 1.4 9.1 Engineering, Supervision and Administration 24.0 5.5 29.5 Equipment, Services and Project Monitoring 3.1 1.4 4.5 Agricultural Supporting Services 3.5 0.4 3.9 Base Cost: 173.2 40.0 213.2 Physical Contingencies 17.4 4.1 21.5 Price Escalation 40.3 9.4 49.7 Total Project Cost: 230.9 53.5 284.4 Financing Plan: IDA 79.4 46.6 126.0 Local Financing: GOK 141.5 6.9 148.4 ARDC, LDBs and CBs 10.0 - 10.0 230.9 53.5 284.4 Estimated Disbursements: (US$ Millions) FY80 FY81 FY82 FY83 FY84 Annual 12.0 26.0 31.0 32.0 25.0 Cumulative 12.0 38.0 69.0 101.0 126.0 Rate of Return: 16%. Staff Appraisal Report: No. 1835-IN dated March 15, 1978.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KARNATAKA IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$126 million on standard IDA terms to help finance construction of irrigation works and com- mand area development in the Upper Krishna, Ghataprabha and Malaprabha irri- gation systems of Karnataka. The proceeds of the credit -- except for part of on-farm development works and drainage channels (US$7.0 million) -- would be channelled to the Government of Karnataka in accordance with GOI's standard terms and arrangements for the financing of State development projects. For on-farm development works and drainage channels, GOI would relend US$7.0 mil- lion of the credit to the Agricultural Refinance and Development Corporation (ARDC) for 9 and 15 years at not less than 6.75% and 7.25% per annum, respec- tively. ARDC would in turn on-lend the funds to the Land Development Banks (LDBs) and Commercial Banks (CBs) participating in the project at annual in- terest of not less than 7.5%. The LDBs and CBs would relend the funds to farmers with repayment periods not exceeding 15 years, including 2 years of grace, at not less than 10-1/2% annual interest. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (1529-IN dated April 25, 1977), was distributed to the Executive Directors on May 3, 1977. 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 620 million speaking over 60 languages. Since Independ- ence the trend in growth of GNP has been about 3.5% per annum, or a little over 1% per annum in per capita terms, while over the five years 1971/72 - 1975/76 it fell to as low as 2.5% per annum, in spite of the record harvest of 1975/76. This unsatisfactory performance is only in part the result of the low availability of investable resources: India's domestic savings effort compares well with other countries at the same average income levels, but the net transfer of resources from abroad has never been above 3% of GNP, and fell to as little as 0.8% between 1969/70 and 1973/74. More signi- ficant perhaps is the fact that in spite of a marked rise in the investment 1/ Parts I and II of this report are essentially the same as Parts I and II of the President's Report for the Loan for State Joint and Public Sector Industrial Projects through the Industrial Development Bank of India (Report No. P-2157-IN), dated November 3, 1977.  rate from about 10% in the early 1950's to about 18% over the past fifteen years, the trend in GNP growth has remained about the same. This indicates a marked decline in the efficiency of capital use, in one or two sectors. In irrigation, investment has for some time been concentrated in major irrigation schemes with long gestation periods. In industry, heavy capital- intensive sectors have been developed disproportionately fast. Furthermore, available existing industrial capacity has been underutilized, particularly in public sector enterprises. The Government has recently recognized these problems, and its changes in strategy offer considerable hope that capital will in general be used more efficiently in the future. 4. Since Independence 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 success- ful, but others have taken excessively long to be completed and have operated well below full capacity. In some regions of the country, growth and struc- tural change have been rapid and compare favorably with developments in many other parts of the world; in other regions there has been stagnation, and in some, decline. Although national income has increased in most years, there has been no rise in the living standards of the vast mass of rural and urban poor, conservatively estimated at 200 million people with per capita incomes of less than US$70 per annum. 5. The structure of the economy has been slow to change over the last two decades. Agriculture remains the dominant sector, with its share of national product declining slightly measured in constant prices and being stable at about 50% in current price terms. Agriculture has grown less rapidly than industry and services over the last twenty years or so, but at the same time there has been a marked but gradual shift in the terms of trade in favor of agriculture. Since the late 1960s, the share in national product of manufacturing industry has remained roughly constant at about 13.5%. There has, however, been a shift in the composition of manufacturing 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. In March, 1977, a party other than Congress formed a Government for the first time since Independence. The Janata, or People's Party, is a amal- gamation of a number of smaller heterogeneous parties. The state of the eco- nomy was not a prominent election issue; in fact the economy was generally stronger than at any time in the last ten years. Over the two years 1975/76 and 1976/77, the growth of GDP averaged 5.4% per annum. Agricultural produc- tion in 1976/77 did fall by about 3% but only because of a return to a more normal harvest of 111 million tons after the record 121 million ton output in 1975/76. In fact, the 1976/77 figure is the second largest harvest on record. The growth of industrial production accelerated over the past two years from 6.1% in 1975/76 to 9.2% in 1976/77. The volume growth of exports continued its impressive recent performance, and averaged approximately 13% per annum  over the past two years. This export growth, together with hardly any in- crease in import levels, has resulted in dramatic balance of trade improve- ments with an estimated deficit for 1976/77 of less than US$500 million. In sum, the overall resource position with record foreign exchange and foodgrain - reserves, is exceptionally strong, and gives the Government considerable room for manoeuver. 7. In agriculture the bumper crop of 1975/76 was largely due to remark- ably good rainfall, both in amount and distribution, while the good crop in 1976/77 was produced under somewhat less than normal weather conditions. A conspicuous change was the increase in fertilizer use, which rose by about 25% over 1975/76, following marked declines in fertilizer prices. Industrial production benefited from fewer labor disputes, fuller utilization of in- stalled capacity in both private and public sectors, a more liberal import policy, relatively good power availability, and increased demand because of higher consumer incomes, expanded exports and higher public expenditures. Inflation re-emerged in 1976/77 as an important issue of economic management. During 1975/76 the wholesale price index had fallen by 8.5%; but in 1976/77 it rose by 11.6%. The key characteristic of this rise was that it occurred largely in a few agricultural commodities for which prices had dramatically fallen in the previous year. In the twelve months ending September 1977, the increase was less than 5%. The overall price index has shown virtually no trend over the past three years taken together. 