India - Second Gujarat Medium Irrigation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3823-I] REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOEMENT ASSOCIATION TO THE EX ECUTIVE D IREC TORS ON A PROPOSED IDA CREDIT IN AN AMOUNT OF SDR 164.3 MILLION TO INDIA FOR THE GUJARAT MEDIUM IRRIGATION II PROJECT May 21, 1984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of May 1.6, 1984) US$1.00 = Rs 10.995702 Rs 1.00 = US$0.0909446 Rs 1 million = US$90,945 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 10.8. FISCAL YEAR April 1 - March 31 ABBREVIATIONS AC - Appraisal Committee AE - Assistant Engineer CAD - Command Area Development CADA - Command Area Development Authority CWC - Central Water Commission EE - Executive Enginieer ERR - Economic Rate of Return GAU - Gujarat Agricultural University GOG - Government of Gujarat GOI - Government of I:ndia ICB - International Competitive Bidding ID - Irrigation Department LCB - Local Competitive Bidding MIP - Medium Irrigation Project O&M - Operation and Maintenance QCU - Quality Control Unit RWS - Rotational Water Supply SE - Superintending Engineer WALMI - Water and Land Management Institute wMC - Water Management Committee f  FOR OFFICIAL USE ONLY -iii- INDIA GUJARAT MEDIUM IRRIGATION II PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President (GOI). Beneficiary: Government of Gujarat (GOG). Amount: SDR 164.3 million (US$172.0 million equivalent) Terms: Standard On-lending Terms: From the Government of India to the Government of Gujarat as part of Central assistance to States for development projects on terms and conditions applicable at the time. GOI would bear the foreign exchange risk. Project Description: The proposed project is a follow-on to the Gujarat Irrigation Project (Credit No. 808-IN of July 17, 1978), which assisted the Government of Gujarat to start 23 new medium irrigation projects (HIPs) and to modernize six others. It would: (i) complete con- struction of the 29 sub-projects begun under the first time slice, including a lined canal system to the 8 ha subchak level and field channels leading to individual fields; (ii) introduce efficient, reliable, and equitable water management systems in each HIP; (iii) establish an appropriate institu- tional framework for extending improved water manage- ment activities in the State; (iv) strengthen the project organization for quality control and the design of minor networks; (v) provide mechanical skill training; (vi) provide training for farmers; and (vii) provide vehicles, plant, and communications equipment for the construction, maintenance and operation of the MIPs. The project would create about 241,000 ha of additional irrigated area and provide a more reliable water supply for 133,000 ha of existing irrigation. Possible risks to the project include a possibility of GOG prematurely diverting financial and manpower resources to the Narmada project, 1/ resulting in implementation delays. However, given the substantial sunk costs, GOG's commitment to the project and farmers' 1/ A large irrigation project expected to cost more than US$6,000 million over 20 years. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -iv- pressures, GOG is highly unlikely to follow such a course. Another risk is that Rotational Water Supply (RWS) may not be effectively adopted thus reducing irrigation benefits. However, given GOG's conviction of the merits of RWS and the assurances IDA intends to seek from GOG, it is expected that GOG would adhere to the project design. Estimated Cost 2/: (US$ millions) Local Foreign Total Construction of MIPs (23) 167.8 24.7 192.5 Modernization of Projects (6) 62.2 10.0 72.2 Training 1.2 0.3 1.5 Monitoring and Studies 6.4 0.3 6.7 Total base cost 237.6 35.3 272.9 Physical Contingencies 20.6 3.6 24.2 Price Contingencies 40.9 6.1 47.0 Total Project Cost 299.1 45.0 344.1 Financing Plan: (US$ millions) Local Foreign Total GOI/GOG 172.1 - 172.1 IDA 127.0 45.0 172.0 Total :299.1 45.0 344.1 Estimated Disbursements (U'S$ millions) FY85 FY86 FY87 FY88 FY89 FY90 Annual 35.4 40.9 35.0 30.4 23.1 7.2 Cumulative 35.4 76.3 111.3 141.7 164.8 172.0 Rate of Return: About 30%. Appraisal Report: No. 5028-IN, dated May 18, 1984. Z/ Includes taxes and duties which are insignificant.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE GUJARAT MEDIUM IRRIGATION II PROJECT 1. I submit the following report and recommendation on a proposed IDA Credit to India for SDR 164.3 million (US$172 million equivalent) on standard IDA terms, to finance an irrigation project in order to increase crop produc- tion and farmers' incomes through implementing the State Government's invest- r ment program for medium scale irrigation projects throughout Gujarat and better water utilization. The proceeds of the Credit would be channeled to the Government of Gujarat in accordance with the Government of India's standard terms and arrangements for financing State development projects. The 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 24, 1984. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 750 mil- lion (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 with little or no land. Growth of value-added in agriculture -- 2.2% since 1950/51 -- has been slower than growth of industrial value-added (5.0% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 60% to just under 40%, while the share of industry rose from 15% to around 25%. 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 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Upper Ganga Irrigation Modernization Project (No. P-3804-IN), dated May 3, 1984.  -2- eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased markedly since 1950/51: gross national savings more than doubled from 10.8% of GDP (at factor cost) to 22.8% in 1982/83, while gross domestic investment rose from 12.5% of GDP to 24.9% in 1982/83. Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20% was reached during the early 1960s. Surpluses arose for a few years in the late 1970s, and at the present time, foreign savings are about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3% of GDP and averaging below 1% for the past five years. Net foreign savings have never risen above 3% of GDP, and presently stands at 2.1%. 5. Before the 1970s, 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 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-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 7.3% 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, con- tributed to this growth, liberalized access to imported inputs and more effec- tive 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 4.9%, 3.9% and 5.6%, respectively. In 1979/80, 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 large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks in 1979/80 coincided with the prepara- tion 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 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substantially recovered with real GDP growing by 7.9% and 5.2%, 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 15% and 5.5%, respectively. The availability of power, coal, and rail transport, already improved in 1980/81, was even better in 1981/82, recording growth rates of about 10%, 9.6% and 12.9%, respectively. The easing of constraints on the supply of infrastructure and basic commodities was a determining factor in the improved performance of the industrial sector. This overall improvement in the Indian economy, combined with a more restrictive monetary policy contributed to a sharp decline in the rate of inflation. Wholesale prices rose by about 9% on  -3- an average annual basis in 1981/82 and by only 2.5% in 1982/83, reflecting a strong deceleration from a peak increase of 18% in 1980/81. 8. After two years of fairly solid performance, the Indian economy faced a difficult year in 1982/83 due to the drought in mid-1982 which brought down the GDP growth rate to around 2% and put further strains on the already dif- ficult balance of payments and domestic resource situation. Besides a sig- nificant decline in the range of 4.5%-6.5% in agricultural production, GD? growth was also constrained by a slowdown in industrial growth from 8.6% in 1981/82 to about 4% in 1982/83. This resulted from a combination of several factors, notably the decline in agriculture income, persistent (though lessened) power shortages, a textile strike in Bombay, as well as depressed export markets and increased competition from imports. The Government was able, however, to protect the level of savings to a large extent and keep the momentum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in sup- port of this effort. Similarly, the timely implementation of various economic policies mitigated the otherwise very distressing effects of a poor monsoon. Continued improvements of the infrastructure sectors, although at a slower pace than in the previous two years, also reduced the negative effects of the drought. 9. Agricultural production in 1982/83 received a serious setback from the drought. Foodgrain production, which had reached a record 133 million tons in 1981/82. declined to 124-127 million tons. Production of most other major crops also declined in 1982/83. Corrected for weather variations, this still represents a creditable performance. In 1979/80, with a broadly comparable monsoon, foodgrain production reached only 109 million tons. The Government was able to mitigate the effects of the 1982 drought through efficient manage- ment of foodgrain procurement and distribution, careful timing of foodgrain imports, and appropriate allocation of power to irrigation pumps. These policies helped to avoid disruptions in basic food supplies and contributed to price stability during the year. While the management of the foodgrain economy after the drought was a significant achievement, the effect of the drought on production re-emphasized the continued importance of the monsoon in India's agriculture. The performance of the recent past and probable future trends suggest that on average foodgrain supplies will meet demand. The balance remains delicate, and the need for foodgrain imports to maintain con- sumer supplies or adequate buffer stocks could arise from time to time. Thus, programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services performed generally well in 1982/83, although growth of coal, power and rail transport failed to maintain the momen- tum of the marked recovery of 1981/82. Despite lower hydro generation due to the failure of the monsoon, overall power generation recorded an increase of about 7%. This was due largely to an increase in capacity utilization in thermal plants resulting from improved overall management, stabilization of most of the new large units and better availability of coal due to the combina- tion of increased coal production and improved railway performance. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% in 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational eff iciency of the railways but rather to slack demand from core sectors like steel, iron ore, coal washeries and fertilizers. Coal production growth (4% in  -4- 1982/83), after 10% growth in the two preceding years was creditable. There were no major shortages and there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily from better utilization of existing capacity, but in the future most improve- ment must result from added capacity. It is therefore critically important that India maintain the pace of investment in these key sectors and mobilize sufficient resources to do so. 11. The Indian economy has reverted from a situation of resource surplus, which had been a temporary phenomenon of the late 1970s, to one of resource scarcity. Investment has again grown quicker than national savings, and the scope for further increases in the latter appears limited. India's gross national savings rate, which averaged 22.4% of GDP in the last three years, is high by any standard, particularly considering India's low income and the large proportion of its population living below the poverty line. 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. In 1981/82 there was a significant increase in public savings due to improved profitability of various public sector enterprises. This trend which was maintained in 1982/83 needs to be accelerated. The gap between gross investment and national savings which rose from 0.4% of GDP in 1979/80 to 1.8%, 2.3% and 2.1%, respectively in the first three years of the 1980s, has been financed by foreign savings. 12. India's ability to generate resources to meet its development objec- tives has become increasingly linked to the balance of payments. The current account balance which recorded surpluses between 1976/77 and 1978/79, sharply deteriorated to deficits of nearly US$2.9 billion in 1980/81 and US$3.8 billion in 1981/82 (1.8% and 2.3% of GDP, respectively). This was partly due to a sharp rise in the oil import bill as a result of both the disruption of oil production in northeast India in 1980 and significant oil price increases, and to a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. The current account deficit in 1982/83 declined to US$3.3 billion or 2.1% of GDP. The improvement would have been greater had not the drought resulted in the need to rebuild food stocks through imports and at the same time led to a lower level of GDP growth. This improvement in the balance of payments is to a significant degree the result of India's develop- ment and adjustment efforts over the past three years. It also reflects a reduction in the trade deficit as compared to the levels reached in 1980/81 and 1981/82. The trade deficit declined from US$7.6 billion in 1980/81 to US$6.0 billion in 1982/83 due to continued export volume growth (following the sub- stantial resumption in 1981/82) despite poor world market conditions, coupled with the containment in import growth due to import substitution of petroleum products, metals and fertilizers while allowing substantial growth in "other" imports through more liberal import policies. Nevertheless, it is expected that the balance of payments will be under strain for the next several years, for India's adjustment program will continue to require high levels of imports. 13. The high investment rate, about 25% of GDP, envisaged in the Sixth Plan coupled with the limited possibilities of raising domestic savings beyond the present high levels, necessarily implies a need for external resources. Faced with a reduction in the availability of bilateral and multilateral concessional assistance, India has begun to borrow significant amounts on commercial terms from the Euro-dollar market in addition to much greater utilization of  -5- suppliers' and export credits. India's favorable debt service profile has enabled India to tap commercial capital markets at favorable spreads (over relatively high underlying rates). In the period 1980-84 India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,020 million, This borrowing has been used for specific development projects in the public and private sectors (mainly for petroleum exploration and development, steel, aluminum and shipping). India also reached an agree- ment with the International Monetary Fund for the use of the Extended Fund Facility for SDR 5 billion, of which SDR 3.9 billion have already been drawn. The transfer of funds under this arrangement has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. In January 1984, India announced that it would not utilize the remaining SDR 1.1 billion because her external accounts have adjusted more rapidly than was envisaged at the time the arrangement was formulated. Development Prospects 14. 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 manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. 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. 15. The medium-term framework for advancing India's development objectives is the Sixth Five-Year Plan (1980/81-1984/85), which is now in its fifth year. The Plan assigns priority to agriculture, energy development, the growth of exports and domestic import substitutes where appropriate, and the removal of infrastructural bottlenecks. Overall performance has so far been encouraging, although bottlenecks in key sectors such as power and transport are likely to persist. Moreover, fulfillment of the Plan targets will require additional resource mobilization. The efforts of the Central Government to raise resour- ces have so far been impressive and are likely to be broadly sufficient to meet the financing requirements of the Central Government's share in plan investment, even if some increase in inflation is experienced above current low levels. However, a shortfall in public savings is likely to occur in some States unless further measures are introduced. There will be a need also for continuous efforts to maintain the current level of private savings. Recent increases in interest rates and tax concessions on time deposits and the con- tinued dampening of inflationary expectations should stimulate such savings. 