India - National Agricultural Extension Project

Doc_man of The World Bank FOR OMCIAL USE ONLY Repot Ne. P-3876-3N REPORT AND RECOM DAIION OF THE PRESIDENT OF THE INTERN&TIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT IN AN AMUNT OF SDR 38.6 MILLION TO INDIA FOR THE NATIONAL AGRICULTURAL EXTENSION PROJECT September 6, 1984 isdocment has a retricted diributio d may be used by recipients ony in the peform_c of rociad dutes lb eoaeb may od othrwis be disdosed W Word Bnk ahRlration.  CURRENCY EQUIVALENTS (As of September 6, 1984) US$1.00 - Rs U.78 Rs 1.00 m US$0.085 Rs 1 million - US$85,000 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 11. FISCAL YEAR April 1 - March 31 ABBREVIIONS AEO - Agricultural L.xtension Officer(s) DAO - District Agricuiti."l Officer(s) DOE - Directorate of Extensin EUAC - Extension Technical Advisory committee GOI - Government of India GOMP - Government of Madhyr. Pradesh GOO - Government of Orissa GOR - Government of Rajasthan ICAR - Indian Council of Agricultural Research IDA - International Development Association MOA - Ministry of Agriculture E&E - Mouitoring and Evaluation NAEP - National Agricultural Extension Project KARP - National Agricultural Research Project SAU - State Agricultural University/Universities SDAO - Subdivisional Agricultural Officer(s) SMS - Subject Matter Specialist(s) T&V - Training and Visit System VEW - Village Extension Worker(s)  A OFFICIAL USE ONLY CONFDENTIAL NATIONAL GRICULTURAL EXTESBION PROJECT CREDIT AND PROJECT SIUARY Borrower: India, acting by its President. Beneficiaries: The States of Nadhya Pradesh, Rajasthan and Orissa and the Government of India's (COI's) Ministry of Agriculture Extension Division and Directorate of Extension. Amount: SDR 38.6 zillion (US$39.1 million equivalent). Terms: Standard. Oa-lending Terms: From GOI to the Governments of Madhya Pradesh, Rajasthan and Orissa as part of Central assistance to State development projects on terms and condi- tions applicable at the time. GOI will bear the foreign exchange riak. Proiect DescriDtion: The project would (i) strengthen the reorganized agricultural extension system introduced in Rajasthan, Nadhya Pradesh and Orissa under Phase I projects; (ii) reorganize and strengthen the Central Government-s Extension Division and Directorate of Extension in order to increase their ability to support more effectively State agricultural extension programs and to perform more effectively their coordinating and policy guidance role throughout India; and (iii) provide funds to assist in the financing of other projects for extension reform, special studies and special sub-projects, and the supervision, monitoring and evaluation of said activities. This document has a restricted distribution and may be used by recipients only in the performance or their ofTca duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Estimated Cost 1l: (MSS millions) Local Forei Total Incremental Staff 9.5 - 9.5 Civil Works 20.7 1.1 21.8 Vehicles and Equipment 2.9 0.8 3.8 Incremental Operating Costs 4.3 0.1 4.4 Trainng 5.1 - 5.1 Subtotal 42.5 2.0 44.5 Physical Contingencies 2.2 0.1 2.3 Price Contingencies 9.2 0.3 Subtotal 53.9 2.4 56.3 Special Sub-projects Fund 7.5 0.8 8.3 Project Preparation Fund 0.9 0.1 1.0 Total 62.3 3.3 65.6 x _- Financinx Plan: (MS millions) GOI/States IDA Total Madhya Pradesh (GOHP) 5.4 7.8 13.2 Orissa (GOO) 7.5 10.6 18.1 Rajasthan (GOR) 8.2 11.7 19.9 DOE (GOI) 2.1 3.0 5.1 Special Subprojects (GOl/Implementing Agency) 3.3 5.0 8.3 Project Preparation - 1.0 1.0 TOTAL 26.5 39.1 65.6 1/ Includes taxes and duties of US$1.1 million equivalent.  Estimated Disburseents 1 _s ( millio") FY85 FY86 FY87 F88 FB 8 FY Annual 1.6 5.5 9.5 11.1 8.5 2.9 Cumlative 1.6 7.1 16.6 27.7 36.2 39.1 Rate of Return: Not applicable. A,kraisal Reiort: No. 4893-IN, dated August 28, 1984. vJ According to IDA fiscal year.  INTERNATIONAL DEVELOPUEN ASSOCIATION REPORT AND RECO TION OF HE PRESIDENT TO THE EXECUTIVE DIRECTORS 0 A PROPOSED CREDIT T0 INDIA FOR THE NATIONAL AGRUL LTRL EXTENSION PROJECT 1. I submit the following report and recommendation on a proposed IDA Credit to India for SDR 38.6 million (US$39.1 million equivalent) on standard IDA terms, to help finance a national agricultural extension project in order to reorganize and strengthen agricultural extension services in several Indian Statez 3nd the Central Government. The proceeds of the Credit would be channeled to the State Governments concerned as part of Central assistance to those States for developmeat projects on terms and conditions applicable at the time. The foreign exchange risk would be borne by the Government of India. PART I - THE ECONOMY 1/ 2. An economic report, "Situation and Prospects of the Indian Economy - A Medium Term Perspective" (4962-IN, dated April 16, 1984), was distributed to the Executive Directors on April 23, 1984. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 750 million (in mid-1984) and an annual per capita income of US$260. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those who own little or no land. Growth of value-added in agriculture - 2.2Z since 1950/51 - has been slower than growth of industrial value-added (5.31 per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 52Z in 1950/51 to about 33% in 1981/82, while the share of industry rose from 20% to around 26Z. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress, with per capita income rising by about 1.4Z per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased markedly since 1950/51: the gross national savings rate more than 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Kerala Social Forestry Project (No. P-3858-IN), dated July 11, 1984.  -2- doubled from 10.8Z of GDP (at factor cost) to 22.7Z in 1983/84, while the gross domestic investment rate rose from 12.5Z of GDP to 24.85 in 1983184. Foreiga savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 201 vas reached during the early 1960s. Currently, foreign savings account for about 81 of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3Z of GDP and averaging below 12 for the past five years. Net use of foreign savings has never risen above 31 of GDP, and presently stands at 2.1Z. 5. Before the l970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.21 per annum, while the volume growth of imports over the same period was 4.3Z. In the early to uid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India's exports grew on average about 7.31 per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added substantially exceeded the historical 30-year trends (paragraph 3) averaging 5.3Z, 3.3Z and 8.1Z, respectively, during the 1975/76 to 1978/79 period. In 1979180, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a relatively large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks coincided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.21 per annum. Recent Trends 7. Despite the effects of two severe droughts in 1979/80 and 1982/83, India's economy in the early 1980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 52 per annum, while between the two recovery years (from 1980/81 to 1983/84), it was 4.5% per annum - substan- tially higher than India's long-term growth rate of 3.61. Continued rapid economic growth has resulted from a development strategy which includes higher investment levels and liberalized policies on imports, industrial licensing, prices, and commercial borrowing. These policies, by easing constraints on the supply of infrastructure and basic comnodities, were a determining factor in the improved performance of the economy and the industrial sector. This overall improvement in performance, combined with a  -3- more restrictive monetary policy in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from over 18% in 1980/81 to only 2.6Z in 1982/83, but rose to over 9Z in 1983184, mainly due to the effect of the 1982183 drought on food prices. Further improvements in the policy environment vill be required to maintain these higher levels of economic growth and investment without put- ting undue pressure on the balance of payments or reviving inflationary expectations. S. Economic growth in the early 1980s has not been steady, reflecting the uneven rainfall during the period. In 1980/81 and 1981/82, the economy substantially recovered from the 1979 drought, with real GDP growing by 7.6% and 5.32, respectively. While industrial output expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15Z and 5.5%, respectively. The supply of power, coal, and rail transport, already improved in 1980/81, was further expauded in 1981/82, recording growth rates of about 1OZ, 9.6% and 12.5%, respectively. This overall improvement in the Indian economy was halted in 1982/83 by a severe drought in mid-1982 which reduced agricultural production by 4Z, brought down the GDP growth rate to 1.8%, and put further strains on the already difficult balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain imports, procurement and distribution, and the allocation of power to irrigation pumps mitigated the otherwise very distressing effects of the poor monsoon. The economy recovered in 1983/84. led by a robust agricul- tural sector - GDP grew by about 6.5% to 7% with agricultural production growth in the 9Z-10Z range and industrial growth of 4.5Z. The major factors contributing to the good economic performance during 1983/84 were the excel- lent monsoon, combined with adequate agricultural policies and programs, and satisfactory performance of the coal and transport sectors. The power sector, however, emerged again as a constraint on higher growth, especially in industry. 