8. The balance of payments situation has improved dramatically since the 1973-1975 period. In 1975/76 the trade deficit was $1,530 million, which was more than covered by US$1,560 million in net aid, US$205 million in net purchases from the IMF, and US$559 million in net miscellaneous capital and invisibles (mostly private remittances); indeed, this large aggregate net resource inflow led to a US$794 million increase in foreign exchange reserves, to a level of almost US$2.2 billion. In 1976/77, the balance of payments continued to improve, with exports provisionally estimated to have increased by US$1,145 million against an imports increase of only US$85 million, so that the trade balance deficit is now estimated at only US$470 million. The sharply decreased trade deficit, along with a further increase in the net inflow of miscellaneous capital and invisibles from abroad of US$640 million, more than offset the fall of US$350 million in net aid and the US$365 million repurchases of currency from the IMF, and allowed a US$1.5 billion addition to reserves, which reached a level of US$3.7 billion at the end of March 1977. These developments have continued in the current year, with reserves estimated at US$4.9 billion as of November 1977. Development Prospects 9. The favorable economic situation gives the Government the opportun- ity to address the longer-term constraints on growth. The basic task is to raise the overall rate of growth from its historic range of 3% to 4%. In the long run this will require raising more resources for investment. But it will also be important to achieve significantly better utilization of avail- able resources, partly through an immediate boost to industrial demand.  -4- 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76 and the good crop in 1976/77, the long-term growth rate of foodgrain production has been unacceptably low, less than 3% per annum over the last twenty-five years, and less than 2% since 1967/68. This has meant that only in good years has there been any margin of production to cater to per capita growth in food consumption, and in normal years it has been necessary to import food. There is considerable scope for stepping up growth. Three promising developments are the sharp increase in government outlays and improved project implementation for irrigation; the indications that private investment in tubewells is picking up again after a slowdown in the early 1970s; and the recent recovery of fertilizer demand. With regard to more productive use of existing capacity, there is increased awareness in the Government that the benefits of irrigation projects can be much increased not only through command area development but also through more efficient design and operation of major surface irrigation infrastructure. Finally, a reorganized and improved extension and research system, which has been recently introduced in several States in northern and eastern India, holds out the hope that recent produc- tivity increases on both irrigated and rainfed farms will be sustained in future. 11. A strong effort to raise agricultural growth is essential, not only to meet food requirements, but also because of the pervasive influence of agriculture on the levels of activity in other sectors of the economy. This effort must also be so structured as to increase the incomes of small and marginal farmers. These farmers work 25% of the cultivated land and account for somewhat more than 25% of production; more importantly, they make up about 70% of rural population and constitute the majority of those living below the poverty level in India. 12. The industrial sector is poised for growth, as serious constraints on the supply side have been removed by the improved situation, particularly with respect to coal and imported raw materials and components; however, the power supply situation is once more somewhat worrisome (paragraph 13 below). There has been a progressive liberalization of controls and the 1976/77 Central Budget announced a reduction of some taxes on private industry. In many cases management of public enterprises has improved, as is reflected in their markedly higher production and profitability as a group. In the medium- term it is the demand for industrial output that will determine industrial growth. In certain industries, export demand will provide a strong pull on production; this is true, for example, for certain chemicals including dye- stuffs and crude drugs, some electrical equipment, processed agricultural products, vehicles and automobile ancillaries. But the impact of increased exports on overall industrial demand will grow only slowly given the current low share of exports in sales. If the higher growth and productivity in agriculture discussed earlier were to materialize, it would provide a sig- nificant stimulus to industry. It is difficult to specify the linkages explicitly; but because of the large share that agriculture holds in GNP, the coefficients do not have to be large for agricultural growth and the concomitant growth in demand for industrially produced inputs and mass con- sumption goods to boost overall industrial demand significantly. A higher public deficit and increased public investments are the instruments most  directly under Government control, and also those that can increase demand for industrial products most immediately. While the first budget of the new government projects a relatively small deficit, it does maintain a 20-22% increase in spending over the likely outlay in 1976/77. 13. The general improvement in the supply of energy augurs well for India's ability to meet the needs of a more rapidly growing economy. Organ- izational and transportation problems in the coal industry have largely been overcome, stocks are comfortable, and the industry has good prospects for meeting domestic demand though exports have been cut as a result of a disrup- tion in explosives supply earlier in the year. The supply of electricity continues to be a concern, since the power situation is not uniformly good. Power shortages affect a number of the more industrialized states; as a result, there is a continued constraint on the expansion of industry. This is despite a number of favorable factors: greatly improved capacity utiliza- tion in thermal power stations; more efficient exchange of power between states; accelerated implementation of power projects; and somewhat improved availability of finance for power investment. The underlying reason for the weak power supply position is that capacity shortages continue despite the improved investment program. The prospects for the oil and gas sector have been further improved by new finds of oil and gas near the large offshore Bombay High field. Crude oil from Bombay High was brought to shore for the first time in May 1976; production reached an annual rate of 2 million tons by March 1977, and will rise to a level of 12-13 million tons by 1984/85. Although India will continue to import crude at or somewhat above the current level, much of the foreign exchange burden of rapidly rising imports will be avoided by the development of these resources. Prospects are also bright for further discoveries offshore, given the current high level of exploration activity. 