16. The higher capital formation rates of the past few years augur well for future income growth. However, 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. These services, such as power, tran- sport and irrigation, have inherently high capital-output ratios. However,  -6- there is scope to improve the sectoral capital-output ratios through greater efficiency and better management. Bottlenecks in basic infrastructural sectors clearly can prejudice growth in other sectors where large investments have been made. As demonstrated in the last three years, performance in the basic serv- ice sectors can be improved through better planning and management, thus lead- ing 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, expansion of planned capacity in accordance with the require- ments of the rest of the economy will. be vital to overall medium- and long-term development prospects. In the short term, however, achieving an adequate balance between supply and demand in these sectors will remain a difficult objective. 17. Under the Sixth Plan, India has an ambitious oil production program backed by substantial financial commitment. While the gap between domestic consumption of petroleum and production remains large, the prospects for progressive substitution of domestic petroleum for imports are quite bright. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. India's dependence on oil imports dropped from 63% in 1979/80 to about 45% now and a scheduled expansion in production is expected to decrease oil imports (in crude equivalent terms) to about 33% of consumption by 1984/85. 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. 18. Despite an expected continued decline in its current account deficits from the current 2.1% to about 1.7% of GDP by the late 1980s, India will require growing access to world financial markets to complement concessional assistance. These commercial sources of funds will be important in the future since India's current account deficits, though not large relative to the size of the economy, will nevertheless be large in absolute terms and will neces- sitate external borrowing beyond levels expected to be available from normal concessional sources. Given the favorable structure of India's external debt, which reflects the past reliance on concessional sources, India should remain creditworthy for a substantial growth in external borrowing. 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 external balance, while at the same time achieving more rapid growtth than in the past. In the longer term, income growth represents the best strategy for achieving these needed adjustments, both by generating higher savings for further * investment, and by fostering the development of export and import-substituting industry to improve the balance of payments. In the short term, a relatively large external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance. 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 Government's effort to maintain an adequate rate of growth while adjusting the structure of the  -7- Indian economy to a more open and efficient environment requires foreign resources in addition to the level of commercial borrowing available to India. inxdia is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. The fact that T.ndia has been able over the past seven years to maintain a rate of growth above the long term trend, despite the poor monsoons of 1979/80 and 1982f83, lends substance to the hope that a more open trade policy and con- certed efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of savings both foreign and domestic, can sustain a rate of growth closer to 5.0% per annum than the long-run trend of 3.6% per annum. Combined with a reduction in the rate of population increase 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 less than 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 2$J. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census placed India's popula- tion at 685.2 million, or about 14 million higher than official projections. The fact that there was no decline in inter-census rates of population growth, equivalent to about 2.2% per annum, is a cause for concern. The expectation of a measurable decline in the population growth rate has not materialized. The results re-emphasize the need for continuing efforts to strengthen the health and family planning program 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 1979/80 level of about 23% to over 35% by 1984/85. 