9. Agricultural production rebounded strongly in 1983/84 in response to the monsoon, improved use of inputs and continued expansion of irrigation. Overall foodgrain production rose by 1OZ-12Z over the previous year, reaching a new record of 142-144 million tons, a substantial increase over the pre- vious peak of 133 million tons in 1981/82. Corrected for weather variations, foodgrain production continues to grow at a trend of 2.6Z per annum!- sufficient to maintain a broad balance between supply and steadily increasing domestic demand. Nonetheless, the balance remains delicate, and the need for foodgrain imports to maintain consumer supplies or adequate buffer stocks could arise from time to time. Thus, adequate management of foodgrain stocks and programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services had a mixed performance in 1983/84, partially because of sluggish demand from industry during the first half of the year but also due to a failure to maintain the productivity gains of 1980-82. Electricity generation grew only by about 3.7Z due to low reservoir water levels during the first half of the year, delays in the commissioning of new capacity, and a deterioration of capacity utilization in thermal plants. As a result, power generation was about 11.5% below requirements  -4- and constituted a major bottleneck in the economy. Key industries which were adversely affected by power constraints included steel, fertilizers. cement, and coal. To improve performance in the power sector, the Governmreut recently increased incentives for higher labor and management pruductivit- in thermal plants. Railway freight traffic, measured in ton-kos, grew by only 0.5Z in 1983/84, reflecting sluggish demand. Coal production increased by about 6.51 in 1983/84 reaching 139 million tons. When combined with stocks already available this level of production was sufficient to meet the rela- tively slow demand growth. Infrastructural constraints would have emerged much more sharply had the pace of industrial growth and demand been more rapid. It is therefore critically important that India maintain the pace of investment in these key sectors, mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross investment and national savings increased from negligible levels during the late 1970s to an average equivalent to 2.11 of GDP in 1980-84. India's gross national savings rate, which averaged 22.6Z of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substantial increase in the savings rate is therefore quite limited. If India is to maintain investment at about 25Z of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. This would also allow a marginal decline in the use of foreign savings from the recent 2.1Z-2.31 of GDP to 1.51-1.8%, to ensure a sus- tainable external debt service burden. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses from 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.11 of GDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and con- tinued to move against India during the first three years of the 19808. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remit- tances stagnated (reflecting slower development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Faced with severe infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth rate from its historical level of 3.62 to 5.2% while adjusting the country's external balance to the adverse price developments in the world markets. The main elements of this strategy are export promotion, import substitution where economically justifiable, implementation of a coherent energy policy designed to meet the energy needs of the economy while curbing the growth of oil imports, and continued movement toward a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity  -5- expansion. The program is being successfully implemented, and is leading to substantial improvements. 13. A positive development in India's balance of paymnets is the reduc- tion in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1983/84 despite unfavorable world market conditions and import liberalization. Export volume growth and import substitution of oil and petroleum products, metals and fertilizers more than offset the substantial increase in "other" imports. These "other" imports consist mainly of industrial imports and capital goods which historically have been in chronic short supply and vhich are of critical importance to capacity utilization, product quality, and plant modernization and expansion. A major factor in the decline of the trade deficit vas the lover net import bill for petroleum, vhich dropped from US$6.7 billion in 1980/81 to US$3.4 billion in 1983/84 in response to a successful oil development program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a sig- nificant degree the result of India's development and adjustment efforts over the past three years. It is expected that the balance of payments will continue to be under strain for the next several years, since the adjustment strategy will continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need exter- nal capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the import requirement associated vith improved growth rates. Faced with a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (IHF) and commercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983/84, India drew SDR 3.9 billion from the Extended Fund Facility of the INF. In addition, India borrowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borrowing has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrowings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This larger commercial borrowing and transfer of funds under the arrangement with the IN? has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. Develooment Prospects 15. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufac- turing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports - is exten-  -6- sive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India alzso has a wide range of institutions capable of fostering development and is well-endowed with human resources. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 16. The Government is currently preparing the Seventh Plan which will lay down the development strategy for 1985/86-1989/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economi- cally justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real investment projected to be about 30% higher than in the period 1975-80-a creditable performance indeed. The Sixth Plan expenditure targets, however, will not be fulfilled as resource mobilization by the public sector will fall short of the financing requirements of planned public investment. Actual aggregate real investment is projected to be about 7% below the original target for the period 1980-85, private investment being 5% to lOZ higher and public invest- ment about 20% lower in real terms than actually projected. In terms of meeting Plan expenditure targets, the performance of the Central Government is considerably better than that of the State Governments. The Central Government's Plan outlays are likely to reach about 80% to 90% of the original Plan allocation in real terms, while the States' will probably achieve only about 50% of their targets. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real investment shortfalls relative to original Plan allocations. 17. Although Sixth Plan expenditure targets will not be met, India's capital formation rates have increased from 22.6% in 1975-80 to 24.7% of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure services which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As discussed in greater detail in our recent economic reports, performance in the basic service sectors can be improved through better planning and management, thus leading to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expan- sion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth. 18. Under the Sixth Plan, India has an ambitious oil development program backed by substantial financial commitment. Performance under the program has been excellent with real investment and oil production levels running well ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for  -7- domestic crude and products. While the gap between domestic consumption of petroleum end production remains large, India's dependence on oil imports dropped from 63% of consumption in 1979/80 to about 41Z in 1983/84 and is expected to decrease to about 33Z of consumption by 1984185. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. At the same time, the increases in domestic petroleum prices have helped encourage conservation and slow demand growth. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and exter- nal balance, while at the same time achieving more rapid growth than in the past. This will require the continuation of the current development strategy which assigns high priority to export promotion, public finance discipline, improvement of economic efficiency, and investment in infrastructure, sup- ported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of pay- ments consequences of such a growth strategy. Rowever, an importaut element in providing India with the capacity to adjust flesibly will be adequate flows of concessional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. Although India is currently in a position to increase borrowing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. The fact that India has been able over the past decade to maintain a rate of growth above the long term trend, despite the ?oor monsoons of 1979 and 1982, suggests that a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, can sustain a rate of growth closer to 5.0Z per annum than to the long-ran trend of 3.6% per annum. If the rate of population growth can be brought to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of 1.4Z per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2% per annum in the 1970s despite a measurable decline in fertility rates. The population growth rate failed to decline in the past decade due to a reduc- tion in the infant mortality rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it implies a greater strain on the economy and re- emphasizes the need for continuing efforts to strengthen the health and family planning programs in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979180 level of about 232 to over 35% by 1984/85. The Government is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family  -8- planing, health, education and literacy programs aimed at reducing fertility rates. 21. Reduction of poverty remains the central goal of India economic and social policy. Mkore than one-third of the worlds poor live in India, and more than 80X of the Indian poor belong to the rural bouseholds of landless laborers and small farmers. About 51Z of the rural population and 40 of the urbam population subsist below the poverty line. Significant reductions in poertywill depend primarily c: an acceleration of economic growth, particularly in agriculture, combined with effective iiplmntation of poverty alleviation pregrams. India-s poverty alleviation strategy appropriately recogthzes tat production-oriented programs, which aim at accele-ating the overall pace of economic growth, and poverty alleviation progrmas, tatrgetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (MKP), bhe Integrated Rural Development Program (IRID), and the National Rural Employment Program (MR ). The IIDP and NIEF are targeted programs aimed at increasing the incomes of the poor rapidly, either through the transfer of productive assets or direct employment. The MKP, aims at broadening the provision of social infrastruc- ture and basic services which enbance the humn capital of the poor and improve living standards. These programs represent a vitally important commitment of the Government to address the needs of the poorest. The scale of the poverty problea in India, combined with the inherent difficulties in xmplementing poverty programs in aty country. imply the need for continued efforts to enhance the effectiveness of these programs. PART II - BANK GROUP OPERAXIOIS IN INDIA 22. Since 1949, the Bank Group has made 76 loans and 164 development credits to India totalling USS5,183 million and US$12,016 willion (both net of cancellation), respectively. Of these amounts, US$1,452 million has been repaid, and DS$5,723 million was still undisbursed as of March 31, 1984. Bank Group disbursements to India in the current fiscal year through March 31, 1984 totalled US$1,072 million, representing an increase of about 6 percent over the same period last year. Annex LI contains a summary state- ment of disbursements as of March 31, 1984. 23. Since 1959, IFC has made 29 commitments in India totalling US$224 million, of which US$32 million has been repaid, US$56 million sold and US$17 million cancelled. Of the balance of US$118 million, US$111 million repre- sents loans and US$7 million equity. A surmary statement of IFC disburse- ments as of March 31, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm develooment dusigned to increase agricul- tural productivity, and efforts to improve the availability of basic agricul- tural inputs to farmers through credit, fertilizer, marketing, storage, and  -9- seed projects. Major elements of the lending progrs- have also been directed at helping to meet the energy needa of the economy while curbing the grovth of oil imports, and to ease the infrastructure bottlenecis which have hampered economic grovth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of developmeat finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and fsmily planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan. The continued active involvement of the Bank Group in agriculture, energy and infrastruc- ture development will appropriately contribute to India's adjustment and growth prospects. Irrigation will need continuing support, with eaphasis on improved efficiency in water couveyance systems to ensure reliable delivery to farmers' fields. In addition, major investments to develop the large Narmada River basin will be vital to India's efforts to increase agricultural production. Important complements to these efforts, such as fertilizer production and distribution, agricultural credit and extension, will continue to receive support. A continued program of investments aimed at rapidly increasing the domestic supply of euergy will clearly be necessary if India is to curb the cost of oil imports and alleviate the critical power shortages which constrain output in both the agricultural and industrial sectors. Exploitation of oil and gas rescources is a central element of this program, which should be supplemented by investments in hydro and thermal power generation, and in the expansion of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have been in short supply and which India has a compara- tive advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transportation infrastructure vould mitigate a key constraint to achieving higher levels of economic growth so that further support of the railvays and for ports development will be par- ticularly appropriate. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions vithin the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth rates achieved during the first four years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture and irrigation.  -10- 27. India-s poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from ID-A. However, IDA lending to India has declined from a peak of US$1.5 billion in 1980 to below US$1 billion since that time, mostly due to funding constraints related to IDA 6. Lover IDA 7 replenishment and uncertainties about IDA 8, coupled with increasing claims for IDA funding from other countries, indicate that the amount of IDA funds available to India is likely to continue declining, even in nominal terms, and will remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A continuation of efforts already undervay to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and improvement in the balance of payments. Despite recent setbacks, India's external payments position is still manageable. The ratio of India-s debt service to the level of exports of goods and services and receipts of current transfers was about 12.9Z in 1983184. Over the next several years this ratio is projected to rise to around 20% and remain around that level through 1995196. As of March 31, 1984, outstanding loans to India held by the Bank totalled US$3,884 million, of which US$2,021 million remain to be disbursed, leaving a net amount outstanding of US$1,863 million. 28. 