14. Underlying all other development issues is that of population. Although India's population growth rate of a little over 2% is not high in comparison with most LDCs, the size of the absolute increment - 13 million annually - is daunting. It appears, however, that population growth may have passed its peak in the 1960's, and will continue to slow down, both because the birth rate will continue to decline and because the death rate will not fall as steeply as in the past. It is apparent that India's family planning efforts suffered a setback following the end of the recent emergency period, and acceptor rates are at very low levels currently. However, the new Gov- ernment has announced its commitment to a voluntary family planning program and has maintained ambitious performance targets. Although it will take some time, adoption of family planning practices is expected to increase to higher levels. Over the longer term, with a sustained family planning effort, it should be possible to lower the population growth rate to 1.1% per annum by the end of the century. Our "best guess" projection of India's population by 2000 is 890 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century, but the decline in fertility will bring about an early change in the age structure of the population. The school age group will grow more slowly or not at all after 1981 thereby  -6- reducing the pressures on the primary and secondary education system. The labor force, however, will continue to grow at a fast rate until the end of the century. 15. India's balance of payments position should be comfortable for the next few years. The combination of past global inflation and increased ex- ports have reduced the proportion of export earnings needed for debt service from 30% in 1970/71 to 16% in 1976/77. The ratio is not likely to rise above this level in the next few years. Given continuing favorable policies, the volume of exports should grow by at least 7% to 10% annually in the near future; and import needs for fertilizer, POL and foodgrains will continue to require a diminishing proportion of available foreign exchange. The large inflow of private remittances shows no immediate signs of declining and should continue to bolster the foreign exchange position in the medium term. Imports, including a variety of capital goods, have already been liberalized signifi- cantly. Increased public investment and a revival of the domestic economy is likely to generate substantial additional import demand. However, this should be quite manageable, given the currently comfortable foreign exchange position, continued export effort, and maintenance of the current real level of net aid. The present situation presents an opportunity to raise the level of investment and, consequently, reach a more satisfactory level of long term growth. PART II - BANK GROUP OPERATIONS IN INDIA 16. 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. 17. 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 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). 18. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit 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. 19. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, 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. 20. The need for a substantial net transfer of external resources in support of India'E 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 acceler- ate 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 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. 21. 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 con- cessionary 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 outstand- ing of US$506 million. 22. 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 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 25% and 31% respectively, in 1975/76. On March 31, 1977, India's outstanding and disbursed 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 assist- ance 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 - AGRICULTURE AND IRRIGATION IN INDIA General 23. Agriculture is the most important sector in India; it engages 70% of the labor force, has recently contributed about 42% of national product 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. 24. Since independence, the overall growth rate of agricultural pro- duction has averaged about 3% per annum. This low overall rate of growth obscures considerable variations over shorter periods of time, between crops, and between regions. The overall rate is 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 led to annual increases in wheat production of about 20% between 1967 and 1971, and two consecutive favorable monsoon seasons in 1975 and 1976 resulted in bumper crops in these years. Other foodgrain crops, notably rice, have not enjoyed anything like the same success as wheat, mainly because of the difficulties of developing high yielding seeds. Consequently, the effects of the green revolution, which primarily affected wheat, have been concentrated in northwestern India. 25. 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 is the rate of rehabilitation and expansion of irri- gation and the extent to which more effective use can be made of existing investment in irrgation facilities. The Government is also placing emphasis on the improved supply of inputs such as seeds and fertilizer, agricultural credit, and extension services. Irrigation 26. Up to 1964/65, the irrigated area in India increased at a rate of only 2.1% per year, of which about two-thirds was from surface water resources and one-third from groundwater. Since then, the rate of increase has about doubled, mainly through an accelerated program of groundwater development. At present, the total irrigated area is approximately 45 million ha, of which about three-fifths is surface irrigated and two-fifths irrigated from ground- water. 27. The pace of surface water development remained relatively constant at about 0.5 million ha per year until the end of the Fourth Plan (1969/70- 1973/74). During this period, actual increases in the surface irrigated area  lagged behind GOI's physical plan targets for more rapid development. A major problem was the continuing tendency of the States to start a large number of projects, which, given the limited financial resources, could only be constructed slowly and resulted in delayed benefits. However, in recent years, budgetary allocations have grown rapidly and the authorities have increased their efforts to complete on-going projects. As a result, the new area brought under command in 1976/77 was 1.1 million ha or about twice what was achieved in any single year before the start of the Fifth Plan in 1974/75. However, while the increase in area brought under the command of new surface irrigation projects is impressive, the increase in area actually irrigated has been more modest than the figures imply - particularly in the case of major and medium irrigation schemes due to inadequate distribution and drainage systems. In areas actually receiving water, irrigation efficiencies remain low and water supply is relatively unreliable. 28. The Second Irrigation Commission of 1972 and the National Commis- sion on Agriculture, which reported in 1976, also found that the under- utilization of irrigation potential was attributable to the lack of integrated development in the irrigation areas, insufficient farmer training, and lack of efficient extension services and 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, GOI and the State Governments have adopted various measures to improve utilization, and a Command Area Development Department has been set up in the Ministry of Food and Agriculture to coordinate work on selected high priority projects. Such measures for command area development (CAD) include public investment in irrigation-associated infrastructure such as drainage, roads, markets, agricultural extension and research - and private investments, mainly at the farm level - like land shaping and leveling, water course lining, field channels and drains. 