21. Reduction of poverty remains the central goal of Indian economic growth. More than one-third of the world's poor live in India, and more than 60% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40% of the urban popula- tion subsist below the poverty line. Improvements in the living standards of the poor will depend to a large extent on the overall growth of the economy, particularly on increases in agricultural production and employment, and in non-farm rural employment. These developments will have to stem in large part from market forces which can be encouraged and reinforced by appropriate Government policies and the strengthening of basic services and infrastructure. The declining trend in real foodgrain prices between 1970 and 1981, resulting from India's sustained effort to raise agricultural production, reflects such developments. There is also a role for direct Government action in faster implementation of land reform (though the scope for significant reduction in poverty through land redistribution is quite limited in India), in increasing the supply of credit available to small farmers and rural artisans, and finally in broadening the provision of those services which enhance the human capital of tLhe poor and improve living standards. Many of the latter are elements of the 'Minimum Needs Program, which has been an integral part of Indian planning for the past decade. Progress has been slow but steady in the expansion of primary education, the extension of rural health facilities and the provision of secure village water supplies. Operations such as the community health volunteer program and the national adult literacy campaign provide encouraging ev,,idence that well-targetted, relatively low-cost programs can lead to enhanced prcspec-s for India's poor.  -8- PART 11 - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 76 loans and 160 development credits to India totalling US$5,183 million and US$11,851 million (both net of cancellation), respectively. Of these amounts, US$1,387 million has been repaid, and US$6,224 million was still undisbursed as of September 30, 1983. Bank Group disbursements to India in the current fiscal year through September 30, 1983 totalled US$286 million, representing a decrease of about 2 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1983. 23. Since 1959, IFC has made 29 commitments in India totalling US$224 million, of which US$30 million has been repaid, US$56 million sold and US$18 million cancelled. Of the balance of US$120 million, US$113 million represents loans and US$8 million equity. A summary statement of IFC disbursements as of September 30, 1983, 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 development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth 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 develop- ment 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 family 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 coutinued active involvement of the Bank Group in agriculture, energy and infrastructure development will appropriately contribute to India's adjustment and growth prospects. Irrigation will need continuing support, with emphasis on improved efficiency in water conveyance 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 energy 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 resources is a central element of this program, which should be supple- mented by investments in hydro and thermal power generation, and in the expan- sion of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have been in short  -9- supply and which India has a comparative advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transpor- tation infrastructure would mitigate a key constraint to achieving higher levels of economic growth so that further support of the railways and for ports development will be particularly 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 within 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 to India, 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 competi- tiveness 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. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support. This requirement for additional assistance can be met, in part, through Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A con- tinuation of efforts already underway 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 12.9% in 1983/84. Over the next several years this ratio is projected to rise to about 20% and remain around that level through 1995/96. As of September 30, 1983, outstanding loans to India held by the Bank totalled US$3,932 million, of which US$2,100 million remain to be disbursed, leaving a net amount outstanding of US$1,832 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 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with 50%, 43% and 53%, respectively, in 1981/82. On March 31, 1982, India's outstanding and disbursed external public debt was about US$17.9 billion, of which the Bank Group's share was US$7.1 billion or 38% (IDA's US$5.9 billion and IBRD's US$1.2 billion). In 1981/82, about 16.0% of India's total debt service payments were to the Bank Group.  -10- PART III - AGRICULTURE AND IRRIGATION IN GUJARAT Background 29. The State of Gujarat which covers an area of 18.8 million ha, has a population of 36 million (1983) growing at the rate of 2.5% per annum. Between 1960 and 1982, the State's GDP grew at an annual rate of 3.7%, and in 1983 per capita income reached a level of US$320 compared with the all-India level of US$250. The State has a large and fast growing manufacturing sector. Agriculture, however, accounts for more than 30% of the State's income, and more than 60% of the working population. Furthermore, agriculture-based industries account for more than 50% of all factory employment. Since much of Gujarat is characterized by low and highly vari- able rainfall, agricultural production largely depends on weather conditions. Unreliable rainfall coupled with limited irrigation facilities have made the State susceptible to drought