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 34Z of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with 62Z, 33Z and 37Z, respectively, in 1983/84. On March 31, 1984, India-s outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the bauk GroupEs share was US$9.6 billion or 36Z (IDA's US$7.8 billion and IBID's US$1.8 billion). In 1983/84, about 19.0% of India's total debt service payments were to the Bank Group. PART III - AGRICULTURE AND AGRICULTURAL EXTENSION IN INDIA Agriculture 29. A major objective of agricultural policy in India during the past 15 years has been to achieve self-sufficiency in foodgrains and to increase farm incomes in an equitable manner. Marked progress has been made: there has been a remarkable increase in foodgrain production in recent years with India attain- ing self-sufficiency, although a shortage of edible oils persists. Nevertheless, continuing efforts to improve agricultural productivity are essen- tial to meet the increase in demand for food for a population which is growing at 2.2% per year. In addition, the rate of yield increases has been falling and parts of the country sometimes show little growth in agricultural production. In addition, a large part of the rural population can neither produce nor pur- chase what it needs. The projections of demand for foodgrain by the last year of the Seventh Five-Year Plan (1990) call for foodgrain production of 168-170 million tons annually compared with production of about 150 million tons in  -11- 1983/84-an annual growth of about 3% compared with the growth rate over the last fifteen years of about 2.5Z per year. 30. Nearly 90Z of the recent increases in food production has come from vheat and rice, predominantly in irrigated areas. Less impressive results are expected in the future because cultivated areas benefitting from high-yielding technology are beginning to experience problems not confronted hitherto, includ- ing increasing pests and disease and micro-nutrient deficiencies, demanding even more sophisticated technology. Moreover, most of the future increase in foodgrain production will have to come from rainfed regions, vhich are expected to constitute 60% of the area under cultivation, even after the nation's irriga- tion potential has been fully developed. Hence, greater problems both in developing the improved technology needed for heterogenous agro-climatic condi- tions and in transferring this knowledge to the farmers of these regions can be anticipated. 31. Therefore, the future pattern of agricultural development in India points to the crucial role which improved agricultural extension and research will have to play in helping the country sustain self-sufficiency in foodgrains. The improvement of agricultural extension remains a relatively low-cost but major means of increasing agricultural productivity, of msking more effective use of past investments in infrastructure and of reaching all farmers, espe- cially smaller ones. Agricultural Extension 32. Soon after independence in 1947, GOI began sponsoring a number of programs designed to meet the need for more efff_-ive, country-wide agricultural development, but they mostly met the needs of larger farmers. In order to achieve a more broadly based increase in agricultural output and in response to changing rural conditions, GOI, with IDA assistance, introduced a different approach through the training and visit (T&V) system of agricultural extension. T&V aimed at increasing the productivity on farms and the income of farmers by simultaneously addressing constraints to the transfer of new agricultural technology, disseminating the results of research and obtaining feedback on actual farm problems. It did so by providing farmers, on a regular and sys- tematic basis, with up-to-date advice on proven farming practices best suited to their specific conditions. These objectives were accomplished by a regular system of training and visits by field staff supported by professional advice from state-level institutions. 33. Organizationally, the system has sought to establish a single line of command from the State Director of Agriculture to the Village Extension Worker (VEW) and merged the VEWs and all agricultural field staff into a unified exten- sion service, employed exclusively on agricultural extension. Between 700 and 800 families were served by a VEW, working with 8 to 10 contact farmers. Agricultural Extension Officers (AEO) each supervise about eight VEWs, working with them during field visits. Sub-divisional staff include a Sub-divisional Agricultural Officer (SDAO) (with an Assistant SDAO in larger units) to ensure satisfactory supervision, training and guidance over 6 to 8 AEOs. To strengthen technical support and training, a team of Subject Matter Specialists (SMS) at sub-divisional level impart training to VEWs in agronomy, plant protection and training. At district level, a District Agricultural Officer (DAO) supervises the work of sub-divisional staff.  -12- Bank Group Activities in Agricultural Extension 34. Bank Group-assisted projects have introduced the T&V system of agricultural extension into 13 Indian States. 1/ Hovever, introduction of the ThV system has not been easy. The shift from a system based on multi-purpose functionaries to a system of professional extension carried out by single- purpose extension workers involves a major administrative and conceptual reform which inevitably encounters bureaucratic, political and logistical hurdles. The new system also calls for major attitudinal changes on the part of farmers and all concerned Government officials. These factors have given rise to a number of problems which have been commonly experienced in agricultural extension projects financed by the Bank Group in India, especially during the early years of implementation: involvement of extension staff in non-extension activities; insufficient research-generated technology; poor feedback from field to research institutions; weak inter-ninisterial and inter-departmental coordination; and poor monitoring and evaluation. The continuing involvement of extension staff in non-extension activities and the problems concerning the technology being extended to farmers, which are the most intransigent constraints, are to be given special attention under the proposed project. 35. Indicators of the impact of completed five-year, IDA-supported projects in three of the States which are included in the proposed project are favorable. In Orissa, a major advance in rice productivity appears to have occurred. This increase would also appear to have been the trigger for diver- sification into other crops. Fertilizer consumption has increased by 33Z during project implementation while gross cropped area increased by 15X. Similarly, significant achievements have been made in Madhya Pradesh under two projects in establishing a structure on which further improvements can be built. Evidence also indicates high rates of adoption of some practices and the overwhelming importance of extension staff as the source of technical knowledge among farmers. In Rajahthan, significant qualitative and quantitative improvements have been made in the extension service enabling foodgrain production to be more or less sustained during periods of drought. There is also evidence of a sig- nificant lift in crop yields from 1980-81 onwards compared with pre-project levels. A'though it is difficult to ascertain and quantify which of these improvements are attributable to extension, it is not unreasonable to expect that some of them are presumed to have resulted from improved extension services and from closer links between extension and field-based research activities. 11 The Orissa Agricultural Development Project (Cr. 682-IN, April 1, 1977); the Madhya Pradesh Agricultural Extension and Research Project (Cr. 712-IN, June 1, 1977); the West Bengal Agricultural Extension and Research Project (Cr. 690-IN, June 1, 1977); the Assam Agricultural Development Project (Cr. 728-IN, June 30, 1977); the Rajasthan Agricultural Extension and Research Project (Cr. 737-IN, November 14, 1977); the Bihar Agricultural Extension and Research Project (Cr. 761-IN, January 6, 1978); the Composite Agricultural Extension Project (Cr. 862-IN, February 16, 1979); the Kerala Agricultural Extension Project (Cr. 1028-IN, June 25, 1980); the Maharashtra Agricultural Extension Project (Cr. 1135-IN, May 7, 1981); the Tamil Nadu Agricultural Extension Project (Cr. 1137-IN, May 7, 1981); the Second Madhya Pradesh Agricultural Extension Project (Cr. 1138-IN, May 7, 1981); and the Andbra Pradesh Agricultural Extension Project (Cr. 1219-IN, May 5, 1982).  -13- 36. Overall, the Bank Group's experience vith improving extension in India has been positive. Beginning in 1977, the new system was introduced in several States; there is groving evidence of its favorable impact and it has received wide support from the farming coumunity and State Departments of Agriculture. Experience also shows that the system adopted for technology transfer is fun- damentally sound and that the impact on production, even in the short term, can be substantial. In several States, the extension service is able to identify constraints at farm level and identify the agency responsible for their alleviation, either within its own operations or in other support services. It is also exerting considerable pressure on the research support network to re- orient its research priorities to meet the needs of the farmers. Hence, it is intended that the Bank Group continue supporting the introduction of the T&V system of extension in those States which currently operate a different system but which wish to change. Moreover, since extension reorganization is institu- tionally immature in many States which have accepted the T&V system, it is essential that the technical and supervisory support of the Bank be sustained. PART IV - THE PROJECT 37. The proposed project was prepared by the States of Madhya Pradesh, Rajasthan and Orissa, and GOI. The project was appraised in December, 1983. A report entitled "Staff Appraisal Report - National Agricultural Extension Project" (No. 4983-IN, dated August 28, 1984) is being distributed separately to the Executive Directors. Negotiations were held in Washington, D.C. in August 1984. The Governments of India, Madhya Pradesh, Rajasthan and Orissa were represented by a delegation coordinated by Mr. Prithvi Singh of the Department of Economic Affairs, Ministry of Finance. A Supplementary Project Data Sheet is attached as Annex III. Project Rationale and Obiectives 38. Agriculture is a State responsibility under the Indian Constitution, which means that States are responsible for identifying and ilaplementing invest- ments to improve agricultural performance. However, the Government of India is considering making agricultural extension subject to Central Government sponsor- ship upon commencement of the Seventh Five-Year Plan in 1985/86. Under such an arrangement, Central Government funds would flow directly to States to cover a substantial portion of investment costs, while the States are expected to con- form to certain agreed criteria associated with implementation. Such an arran- gement would therefore constitute an enhanced incentive for States to continue to implement the T&V system of agricultural extension, and would entail the creation of a Central apex institution for financing extension. Until this change can be brought about, the proposed project would represent an inter- mediate step toward setting up a national funding umbrella for improvement of extension institutions and services at the State level. Under the proposed project, IDA support for State extension development would be conducted under arrangements made directly with the State Government concerned while, at the same time, the proposed project would help to bring about the reorganization and strengthening of the relevant Central Government organization to enable it to perform more effectively its present coordinating and policy guidance role and, in time, to enable it to assume greater responsibility for helping states to prepare future extension projects and to appraise, supervise and evaluate them. Extension is not yet so firmly established in any state that it can be considered self-sustaining. In addition, more attention needs to be given at  -14- both State and central levels to monitoring and evaluating the impact of exten- sion activities. Given the extent of administrative and attitudinal change being sought, present efforts need to be intensified. Further strengthening and deepening of the extension effort is required. Continued investment through the proposed project would take advantage of the earlier projects, and progress in implementing second phase activities are expected to improve as the various difficulties experienced in the past are overcome. The project would also endeavor to strengthen further the linkage between extension and research. IDA's continued involvement would provide the independent encouragement and guidance needed for State and Central efforts in implementing and maintaining extension reform in the face of considerable political and administrative dif- ficulties inherent in the task. Without continued IDA support, extension reform is less likely to have the desired long-term impact. 39. The project is designed to improve the agricultural extension systems in three States and thus help contribute to increasing the level of agricultural production in those three States, and to improve the capabilities of the Central Government to support agricultural extension activities nationvide. In Madhya Pradesh, Rajasthan and Orissa (Map 17967R attached to show the locations of each State), the project will strengthen and further develop the reformed agricul- tural extension systems introduced in those States under Phase I projects which have now been completed. In addition, support will be provided for reorganizing and strengthening the Directorate of Extension (DOE) in the Central Ministry of Agriculture (MOA) to enable it to carry out more effectively its coordinating and policy guidance role and to provide assistance to the States in the design and implementation of their agricultural extension activities. Lastly, two funds will be established under the project: (i) to provide financing for States already receiving IDA support for short-term innovative sub-projects to strengthen special aspects of agricultural extension; and (ii) to provide DOE and the participating States with funds for the preparation of future State sub-projects, sector studies or related activities which would assist the implementation of this and other IDA-supported agricultural extension projects (paras 53-55 below). 40. The project seeks to achieve several objectives: (i) Institutional Development. The project provides support for expand- ing and strengthening the Extension Division and the DOE in the Central MOA to improve their abilities to assist the States with their agricultural extension activities, and to undertake enhanced policy analysis, project development, and the coordination of inter-State activities, and over time, to assume respon- sibility for assisting the States in the design, implementation and monitoring of their extension projects and to provide policy guidance and support to the States. (ii) Administrative Consolidation. While the T&V extension system has been successfully introduced in participating States, its benefits can be fur- ther increased. The project aims to consolidate the administrative changes introduced during Phase T projects and to sustain the commitment among decision- makers and extension staff in the participating States to a full acceptance and improved effectiveness of T&V extension. The project thus provides an important incentive for ensuring the continuation of extension reform in the Phase II States.  -15- (iii) Expanded Coverage. Experience gained thus far from existing State projects has identified the need for more specialized extension support in order to meet the needs of all farmers, to provide more relevant and usable recomendations, and thus to realize the potential production increases vhich could be achieved through expanded coverage. The project is designed to address this need by broadening the technical subjects covered under agricultural exten- sion to include, inter-alia, land use, soil management, water management, drainage, horticulture and farm forestry. The project will also expand exten- sion services into new agricultural areas not previously included under the Phase I projects. (iv) Oualitv Improvement. The project will seek to ensure improvements in the quality of extension services at the State and Central level. Special emphasis will be placed on expanded and improved training programs to address the additional technical subjects to be covered. Attention will also be focused on developing the ability of the DOE to guide the States in such areas as improving the roles of the SMS, AEO and contact farmer, establishing and con- sidering formal links with research, and improving field trials and adaptive research in order to raise the quality of technical advice. 'v) Extension/Research Linkages. Although research is providing increasingly effective support to extension, improvements are needed in adaptive research and field trials related to actual farming concitions, and in better communication between extension and research staff on farmer needs and research priorities. The project will aim to improve researchlextension linkages by ensuring farmer and extension staff participation in the identification of research programs and by encouraging the State Agricultural Universities (SAUs) to adopt research strategies designed for differing farm situations. At the Central level, the Indian Council of Agricultural Research (ICAR) staff will participate in the Extension Technical Advisory Committees, to be established under the project, and join regular extension field visits to review actual farming conditions and activities. 