29. In view of the emergence of high production farm technologies dependent on effective water control - and given India's already substantial investment in surface irrigation - the economic return on investment that improves water delivery or else facilitates better use of the water provided can be very high. Consequently, rehabilitation and modernization of irriga- tion infrastructure as well as command area development are being given high priority by GOI, and a relatively large proportion of public sector invest- ment in irrigation has been allocated for these purposes. Plan allocations have been supplemented by the resources of agricultural and commercial banks participating in financing command area development programs through farm credit. In addition, major institutional changes have been proposed affect- ing the coordination of services in command areas and the administration of credit. Moreover, new projects are being designed, implemented and operated on the basis of improved technologies. 30. 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 irriga- tion developments is given equally high priority as command area development.  - 10 - Agriculture and Irrigation in Karnataka 31. Karnataka, with an area of about 190,000 km and a population of about 30 million, is predominantly agricultural. At least half of the total area of the State, inhabited by nearly one half of the population, is drought prone. Of the estimated cultivable area of 12.6 million ha, about 10.5 million ha are actually cultivated. The total area covered by irrigation in the State is approximately 2 miLlion ha (out of a potential estimated at 4.5 million ha), with a net area actually irrigated in 1975/76 of 1.8 million ha or some 14% of the cultivable area. Rice, sorghum, wheat, millet and pulses are the State's principal food crops. Important cash crops are sugarcane, cotton, oilseeds, and tobacco. 32. Karnataka consists of four climatically distinct regions: (i) The long narrow coastal belt between the Arabian Sea and the Western Ghats, which receives a high and assured rainfall during the southwest monsoon season. Rice is the main crop in this area, and coconuts and arecanuts are extensively grown. (ii) The Western Ghats, a long narrow mountainous area parallel to the western coast and adjoining the coastal belt to the east, where again rainfall is heavy and assured. Rice, coffee, coconut and arecanut are the principal crops. (iii) The arid northern plateau in the northeast of the State, which covers the Krishna and Bhima river basins and the northern part of the Tungabhadra river basin. Rainfall in this region averages only about 600 mm or less and is highly variable from year to year. The principal crops grown are sorghum, pearl millet, groundnut and cotton. (iv) The south- ern plateau located in the southeast of the State, covering the upper Cauvery, Tungabhadra and Penner river basins. Here also rainfall is low and variable, but the area receives some irrigation, mainly from tanks. Principal irrigated crops are rice and sugar cane, while the main rainfed crops are sorghum, millet, castor and pulses. 33. In view of the high risk of drought, especially in the plateau re- gions of the State, the Government of Karnataka (GOK) is giving high priority to increasing the irrigated area. Of the statewide total irrigation poten- tial of 4.5 million ha, the Krishna river basin contributes 3.4 million ha. Within the Krishna basin, irrigation projects presently under construction are the Ghatapraba, Malaprabha, Tungabhadra and Upper Krishna Schemes. When completed, these schemes will have the potential to irrigate some 1.6 to 2.0 million ha, of which only 350,000 ha have been developed so far. The Tunga- bhadra, Ghataprabha and Malaprabha schemes have encountered serious problems in realizing the potential created by the irrigation infrastructure executed so far. Construction of field channels and land shaping inside outlet com- mands had been left to farmers but this approach was not successful. 34. In order to redress these deficiencies and ensure a more rapid utilization of irrigation potential created, GOK has, for each of the major irrigation schemes in the State, established Command Area Development Authorities (CADAs). Nevertheless, mainly due to organizational inadequacies (including unclear or inappropriate delineation of responsibilities among the many institutions involved, and lack of provision for farmers ineligible for  - 11 - normal credit), land development has remained slow. Of the 200,000 ha of irrigation potential created in the Malaprabha and Ghataprabha schemes, only a small area has so far been provided with field channels and land shaping through the CADAs. Other shortcomings in these areas are the lack of adequate drainage and access roads. Provisions designed to overcome identified short- comings have been incorporated in the proposed Project. 35. The Bank Group has been directly involved in agricultural devel- opment in Karnataka through four previous IDA credits. Through the Mysore Agricultural Credit Project, for which a US$40.0 million Credit was approved in December 1971 (Cr. 278-IN dated January 7, 1972) and disbursed by June 1977, funds were made available to refinance loans to farmers for minor irrigation, farm mechanization, and land shaping. The Mysore Agricultural Wholesale Markets Project, which covered a five year investment program of providing agricultural markets in strategic locations, was assisted by a US$8.0 million credit, approved in March 1973 (Cr. 378-IN). A third credit, providing US$30.0 million for implementing Karnataka's integrated program for increasing milk production through a program based on the highly successful AMUL dairy scheme, was approved in June 1974 (Cr. 482-IN). The Drought Prone Areas Project, for which IDA provided a US$35 million credit in January 1975 (Cr. 526-IN), includes one district in Karnataka (Bijapur); it consists of an integrated set of measures designed to improve agriculture in dry areas under rainfed conditions. Both the Agricultural Markets Project and the Dairy Project had slow starts, but have picked up momentum after some, mainly institutional, adjustments that included new management and revised interme- diary lending terms. Progress is now satisfactory. The Drought Prone Areas Project also shows overall satisfactory progress, although implementation of some components is still slightly behind schedule. PART IV - THE PROJECT 36. The proposed project was prepared with assistance from the FAO/IBRD Cooperative Program and appraised by the Bank in September 1977. A Supple- mentary Project Data Sheet is attached as Annex III. A Staff Appraisal Report entitled "Karnataka Irrigation Project," Report No. 1835-IN, dated March 15, 1978, is being circulated separately to the Executive Directors. Negotiations of this project were held in Washington in March 1978. The Borrower, the Government of Karnataka, and the Agricultural Refinance and Development Corporation were represented by a delegation headed by Mr. J. K. Sibal. The Project 37. The objective of the project is to increase agricultural production, to improve farm incomes, and to provide employment opportunities, primarily for small farmers and landless laborers, within three major irrigation schemes presently under construction in northeastern Karnataka: the Upper Krishna Scheme (UKS) on the Krishna river, and the Ghataprabha and Malaprabha Schemes located on two tributaries of the Krishna. Basically, the project would  - 12 - comprise a five year phase of the development of UKS. Under the project, the pace of development would be accelerated significantly in comparison with the performance of the past. Improvements would be made both in the design and construccion standards employed and in the organizational and adminis- trative arrangements for command area development. The project would also conta n rrovision for land development - mainly landshaping and construction of field channels - in the Malaprabha and Ghataprabha Schemes. By completion of the project investment in 1983, about 105,000 ha of the potential UKS cul- tivable command area of 425,000 ha would be irrigated. Optimization of returns on all investments in UKS would be achieved by the development of irrigation in the full 425,000 ha area. A period of about 15 years, including the five years of the project, would be required. 