and famine. Consequently, the Government of Gujarat (GOG) has given high priority to irrigation development. Irrigation 30. Only about 54% of the ultimate irrigation potential of the State has been developed, and about 75% of the undeveloped potential is located in the Narmada Basin, which will be the focus of irrigation development in the second half of the 1980s and in the 1990s. Presently, however, GOG gives priority to completion of on-going major and medium irrigation projects. Utilization of the capacity created in major and medium schemes is unsatis- factory and was estimated at about 56% in 1983. A special working group established by GOG to investigate the situation, recommended that: (i) planning of new projects be improved and more realistic assessments be made of the net irrigable areas to be served under each project; (ii) conveyance efficiency of canal systems in completed schemes be improved; (iii) field channels be constructed at Government cost; and (iv) operation of existing schemes should be improved. The Project Area 31. Background. The project area is about 375,000 ha, of which about 135,000 ha (36%) are commanded by modernization schemes. Water is the major constraint to increasing agricultural production in the project area which experiences recurrent water shortages, due to low and highly variable rainfall. Access to most of the project area is good because of a well- developed road system of national highways, and district and village roads.  Climate. Topography and Soils. 32. The State has a tropical monsoon climate with temperatures suitable for year-round cropping. Mean monthly temperatures range between 18 and 23 degrees centigrade in January, and 32 to 34 degrees centigrade in May. Annual rainfall ranges from less than 300mm in the northwest to over 2,000mm in a small area in the southeast. Most parts of the State receive between 4 500mm and 800mm. About 95% of the rainfall occurs during the June-September monsoon. Because of the wide variations in amount and timeliness of the rainfall, supplementary irrigation during the kharif season is necessary for stable and high crop yields. Intensive cropping in the rabi and hot seasons is feasible only with irrigation. 33. The area is flat and forms a gently inclined plain from west to south with a land slope range of between 0%-3%. The soils vary from clay loam to clay in texture. Most of the area is provided with a network of natural drains and the soils are thus well drained. The soils are free of salinity and alkali problems, and are suitable for food and non-food crops under irrigation. Population, Land Tenure and Land Use 34. The population of the project area is estimated at about 866,000 (1981), comprising about 112:000 households with an average family size of about 7.7 persons. The mean farm size is 3.4 ha. The farmers in the low rainfall areas possess more land than in high rainfall areas. Of the 18.8 mil- lion ha of total geographical area in the State, about 9.6 million ha (51%) is under cultivation. Forests occupy about 2 million ha (11%), barren or uncultivable land accounts for about 3.5 million ha (18Z), cultivable waste- land accounts for 2 million ha (11%) and the remaining 1.7 million ha (9%) are either fallow or used as permanent pastures and grazing land. There is little scope for increasing the net cultivable area. Cropping intensities between 1970 and 1980 were low, averaging about 109%. The most widely grown cereals are pearl millet and sorghum. Under rainfed conditions, yields average about 0.6 tons per ha, and about 1.8 tons per ha under irrigated conditions. Yields of sorghum under rainfed and irrigated conditions are about 0.5 and 0.9 tons per ha respectively. About 8% of the total cropped area is in paddy, and about 50% of the cropped area in Shaurastra carries kharif groundnuts, grown mostly under rainfed conditions. Maize is an impor- tant crop of the tribal areas and is grown under rainfed conditions. Wheat, mustard and a variety of vegetables are grown under irrigation and pigeon and chick peas are grown under rainfed conditions. About 18% of total cropped area is planted with cash crops including cotton, tobacco and castor, of which cotton accounts for about 90%. Supporting Services 35. Agricultural Extension. The Agriculture Department is responsible for extension work in the project area. The IDA-assisted Training and Visit system of agricultural extension was introduced in Gujarat in 1979 under the Composite Agricultural Extension Project (Cr.No. 862-IN). Regular demonstra- tions and up-to-date advice on farming practices are provided to farmers through regular visits from trained village extension workers (VEWs). The system calls for increased staff to provide adequate coverage. However, a  -12- number of subject matter specialists and village extension worker posts remain vacant. These posts would be filled by December 31, 1984 (draft Project Agreement, Section 2.05(d)). 