41. State Components. The basic approach to strengthening of agricultural extension services is common to all participating States. However, specific State requirements vary on account of differing levels of agricultural development, administrative arrangements, agro-ecological conditions, population densities and communications. The proposed project will build on the changes in extension services introduced under the Phase I projects by providing additional and more specialized staff, additional infrastructural facilities, expanded training programs, and enhanced monitoring and evaluation capabilities. 42. To enable participation in the proposed project, the three project States have made adequate budgetary provisions for first year project costs and have confirmed that the project will be included in the Seventh Five-Year Plan with sufficient funds to cover all project costs. The States have utilized all Phase I Credit proceeds or have made satisfactory arrangements for the disposal of the balance of funds. In addition, they have made arrangements with their State Agricultural Universities regarding their roles in project implementation. Finally, they have made satisfactory progress towards the submission of comple- tion reports covering Phase I investments. The individual elements of the project components are summarized below.  -16- Proiect Description - Madhva Pradesh. Raiasthan. and Orissa 43. Incremental Staff Requirements. Beyond the staffing levels required under the Phase I projects, each State will require additional field staff, supervisory personnel, and subject matter specialists (SMSs) to meet the needs of broader coverage and increased specialization under the proposed project. To provide the broader technical coverage planned under the project, additional SMSs will be required to handle new technologies, such as water and watershed management and development of tribal areas in Madhya Pradesh, and dry-land farming, horticulture and plant protection in Orissa. In addition, lower ratios of farm families to VEWs are justified in certain cases, such as newly irrigated areas requiring more intensive coverage. Incremental staffing requirements vary among the States. In each, incremental staff positions created under the project would be filled in accordance with schedules agreed with IDA (Section 2.09, draft Project Agreement). Furthermore, all extension staff under the project would be used exclusively for agricultural extension activities; the emoluments, benefits and promotional prospects of staff assigned to the exten- sion service would not be adversely affected as a result of such assignment (Section 2.07, draft Project Agreement). Moreover, by September 30, 1986, each project State would review project execution in consultation with IDA, espe- cially the adequacy of field staff arrangements, and increase the staff and facilities deployed to the extent found necessary by the review (Section 2.10, draft Project Agreement). 44. Infrastructure Facilities (a) Buildings. The availability of appropriate housing within the field workers' areas of operation is critical to effective extension. Low-cost housing will be provided to meet these needs. The project will also provide for adequate additional office buildings and training facilities in each State. (b) Transport. Effective field extension is based on a system of regular and frequent farm visits by field staff. Adequate transport is essen- tial in order to maintain fixed visit schedules, and to enable supervisory staff to reach the field easily and frequest1y. While transport has been provided under the Phase I projects, additional vehicles, mainly motorcycles, mopeds and bicycles, will be provided on a loan-purchase basis under satisfactory terms to meet project needs and to ens_.re their use by field staff. Accordingly, the project States would provide staff with credit for the purchase of vehicles and financial incentives, including appropriate allowances, to encourage their optimum use (Section 2.08, draft Project Agreement). (c) Equipment. To meet the needs of expanded extension activities and increased training, the project will provide funds for the incremental costs of office equipment and furniture, and fcr audio-visual aids to support exten- sion operations. 45. Training. Given the increased sophistication and specialization of extension services, the training of extension staff at all levels will continue to be important. In addition to further development of existing training activities, new courses would be developed to cover new areas of specialization, e.g. watershed management and soil conservation. Training in monitoring and evaluation and extension management will be added which should improve extension implementation and supervision. Programs currently being followed in the  -17- project States would be continued under the project and would be extended to new districts in Rajasthan. 46. Monitoring and Evaluation (M&E). In Madhya Pradesh and Rajasthan, M&E units established in State DOAs under the Phase I projects will be strengthened under the proposed project. In Madhya Pradesh, training of M&E staff will be undertaken, while in Rajasthan, the M&E unit established under the first project, will be strengthened by the recruitment of a Joint Director of Agriculture and supporting staff. In Orissa, under this project, an M&E unit will be established in the DOA under a Joint Director of Agriculture. 47. Operating Costs. The project will provide funds for incremental operating expenses to cover the costs of publicity, training and demonstration materials, housing and travel allowances and vehicle operation. Strengthening of the Extension Division and DOE 48. In order to augment GOI's ability to assist the States in their agricultural extension activities, and to improve the operations of the DOE, the project would strengthen both the Extension Division of the MOA and the Directorate of Extension (a subordinate office of MDA, responsible to the Extension Division). The Extension Division of the MDA is the organization administratively responsible for dealing with State DOAs while its DOE provides both technical guidance to administrators and to State DOAs. 49. Extension Division of MOA. Under the proposed project, the core administrative staff of the Extension Division would be responsible for the administrative, organizational, planning and logistical aspects of extension activities, as well as for relationships with State Governments. A multi- disciplinary team would be organized for each State under the T&V system of extension with representatives from the Extension Division, the Directorate, and up to two outside experts drawn from either the GOI or State agriculture departments, extension services, or SAUs. These teams will visit each State at least twice annually to undertake field investigations, attend workshops and training sessions, and meet with university experts and State Government officials. Their reports will be used by the Extension Division's core staff, and by DOE for monitoring and evaluation and other activities. 50. Directorate of Extension. The DOE is presently comprised of four units-Administration, Farm Information, Extension Training and Field Extension. Under the proposed project, these four units of DOE would be further strengthened. The bulk of the training responsibility for agricultural exten- sion falls on the State Governments, with GOI's responsibility being limited to helping to organize the training needs that normally cannot be met by State institutes and SAUs. This training is normally at institutes that are the direct responsibility of GOI, and for these DOE has an important role in directly organizing the training; in others, such as ICAR institutes and SAUs, its role is largely confined to providing liaison and coordination between the institutes and the States. 51. DOE's Extension Training Unit would continue to assist States to plan, conduct and evaluate training programs for extension staff and it would be strengthened to enable it to execute this role satisfactorily. The Field Extension Unit would also be strengthened to enable it to assist the States in the identification and preparation of Phase II extension projects, monitoring  -18- and evaluation of existing projects and in processing requests for special sub-projects. The Farm Information Unit, which provides guidance to State extension services in the production of audio-visual communication and teaching aids, will also be suitably strengthened under the project. 