38. The Upper Krishna Scheme is designed to bring about 425,000 ha of land under irrigation. The scheme is located in the drought prone north- eastern part of Karnataka in the districts of Gulbarga and Bijapur. Implementation of the scheme was begun in 1957/58. Progress was minimal until after 1973/74, when interstate disputes over the sharing of the Krishna river water were resolved and Karnataka's water rights were established. The Almatti storage dam, the Narayanpur diversion dam and the first 36 km section of the 78 km long Left Bank Main Canal branching off from the Narayanpur reservoir are now under construction. The first three distributaries command- ing about 7,000 ha are also under construction. The scheme covers a large command area and, thus, requires an extensive distribution system. To mini- mize water losses resulting from the long distribution, improved technical standards have been adopted for the design of the canal system. Most impor- tantly, canals would be fully lined, except channels of capacities of 0.3 m 3 sec or less in heavy soils, which would be only stabilized with murrum. 39. About 590,000 people live in the UKS project area, including a total labor force of about 210,000, of which same 170,000 are agricultural laborers. There are no large towns in the area, and villages are widely dispersed. Population density is low at about 90/km . Annual net farm incomes, presently ranging from about Rs 750 to Rs 5,500 per family, depending largely on farm size, would on average triple under the project. In 1974/75, average per- capita income in the UKS area was Rs 650, about three-fifths of the average per-capita income in India in the same period (Rs 1,020). Due to low rainfall, farms in the area are generally large. The average farm size is 5.9 ha and the median size 4.0 ha. Farms below the median size account for about one-sixth of the land, whilst about one-sixth of the farms (those above 10 ha) account for nearly half the land. At present, even a family owning a median size farm (4 ha) is below the poverty line of Rs 600 or US$70. The land ceiling in Karnataka on areas irrigated from a Government source is 10 to 12 ha per family, and 21.25 ha on non-irrigated land. For each family member in excess of five, the ceiling is increased by 20% up to a maximum of 100% where there are ten or more family members. Some 90 percent of all holdings are owner operated.  - 13 - 40. In UKS, the principal crops grown are sorghum and cotton, together accounting for two-thirds of the cropped area; some millet, wheat, pulses, groundnuts, sesamum, gram and safflower are also grown. Overall cropping intensity is about 85% with 58% in the rabi season and 27% in kharif. Even in years of favorable rainfall, some 10 to 15% of the cultivable area is left fallow, and in years of low rainfall, the area uncropped is much greater. Average crop yields are low, reflecting the unpredictability of the rainfall and its distribution. Agricultural research in the UKS area is inadequate and would be improved under the project. GOK plans to establish a main research center and two smaller sub-centers in UKS. Agricultural extension services also need to be improved for the project area. GOK has given assurances that it will, in consultation with the Association, strengthen its extension services in the area through improved organization (Section 3.08 of the Project Agreement). The agricultural extension services would be reorganized along the lines adopted by other States of India under Bank Group assisted irrigation, command area development and extension projects. GOI is further seeking Bank Group financing for a national agricultural extension program. This project, which would also cover the UKS area, is scheduled for appraisal in mid-1978. 41. The Ghataprabha Scheme, begun in the late 1950s, is now developing at the rate of about 26,000 ha per year, and so far 135,000 ha out of a total potential of 314,000 ha have been brought under irrigation. The Malaprabha Scheme - slightly smaller with a potential of 212,000 ha, of which 63,000 ha have so far been brought under command - is progressing at the rate of about 20,000 ha brought under command per year. Agriculture is similar to UKS in both these schemes. Due to a variety of factors (para 34 above), land devel- opment has not kept pace with infrastructure development, and, as a result, much of the land brought under command is not sufficiently prepared to utilize the available irrigation water efficiently. 42. The proposed project would comprise in UKS, in the five year imple- mentation period approximately from April 1978 to March 1983: completion of the Almatti and Narayanpur dams; resettlement of some 13,000 families displaced by the new reservoirs; completion of the Narayanpur Left Bank Canal from about km 36 to km 78, including the 3 km long Rajankollur tunnel and the 1 km long Gundalgeri tunnel, and construction of the 76 km Shahapur Branch Canal; provi- sion of distribution and drainage systems serving 105,000 ha; construction of field irrigation channels to individual farms for 80,000 ha and of field drainage channels and on-farm works for 25,000 ha. The project would include a program to rehabilitate and upgrade about 70 km of existing village roads and to construct about 530 km of new village roads, together serving an area of 105,000 ha. Water use efficiencies and the economic and social impact of the project would be monitored, agricultural research facilities would be established, and a Land Development Training Center for training staff on design, execution, and management of land development works would be set up under the project. Construction of field channels and on-farm works on 26,000 ha of the Malaprabha command and on 5,000 ha of the Ghataprabha command would also be undertaken. 43. In UKS, the Narayanpur and Almatti dams are scheduled for completion by early 1980 and 1983, respectively. Irrigation, drainage and road networks  - 14 - would be completed by 1990, and land development by 1993. Completion of UKS would, thus, take about fifteen years. It is not desirable to condense the construction period further. The implementation program for UKS, including the project, is based on labor-intensive methods, which would require a staff of about 1,800 engineering-trained personnel and a labor force of about 50,000. This is appropriate: The construction technology proposed is well adapted to India's economic circumstances, as experience from other projects on the Deccan Plateau indicates that it would be extremely difficult - if not impractical - to assemble and organize a labor force of more than 50,000 workers. Capital-intensive construction methods would be undesirable for two reasons. First, the design and implementation of land development is a slow and time-consuming process, which cannot be speeded up further. Thus, more rapid implementation of the infrastructure works would increase the lag between the time water becomes available and proper preparation of the land for irri- gated agriculture. This would lead to a loss of potential benefits and the establishment of improper and wasteful