36. Agricultural Research. The Gujarat Agricultural University (GAU) is responsible for agricultural research through its four campuses at Anand, Dantivada, Junagadh, and Navsari, each campus representing four broad agroclimatic zones of the State. GAU maintains 13 main research stations specializing in different crops. Their main work involves selection and testing of superior varieties, improved cultural practices and plant protection. Each campus conducts locality-specific research to meet the needs of the farmers in the area and coordinates the research activities of these stations. Research findings of the main stations are tested through a network of 38 substations located throughout the State before dissemination to the farmers. The technical breakthrough achieved by GAU in pearl millet, cotton, and castor in particular, has helped to improve the productivity of these crops in the State and other parts of the country. GAU, since its inception in 1972, has released 77 improved varieties of different crops having better yield and quality characteristics. Research on irrigated agriculture is carried out in 16 trial-cum-demonstration farms. The main focus of this research has been to determine water requirements in relation to soil types, climate and critical stages of crop growth. 37. Agricultural Credit. Cooperative banks provide short- and medium- term credit to farmers, and are organized on a three-tier basis with the Gujarat State Cooperative Bank at the State level, 18 central cooperative banks at the district level, and 6,800 primary cooperative credit societies at the village level. The Banks collect interest at the rate of 12% a year. The State Land Development Bank with its 182 branches provides long-term loans at an interest rate of about 11%. The Statewide recovery performance of the primary cooperative credit societies was 52% in 1981. The commercial banks also provide all three types of credit. They now account for about 40% of institutional credit. 38. Agricultural Inputs. Gujarat has -a well-developed system for dis- tribution and sale of seeds, fertilizers, and plant protection chemicals throughout the State. The Gujarat State Seeds Corporation and the Gujarat State Cooperative Marketing Federation are two agencies engaged in the production and distribution of improved seesds. There are four fertilizer companies in Gujarat. They produced about 400,000 tons of nitrogen and 250,000 tons of phosphate in 1980/81. This level of production is about 18% and 30% of nitrogen and phosphate produced in all India. The distribution of fertilizers in the State is largely through the cooperative network. Out of about 6,000 distributors, over 80% are cooperative units. There are about 9,600 agrochemical sale centers in the State, mostly in the rural areas. About one-third of these centers are operated through cooperative units. About 7,000 tons of chemicals are being sold to the farmers annually. In general, agricultural inputs are available within easy reach of the farmers. 39. Marketing, Processing and Storage. Some 422 agricultural markets operate in Gujarat, of which 141 are regulated. As Gujarat has about half of its cultivated area under cash crops like oilseeds, cotton, tobacco, and sugarcane, most of the trade in these crops is through regulated markets that serve a specified area, usually within a 10 km radius. Gujarat has a large number of processing facilities mainly for commercial crops. There are over  -13- 800 private oil extraction units with monthly crushing capacity of nearly 0.8 M ton of groundnuts. In addition, there are 17 oil mills owned by cooperatives. All 15 sugar mills are in the cooperative sector with daily crushing capacity of about 2,000 tons. There Xre 970 ginneries, 200 cotton presses and over 1,300 textile units in the State that process lint into yarn. There are nearly 6,100 godowns operated by primary cooperatives that provide a storage capacity of about 850,000 tons and the Gujarat State Warehousing Corporation maintains 74 storage centers in the State having a storage capacity of about 220,000 tons. The present system for marketing, processing and storage is highly competitive and has responded quickly to increased output of both foodgrains and cash crops. Bank Group Lending for Irrigation in Gujarat 40. The Bank Group has assisted Gujarat to finance a number of projects for irrigation development. The first Credit (Cr. 13-IN, 1961, US$4.5 million) financed construction of Shetrunji's canal system. The project failed to achieve its agricultural objectives because of inadequate agricultural supporting services and lagging construction of field channels and drains. The lessons learned were taken into account in preparation of the Kadana Irrigation Project (Cr. 176-IN, 1970, US$35 million), which emphasized on-farm development and the agricultural support program. Due to extreme floods and other construction problems, the project was completed two years behind schedule. However, the project area now is one of the most prosperous and productive areas in Gujarat. 41. Two IDA assisted projects presently are under implementation in the State: the Gujarat Irrigation Project (Cr. 808-IN, 1978, US$85 million) and Gujarat Irrigation II Project (Cr. 1011-IN, 1980, US$175 million). The two credits financed about 80% of Gujarat's annual irrigation investments. The projects include operational improvements and modernization of existing irrigation systems, construction of new schemes, small scale watershed development, reclamation of saline coastal lands and establishment of a water management training institute. New planning procedures and improved stand- ards for design and construction of irrigation projects have been introduced. Initial project implementation suffered from weak management and lower than expected quality of design and construction, partly due to the complex and innovative nature of many components. However, implementation performance is gradually improving and the two credits are expected to strengthen the capacity of the Irrigation Department in Gujarat to design, construct and operate projects which can deliver timely and reliable water supply. 