52. Phvsical Consolidation. At present, DOE offices are situated in four different locations. The proposed project would provide for a new building to house the entire DOE staff, together with necessary support facilities, to be built on the campus of the Indian Agricultural Research Institute. 53. Special Sub-proiects Components. A US$5 million fund would be estab- lished under the project to finance a portion of the costs of special short-term sub-projects prepared by States receiving IDA support for agricultural extension for activities specifically required to strengthen certain aspects of agricuil- tural extension. Special sub-projects will generally be (i) those which seek to strengthen or augment a particular aspect of the extension system across States or at the national level; and (ii) those which are State-specific and intended to strengthen selective aspects of that extension system. Among the former, DOE has already identified a specialized training project for SES at selected SAUs (estimated cost Rs 50 million), an extension managers training project (estimated cost Rs 5 million) and an agricultural communications improvement project (estimated first phase cost Rs 10 million). Under the second category, the States are preparing projects in specialized areas where support is needed for extension activities. While most of these will be fully prepared by December 1984, two sub-projects for financing from the fund will be ready for appraisal within two months. Three other projects (estimated to cost US$3-$3.5 million equivalent) to assist M&E and to improve agricultural statistics are being prepared with IDA assistance and could be ready for financing soon. 54. Special sub-projects would be short-term in duration and generally small in size. Appraisal of special sub-projects would be carried out by DOE to determine technical feasibility and submitted to a Departmental Sanctioning Committee in the Central MOA or to the Expenditure Finance Committee (depending on size - see para 58 below) for final approval. Given that DOE has no previous experience in carrying out such appraisals, for the first four applications received, appraisal would be by a joint IDA/DOE team. Thereafter, respon- sibility for appraisal of sub-projects would be with DOE, subject to final review and approval by IDA. 55. Fund for Special Studies. The project would provide for a discretion- ary fund of US$1 million for financing of consultants or other forms of assis- tance to the Extension Division and DOE and the States for the preparation of future State sub-projects, project completion reports, sector studies or related activities which would assist project implementation. Proiect Organization and Implementation 56. The MOA in the Central Government will have overall responsibility for implementation of the proposed project. The respective State Governments in the case of extension programs, or implementing agencies in the case of special sub-projects, will have primary responsibility for implementation, while the DOE will have primary responsibility for supervision of all sub-projects under arrangements acceptable to IDA.  -19- 57. At the Central level, an Extension Technical Advisory Committee (ETAC) would be established as an inter-disciplinary committee generally responsible for overseeing project implementation, for technical and policy guidance of extension strategy on a nationwide baei.s, and for coordination with related GOI departments and other institutions. ETAC would have 12 to 15 members, with the Joint Secretary, Agriculture (Extension Commissioner) as Chairman, and comprised of representatives from the MOA, the Ministry of Finance, the Planning Commission, the Indian Council for Agricultural Research, State Agricultural Departments and Universities. In view of its size, appropriate sub-committees would be organized to deal with particular subjects. ETAC would be established by December 31, 1984 (Section 3.02, draft Credit Agreement). 58. Confirmation of the eligibility of the implementing agency and of the approval of appraised special sub-projects for financing under the proposed project would be granted by one of two existing GOI committees as follows: (i) a Departmental Sanctioning Committee consisting of the Secretary, MOA (as Chairman), Financial Advisor, MOA and representatives of the Department of Expenditure (Ministry of Finance) and of the Planning Commission, would approve sub-projects estimated to cost up to Rs 20 million; and (ii) an Expenditure Finance Committee consisting of the Secretary, Expenditure in the Ministry of Finance (as Chairman), the Secretary, MOA and a representative of the Planning Commission, would approve sub-projects estimated to cost over Rs 20 million. 59. In the three Phase II States, under the overall guidance of the Director of Agriculture, an Additional Director of Agriculture (Extension) would be responsible for the day-to-day administration and control of the extension program, supported by the administrative machinery of the Department. Coordination among extension, research and allied agencies (input supply, finance, credit, irrigation and the SAU, etc.) will be maintained through a series of inter-disciplinary committees at State, zonal and district levels, as well as through informal contacts, exchange of staff, workshops, training cour- ses and collaboration in field testing programs. Programs of research and extension cooperation will be reviewed, priorities determined and recommenda- tions formulated for adoption in the next season. 60. DOE would undertake comprehensive semi-annual field reviews of each State and special sub-project, and, together with the States, be responsible for the preparation of semi-annual progress reports, in a format approved by IDA at negotiations. DOE would submit to IDA these semi-annual progress reports each June and December, giving for each sub-project a summary of activities under- taken during the prior six-month period, in accordance with the agreed format (Section 3.06, draft Credit Agreement). DOE would also be responsible for preparation of an annual work plan. The States and DOE would also prepare completion reports for their respective sub-projects (Section 2.05(d), draft Project Agreement and Section 3.05(d), draft Credit Agreement). Monitorina and Evaluation 61. While continuous monitoring and evaluation (M&E) is an integral part of all ongoing IDA-assisted extension projects in India, participating States have been slow in establishing M&E units and in collecting and analyzing appropriate data. Recognizing this shortcoming, IDA developed, in 1981/82, an operational manual designed specifically to strengthen M&E of T&V extension projects. Nevertheless, the quality and relevance of much of the M&E work being  -20- done has remained sub-standard as many State M&E units continue to suffer from constraints in staffing and other resources. 62. Under the proposed project, monitoring, reporting and analysis of physical and financial inputs would be the responsibility of each State Department of Agriculture. States would undertake monitoring and evaluation of the project in accordance with procedures satisfactory to IDA and the summaries of results would be forwarded to IDA (through DOE) at least annually (Section 2.06, draft Project Agreement). 63. The DOE component and special sub-projects would be monitored by DOE or by a unit within the implementing agency specified during sub-project appraisal. In addition, the DOEBs Field Extension Unit will provide technical guidance to State M&E cells, and will collect, coordinate and analyze the M&E reports from all IDA-assisted States and forward them to IDA at the prescribed intervals. Proiect Costs and Financing 64. The total project cost is estimated at US$65.6 million, of which US$3.3 million represents estimated foreign exchange costs. Physical contingen- cies of 10 have been applied to civil works, equipment, training and office and vehicle operating costs. Price contingencies have been applied based on estimated inflation rates in India during the project period (local prices at 8% for 1984/85, 7% for 1985/86 - 1987/88, and 6% thereafter; foreign prices at 3.3% for 1984/85, 8% for 1985/86 and 9Z for 1986/87 onwards). 