farming practices that are difficult to correct. Second, the economic cost of mechanical work is substantially higher than the cost of labor-intensive work, especially in an area charac- terized by under-employment. It would be neither practical nor desirable to extend IDA financing over the full fifteen year construction period; instead, a five-year time-slice (April 1978 - March 1983) has been chosen for the pur- poses of project definition. IDA involvement at this particular stage in project development is highly appropriate, as it provides as opportunity to influence the design and implementation of the distribution system, which in Indian irrigation projects is the most critical phase of project development, and on-farm works. In the course of appraisal, GOK has decided to line vir- tually the entire distribution system down to farm turn-outs (para 38 above), to assume responsibility for the construction of field channels inside pipe outlet commands (para 44 below), to construct better and more control struc- tures, and to introduce better communication network along the canals and a monitoring program for conveyance and water use efficiencies (para 42 above). Given the high priority that GOK is attaching to rapid completion of UKS, the risk that implementation of the full project might discontinue after the five- year period covered by the proposed credit, is neglible. GOK has confirmed that it should be technically and financially feasible to complete UKS within fifteen years, and that, to this end, it will make every effort to allocate in its annual budget proposals funds sufficent to complete UKS within this period. 44. The Irrigation Department of GOK would be directly responsible for planning and construction of the Almatti and Narayanpur dams, the irrigation system down to the pipe outlets, major drainage system, and village roads. Two Chief Engineers, reporting to GOK's Special Secretary, Irrigation, would be in charge of design and execution of the dams and of the remaining infra- structure, respectively. State level policy for command area development is formulated by a Cabinet Sub-Committee and by a Secretariat Committee chaired by the Chief Secretary. At the project level, Command Area Development Authorities (CADAs) have been established in 1974 for Malaprabha and Ghataprabha and in 1977 for Upper Krishna. For each CADA, an Administrator is the chief executive for planning and implementation of the command area development program. This includes operational control over agricultural  - 15 - extension activities. In UKS, land development would be executed by the Engineering Wing of CADA. Preparation and follow-up of farmers' loan applica- tions for the financing of land development (see para 47 below) would be the responsibility of a Cooperative Wing. In the Malaprabha and Ghataprabha projects, the implementation of land development works has been delegated to the Soil Conservation Service of the State Agriculture Department, and this arrangement would be retained under the project. Thus, responsibilities for project implementation and operation are now clearly delineated. 45. Engineering designs for project infrastructure would conform with established GOI standards, which are satisfactory. For the canal system, im- proved standards have been adopted to reduce conveyance and operational losses (para 38 above). A panel of Indian experts, chaired by the Chairman of GOI's Central Water Commission (CWC), has been appointed to review the designs of dams and related structures, including design floods and construction methods, and has reported its findings to the Association and to GOK. Its recommenda- tions are acceptable to the Association. GOK has confirmed that they are being implemented. Construction would primarily be carried out by manual labor. Structures would be of concrete or rock masonry. 46. Land development would comprise the works required within the outlet commands of about 20 to 30 ha each. The following works would be constructed: (i) field irrigation channels to convey irrigation water from the pipe outlet to each individual farm; (ii) drainage channels to drain excess water from each farm to the major drainage system; and (iii) on-farm works (land shaping, farm irrigation and drainage ditches). Channels would be lined or stabilized, as appropriate (see para 38 above), to avoid poor water management and high seepage and operational losses. Each farm would be provided with a gated farm turnout to receive water from the field irrigation channel, and with access to a field drainage channel. Field channels and on-farm drainage ditches, would be constructed by small contractors, mainly through manual labor. Structures would be prefabricated. Rough land shaping by machinery would be carried out by contractors. Land smoothing to final grades would be executed by the farmers themselves under the guidance of CADA. Participation in land develop- ment would be compulsory. 47. Financing for land shaping and farm drainage channels would be avail- able to farmers from Land Development Banks (LDBs) and participating Commercial Banks (CBs). Loans for eligible farmers, secured by mortgages, would be for a maximum period of 15 years, including two years of grace, at annual interest of not less than 10-1/2%. Up to 90% of such loans would be refinanced, at not less than 7.5% annual interest, by the Agricultural Refinance and Development Corporation (ARDC), to which a portion of the credit proceeds would be relent for this purpose (see para 49). Land development loans to farmers, who are ineligible for such ordinary loans, e.g. because of defective land title, or who are unwilling to apply for ordinary loans, would receive unsecured Special Loans, which would be fully refinanced from a Special Loans Account agreed upon by GOI, GOK and ARDC and set up by ARDC with a 50% contribution from GOI and a 25% contribution each from GOK and ARDC. It would be a condition of disbursement for on-farm works: (i) that financial arrangements satisfactory  - 16 - to IDA have been made between GOI and ARDC for relending US$7.0 million from the credit to ARDC; (ii) that IDA has received a detailed training program for the land development staff; and (iii) that IDA has received a satisfactory banking plan for UKS (Paragraph 4(b) of Schedule 1 of the draft Development Credit Agreement). Project Cost and Financing 48. The estimated total cost of the five-year project is US$284.4 mil- lion equivalent, net of taxes and duties. This includes US$32 million worth of on-going civil works contracts (and related expenditures for contingencies, design, management and administration) that have been awarded before appraisal and, thus, are not eligible for financing from the proposed credit. The foreign exchange component of total project cost is US$53.5 million (19%), including US$6.9 million for contracts not eligible for financing. The principal cost components net of contingencies are: Almatti and Narayanpur dams (US$52.8 million), irrigation and drainage systems (US$90.9 million), land development (US$22.5 million), village roads (US$9.1 million) and engi- neering, supervision and administration (US$29.5 million), The balance is made up by equipment, services and project monitoring (US$4.5 million), agri- cultural supporting services (US$3.9 million), physical contingencies (US$21.5 million) and price escalation (US$49.7 million). 49. The proposed credit of US$126 million would cover 44% of total project costs, or 50% of project costs net of ineligible contracts. It would finance all eligible foreign exchange costs (US$46.6 million) and US$79.4 million of local costs. Local cost financing is justified in India for projects such as this for the reasons discussed in paragraph 20. The Government of Karnataka would finance 52% of total project cost. The balance would be contributed by ARDC, LDBs and CBs. Of the proceeds of the credit, GOI would channel US$119.0 million to GOK on the standard terms and arrange- ments on which development funds are being provided to State governments by the Center. US$7.0 million would be passed on by GOI to ARDC, at the standard terms for lending by GOI to ARDC, with 9 to 15 years maturity (depending on maturities of loans to be refinanced) at not less than 6.75 and 7.25% annual interest, respectively. ARDC in turn would refinance 75% to 90% of the land development loans extended to farmers by LDBs and CBs at not less than 7.5% annual interest, repayable in accordance with the terms of the loans to the farmers. Procurement and Disbursement 50. The proceeds of the proposed credit would be used to finance: on-farm works (US$7.0 million), other civil works (US$108.0 million), and vehicles and equipment (US$5.1 million). The remaining US$5.9 million would be left unallocated. 51. The estimated cost of vehicles and equipment for project management, monitoring, operation and maintenance of irrigation infrastructure and village road construction is US$4.3 million net of contingencies. of this total,  - 17 - an estimated US$0.6 million would be subject to international competitive bid- ding (ICB) in accordance with Bank Group Guidelines. A preference limited to 15% of the c.i.f. price of imported goods, or the prevailing customs duty if lower, would be extended to local manufacturers in the evaluation of bids. About US$3.7 million worth of vehicles and equipment are not suitable for ICB. Of these, US$1.1 million represents contracts of less than US$100,000 each, for which ICB would be quite inefficient. The remaining US$2.6 million consists mainly of field vehicles and trucks for which, because of existing servicing and spare part supply facilities, there are considerable benefits to be derived from procuring local models. They would therefore be procured locally through normal procurement procedures of GOK, which are acceptable to IDA. 52. Civil works for the Almatti dam spillway gates, for 37 km of the Left Bank Canal, for the Rajankollur and Gundalgeri tunnels, and for the Shahapur Branch Canal (US$63.8 million net of contingencies) would be procured under ICB. Tenders on ICB contracts for the Left Bank Canal and the Shahapur Branch Canal would be divided into up to ten subcontracts to encourage the participation of local contractors, who would be entitled to a 7-1/2% prefer- ence in bid evaluation. Tenderers would be allowed to bid for sections separately, for any combination of sections, or for the complete works. The remaining civil works 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 land development work would be implemented inter- mittently 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 they be carried out by local contractors under small contracts to be let on the basis of competitive bidding or through piece work type contracts. Where bids are not received, the work is being implemented under force account. Force account work would also be used in specified circumstances, where required by safety or quality considerations; such force account work would be limited to a maximum of 25% of civil works. 53. The proceeds of the credit would be disbursed against the foreign exchange cost of directly imported equipment or against the ex-factory price of equipment manufactured locally. For imported items procured locally, disbursements would be at the rate of 70%. Disbursements for civil works would also be on a percentage basis (55% of ARDC's refinance for on-farm works, and 70% of cost for other civil works). Full documentation would be required for all disbursements, except for payments of up to Rs 50,000 for civil works and Rs 20,000 for equipment and vehicles, for which disbursements would be made against certificates of expenditure. The supporting documents for these payments would not be submitted to the Association but would be retained by GOI and GOK for inspection by project review missions. The credit would be expected to be fully disbursed by March 1984, about one year after completion of the five year project slice. Benefits and Economic Justification 54. The five year phase financed by IDA forms an integral part of UKS with a cultivable command area of 425,000 ha and, thus, the benefits and  - 18 - justification for completing UKS have been assessed. Agriculture in the area is presently heavily dependent on rainfall. Completion of UKS would reduce this dependence and provide farmers with more assured and increased income levels. Development of UKS would also help achieve two other objectives, firstly increased foodgrain production, and secondly, additional employment opportunities to landless laborers and small farmers. At full development in about the year 2000, production increases are estimated at 765,000 tons of foodgrain, 109,000 tons of cotton, 110,000 tons of oil-seeds and 11,500 tons of chillies. The value added to the economy would be about US$211 million per year. About 83,000 new full-time jobs for on-farm work would be created. In addition, about 60,000 man-years of non-farm employment would be generated. Net farm incomes would on average triple and reach an estimated US$2,013 for the median 4.0 ha farm. The economic rate of return for investments in UKS, costing US$541 million net of contingencies over fifteen years, is estimated at 16%, discounting costs and benefits a 50 year period and including sunk costs for investments already made. For land development in the Malaprabha and Ghataprabha areas under the five year project, the cost of which is estimated at US$8.9 million net of contingencies, the economic rate of return is estimated at about 45%. The average economic rate of return is 16%. Cost Recovery 55. The investment cost for the irrigation and drainage networks would be Rs 9,585 per ha, and the annual charge for recovering these costs over 50 years at 10% interest would be Rs 970 per ha. Annual costs for operation and maintenance are estimated at Rs 70 per ha. On-farm works, costing Rs 1,800 per ha on average, would be financed through institutional credit (paragraph 47 above) and fully repaid by the farmers within 15 years. Annual payments on loans, after the two year grace period, would amount to Rs 260 per ha in constant 1978 terms. Thus, full recovery of all investment and O&M costs would require annual payments of Rs 1,300 per ha for the areas benefitting from on-farm development and Rs 1,040 per ha for the areas, where no on-farm development has yet been provided or where the farmer is financing these works himself or where he has repaid the loan. 56. In addition to Rs 260 per ha as annual payment on loans (paragraph 55 above), farmers benefitting from the project would be charged a Betterment Levy of Rs 3,700 per ha, to be paid over 20 years in annual installments of Rs 185 per ha. The Betterment Levy has not been collected systematically in Karnataka; however, GOK has given assurances that it would systematically assess and collect the Betterment Levy from UKS beneficiaries (Section 3.11(a) of the Project Agreement). The prevailing water rates depend on crops and are estimated to average Rs 50 per ha under the projected cropping pattern. Incremental land revenue as a result of irrigation is Rs 15 per ha, plus a Rs 9 per ha local tax. Taking into account all water and water-related charges, annual payments for the lands benefitting from land development would amount to Rs 520 per ha while land development loans are being repaid, and Rs 260 per ha thereafter.  - 19 - 57. As a result of the project, net farm incomes would about triple (for present incomes see para 39 above). The average "project rent" (net incremental income less the necessary rewards to the farm family for its labor, entrepreneurship and cultivation risk) is estimated at Rs 2,500 per ha. Since total annual charges to the farmers (para 56 above) would represent only 21% of the project Lent during the loan repayment period and 11% thereafter, they would, even if fully collected, leave sufficient incentive to project farmers to use irrigation water. In fact, there would appear to be scope for a signi- ficant increase in the water-related charges collected under the project. However, there are large variations in the benefits accruing between farmers in the same project. Until it is technically and administratively possible to implement volumetric water charges, the Government will set water charges at an inherently low level in order to give sufficient incentive to use irri- gation water, and will rather focus on taxes, which are easier to assess and collect. Substantial increases in GOK revenues would accrue as a consequence of UKS in the form of incremental sales and income taxes. If fully assessed and collected, these would amount to an estimated Rs 910 per ha. This would raise total GOK revenues under the project to about Rs 1,170 per ha which would be equivalent to 113% of the annual amount required to recover all government- financed project cost. This reflects the fact that GOK is making a strong tax effort. Over the past few years, Karnataka's tax revenue per capita and as a percentage of state income was about 40% higher than the national average. Under these circumstances, present charges to beneficiaries under the project are considered appropriate. In order to increase cost recovery in the future and guard present charges against erosion by inflation, GOK has given assur- ances that it will review and, if necessary, increase its water and water- related charges in the project area from time to time with the objective of collecting full operational and maintenance cost and, to the extent possible, cost of infrastructure investment, having regard, inter alia, for the incen- tives and repayment capacity of farmers in the area (Section 3.11(b) of the Project Agreement). Project Risk 58. The project would provide sufficient water for the proposed cropping pattern. Thus, the risk associated with water supply is limited. The economic rate of return is particularly sensitive to the completion of the full UKS. This risk is reduced, as explained in paragraph 43 above, by GOK's assurance that UKS would be completed as early as is technically and financially feasible. But even if GOK would discontinue project implementation once the five year time slice covered by the proposed credit has been executed, the economic rate of return would still be 10%. It would also be 10% for UKS, if construction prices increase by 15%, crop yields decrease by 15% and output prices decrease by 25%. Another risk is associated with the need to resettle about 13,000 families which would be displaced by the two reservoirs. Provision for their resettlement has been made as part of the proposed project. GOK has a firm policy, laid down in a Government order of 1970, for the rehabilitation of persons whose lands come under submersion under irrigation or power projects. The amenities to be provided to such persons under this policy include provid- ing lands for cultivation, and GOK has given assurances to this effect for the  - 20 - proposed project (Section 3.05 of the Project Agreement). GOK has already made comprehensive administrative arrangements for the implementation of its rehabilitation policy. Thus, overall investment risks under the project are acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 59. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the State of Karnataka, the draft ARDC Agreement between the Association and ARDC, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 60. Special conditions of the project are listed in Section III of Annex III. Making of financial arrangements between GOI and ARDC for relend- ing US$7.0 million of the proposed credit to ARDC, the receipt of a detailed training program for land development staff, and the preparation of a Banking Plan for the project area have been made conditions of disbursement in respect of the on-farm works component of the project (paragraph 4(b) of Schedule I of the draft Development Credit Agreement). 61. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATIONS 62. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments March 15, 1978  ANNEX I INDIlA - SOCIAL INDICATORS DATA SHEET Page 1 of 4 LAND AREA (THOU KM2) ------------------------------------------------ INDIA REFERENCE COUNTRIES (1970) TOTAL 3280.5 MOST RECENT AGRIC. 1780.7 1960 1970 ESTIMATE INDONESIA PHILIPPINES BRAZIL** GNP PER CAPITA (JSS5) 60.0* 100.0* 150.0/a* 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/a 62.0 123.0 11.0 PER SQ. KM. AGRICULTURAL LAND 252.D 306.0 348.U7la 414.0 375.0 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 IrRTALITY RATE (/tHOU) 139.0/a . 130.0 , 80.0 110.0 LIFE EXPECTANCY AT BIRTH (YRS) 41.7 47.2 49.5 , S.5 03.;. GROSS REPRODUCT1"N PrTE 3.2 2.9 2.8 3.2 3.3 2.11 POPULATION GROWTH RATE 1%) TOTAL 2.0 2.3 2.2 2.0 3.0 2.9 URBAN 2.5/b 3.2 3.1 3.7 /a 4.0 5.0 URBAN POPULATION (% OF TOTAL) 17.9 19.9 20.6 17.5 /b 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 /b 44.0 45.6 42.0 15 TO 64 YEARS 55.9 55.3 56.7 7rb 53.5 51.6 55.0 65 YEARS AND OVER 3.1 3.1 3.2 76 2.5 2.8 3.0 AGE DEPENDENCY RATIO 0 8 0.8 0.9 0.9 0.6 ECONOMIC DEPENDENCY RATIO 1.1/c 1.1/a 1.2 /c ., 1.s 1.5 FAM.LY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14565.0 37658.0 259.3 354.0 250.0 USERS (% OF MARRIED WOMEN) ,. .. 1B.7 2.0 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 175000.0 218000.0 248000.0 /a .. 12400.0 29400.0 LABOR FORCE IN AGRICULTURE (%) 71.0 69.0 69.0 .- s5.0 /a 40.4 UNEMPLOYED (% OF LABOR FORCE) 1.O0 *d 1.7 . 7.6 7.5 INCOME DISTR!BUTION S OF PRIVATE INCUMIE REC G 3T- HIGHEST s% OF HOUSEHOLDS 26.7 25.0/b S. .,. , s3.0 /a HIGHEST 20% OF HOUSEHOLDS 51.7 53.17b .. .. ,, 62.0 7S9 LOWEST 20% OF HOUSEHOLDS 4,1 4.77W .. .. . 3.0Q7T LOwESt 40% OF HOUSEHOLDS 13.6 t3.1 t . .. .. o.oa DISTRIBUTION OF LAND OWNERSHIP 1 OWNED BY TOP 10% OF OWNERS .. 45.0 % OWNED BY SMALLEST 10% OWNERS .. . 1.5 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 5940.0/e f4890.0 4220.0 26370.0 . 1910.0 POPULATION PER NURSING PERSON 530. 07M 220.0/c 3680.0ld 76430/.C 3220.0/b FOPULATION P'ER HOSPITAL BED 2590.07 1610.0-- 1 640. 0- 860.0 260. 6-- PER CAPITA SUPPLY OF - CALORIES (x OF REQUIREMENTS) 95.0 92.0 89s0/e 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 52.07o 43.0 45.0 64.0 -OF !HICH ANIMAL AND PULSE 19.0 16.0 . 14.0 22.0 39.0 DEATH RATE (/THOU) AGES 1-4 44.0 . .. .. 6.6 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 39.0 65.0 79.0/b 6r. 0 13.0 67.0 SECONDARY SCHOOL 9.0 .. 28. 07TW i2.o - 9 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 11.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 9.0 60/d .29.0 6.0/b 17.0 ADULT LITERACY RATE (%) 24.0 33. 0- 36-0/b, 59.0 . 6 64.0 HOUSING PFRSONS PER ROOM (URBAN) 2.6 . . 2.8 . . 2.1 1.0 OCCUPIED DWELLINGS WII.-;OUT PIPED WATER (x) ACCESS TO ELECTRICITY 76.0 73.0/C (% OF ALL DWELLINGS) 23.0 46.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) 7.0 6.0 CONSUMPTION RADIO RECEIVERS (PER THOU Pop) 5.D 21.0 24.0 114.0 45.0 60.0 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 SEE NOTES AND DEFINITIONS ON REVERSE