65. The proposed IDA credit of US$39.1 million equivalent would finance about 60% of total project costs, net of taxes and duties, and would cover all foreign exchange costs. The balance of funds for the project would come from the participating State Governments and GOI. For Central Government components, credit proceeds would be made available to the Ministry of Agriculture; for the State sub-projects, GOI would channel channel credit funds to the Governments of Madhya Pradesh, Rajasthan and Orissa, in accordance with standard terms and conditions for Central Government development assistance to the States. Procurement and Disbursement 66. Civil works contracts (US$28.8 million) .J would be small and widely dispersed, both geographically and over time, and therefore would not be suitable for international competitive bidding. Contracts would be awarded on the basis of local competitive bidding in accordance with existing State Government procedures, which are satisfactory to IDA. Where contractors are not forthcoming to execute the works, small civil works estimated to cost $20,000 equivalent or less may be carried out through force account. Vehicles of various types (US$3.4 million) and equipment items (US$1.0 million) would be required under the project. These would be purchased in small quantities over several years and would be widely dispersed in rural areas. To ensure adequate maintenance and the availability of spare parts, they would be procured by local competitive bidding under the State Governments' normal procurement 1/ All figures in this paragraph are inclusive of contingencies which amount to US$11.8 million.  -21- procedures, which are satisfactory to IDA. All contracts for civil works, vehicles and equipment estimated to cost US$100,000 or more would be subject to IDA review. Orders for the purchase of minor equipment, furniture and supplies would be bulked wherever possible and purchased according to established local bidding procedures, except where valued at less than US$50,000, when they would be purchased by prudent shopping through normal commercial channels. The balance of project costs (US$23.1 million) for the three States and the NOA/DOE sub-projects would consist of training (US$6.5 million), incremental salaries and allowances (US$11.5 million), incremental operating expenditures for offices and vehicles (US$5.1 million), all of which would not involve procurement. 67. The proceeds of the credit would be disbursed jj against the cost of civil works (60X of expenditures in Rajasthan, 50% in Madhya Pradesh and Orissa, and 40% in DOE); vehicles, equipment, furniture and materials (100X of foreign expenditures, 80% of local expenditures by States and 50% of local expenditures by DOE); training and research (foreign and local State expenditures 100%; 100Z foreign and 70X of local expenditures by DOE); incremental salaries and allowances */ States 70%, DOE 60%; special sub-projects (60Z); and expenditures against the fund for speciai studies (100%). Disbursements against staff costs, vehicle loans, training, payments less than Rs 300,000 under civil works contracts, payments under Rs 150,000 for locally-procured vehicles and equipment, and expenditures under the fund for special studies would be made against certified statements of expenditure. These statements of expenditure would be audited at least annually and the audit report submitted to IDA not later than nine months after the end of such year (Section 4.01, draft Credit Agreement). Additional supporting application for these expenditures would be retained by State Governments and the DOE for inspection in the course of project review missions. Disbursements against expenditures for all other items would be fully documented. Copies of all State disbursement applications will be provided to DOE prior to submission to IDA. Benefits and Risks 68. The principal benefits of the proposed project would be to (i) increase crop production and thus farm incomes in the three project States by providing improved extension services to farmers; and (ii) increase the MOA Extension Division and the Directorate of Extension's ability to provide con- tinuing technical and administrative assistance to these and other States seek- ing to reform and strengthen their agricultural extension services. 69. Attributing a precise level cf economic benefits to this type of project is difficult since it is impossible to determine what proportion of the benefits expected from improved agricultural practices is due to extension alone 1/ For the States of Orissa, Madhya Pradesh and Rajasthan, disbursements under all categories, except training and research, would be confined to incremental expenditures above the SAR targets established under the Phase I projects. 2/ Actual disbursements against this category in the States would be made against a portion of total eligible staff costs (3.7% for Madhya Pradesh, 4.4% for Orissa and 18.3% for Rajasthan) as a basis for estimating 70Z of incremental salaries and allowances.  -22- and what is due to such other factors as past research efforts, *'dditional purchased inputs or more work by the farmer. In practice, it is generally the combination of all theme, with extension acting as the ^atalyst that brings the desired benefits. Since the incremental cost of the project _s very low per hectare and per farm family, even small production ircreases would generate high rates of return. In areas vhere the reformed extension system has been in operation for some time, including the three States under tb2 proposed project, yield increases are indicated which would give a rate of return well in excess of the opportunity cost of capital (12Z). 70. In late 1981, a study undertaken by the Bank Group in collaboratiou with Haryana Agricultural University concluded that the T&V extension system is more successful in delivering information to farmers than the traditional exten- sion system, achieving significantly higher direct contact with farmers and that rates of knowledge diffusion for all farming practices were faster than com- parable rates under the former systen. Moreover, there is cleAr eridence from areas where the T&V system is well established that it is exerting considerable pressure on other support services, particularly research and input services, to improve performance in parallel with extension, which underscores the important lead effect of a strong extension service. 71. As mentioned above, however, maintenance of a reformed agricultural extension system is not achieved without difficulty. Direct IDA involvement in the project would decrease the risk that a single-line, single-purpose extension service will be used for non-extension functions, and that staff would be trans- ferred to other activities. Although extension will always be vulnerable to outside pressures, there is increasing recognition that its primary function must be technical and that it cannot substitute for weaknesses in other support services. Nevertheless, the pressure for non-technical involvement of extension staff is likely to continue. IDA participation has been and is expected to continue to be especially useful in resisting these pressures. 72. To develop professional cadres and give technical staff opportunities for promotion within their field of expertise is difficult, although needed to develop higher professional standards and to encourage staff to remain within their specialities. The training which would be involved, with increased specialization and improvement of extension services, would be an enormous task. Appropriate selection for training and cadre development would continue to be sought through the proposed project, as well as through supervision of on-going projects. 73. A number of general administrative constraints and policy problems frequently encountered in current extension projects are also likely to impede development of extension and will require continuing attention of GOI and IDA. Among these problems are promotion by seniority, frequent transfers, changes of discipline and failure to implement objective selection criteria for training. 74. Perhaps the most critical risk in the proposed project is whether the central entity being developed in MOA to support extension can supplement and eventually take over much of the responsibility now resting with IDA to advise and assist States with extension reform and development. While the proposed project will improve the center-s ability to assume its role, IDA will have to work directly with the States during the transition.  -23- PART V - LEGAL INSTRUMENS AND AUTHORITY 75. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the States of Madhya Pradesh, Rajasthan, and Orissa and the Recommendation of the Committee provided for in Article V, Section l(d), of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 76. Special conditions of the project are listed in Section II of Annex III. 77. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMEDATION 78. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President September 6, 1984  AMEX I Page 1 of 5 T AB LE 3L In=A - SOCXAL INDIcAmTRs. D SnUe INDIA R GfE3 U GS (UEIGHZED AERAGES) Q#JST 3E'o I? ESETIAE) lb UJOfb M'MW lOW IDDLE DIC