42. Credit No. 808-IN was a first time-slice operation to support medium irrigation projects (MIPs) which individually are too small to justify Bank participation. The time-slice was to finance: (i) construction of new MIPs; (ii) modernization of existing schemes; (iii) a network of automatic dis- charge measuring stations; and (iv) establishment of a Water and Land Management Institute (WALMI). The distribution system was to be designed for rotational water supply (RWS) and to be lined to the 8 ha outlet. Individual  -14- MIPs were to be appraised by an Appraisal Committee (AC) especially estab- lished for this purpose in the Central Water Commission. The AC was authorized to approve MIPs meeting the technical criteria, costing less than Rs 70 million and having a benefit/cost ratio higher than 1.O. All others were to be approved by IDA. 43. In 1978 the US Government approved US$30 million of USAID funds for the project. Accordingly, the project scope was extended to cover an accelerated MIP program. The actual cost of most MIPs have proved to be higher than estimates due to: (i) a revision of hydrology and dam design; (ii) an increase in the cost of cement; and (iii) a higher than estimated cost of lining. By mid-March 1984, IDA disbursements amounted to US$79 million (about 93% of the credit) and GOG expected to complete by the end of March 1984 works to fully utilize both IDA and USAID funds. 44. Twenty-nine MIPs have been cleared by the AC. In most of the MIPs work concentrated on headworks. Consequently, secondary canals in some of the MIPs, and works on the minor distribution system in most of them are lagging behind schedule. Construction of the dams in some MIPs was delayed because the flood hydrology had to be revised following an unprecedented cyclonic storm in 1979 in the Sahrashtra region. This has delayed completion of many of the dams by about a year. During the first two to three years of project implementation, the most serious constraint was shortage of staff, which was substantially resolved at the beginning of 1982 through recruitment of new staff. Technical standards which were initially inadequate have also improved considerably following Bank intervention and training courses at WALMI. Quality control and construction standards were also improved after the issuance of new standards by GOG. The project has suffered from poor management. A study aimed at improving planning through the use of small computers has been undertaken by the Operations Research Group (a consultancy group). The network of automatic discharge measuring stations has been completed. 45. Overall, the project achieved most of its objectives. The Bank assisted with the design of the minor system through establishment of pilot water management areas and training courses for design engineers were conducted. In addition, GOG has initiated pilot RWS activities with assis- tance from the Water Management Team at the Bank's New Delhi Office. A WALMI has been established in temporary buildings and a permanent campus is being constructed near the Agricultural University at Anand. Sub-projects were appraised in accordance with Bank guidelines. The MIPs started under the project cover a total area of 213,300 ha of cultivable command area, and in 72,800 ha, over 50% of the distribution system was completed, which compares favorably with the appraisal target of 63,000 ha. Modernization works have been completed over about 22,000 ha, and similar works at various stages of completion are underway in another area of about 140,000 ha, which also compares favorably with the appraisal estimate of 55,000 ha. Finally, the water management studies conducted under the project resulted in development of detailed design and operation criteria which have been incorporated in Phase II.  -15- PART IV - THE PROJECT Background 46. The project was appraised in January/February 1984. Negotiations were held in Washington, D.C. in May 1984, with an Indian delegation coor- dinated by Mr. S.P. Bajpai, of the Government of India's Department of Economic Affairs, Ministry of Finance. The Staff Appraisal Report, No 5028-IN dated May 18, 1984 is bping circulated to the Executive Directors separately. A supplementary Data Sheet is a.tached as Annex III. 47. The focus of the project is on the introduction of an RWS system which would constitute the first serious attempt to test RWS on a large scale beyond northern India and to demonstrate its advantages. The project would provide the basis for expansion of RWS within Gujarat and throughout India. Introduction of RWS and the need to adhere to strict water scheduling would be innovative. Bank involvement in the initial stages would be essential to: (i) introduce the RWS system which is the most suitable under conditions in most of the sub-projects; (ii) ensure adoption of proper operational prac- tices for RWS from the outset; (iii) establish an appropriate institutional framework for efficient implementation of RWS; and (iv) extend the experience to be gained with this project regarding improved design and improved system operations and water management to the upcoming Narmada project. Project Objectives 48. The main objectives of the project are to: (i) complete the construc- tion to adequate standards of the sub-projects started under the first time slice; and (ii) adopt in the sub-projects a rotational water supply system based on predetermined scheduling and equitable water allocation. The main criterion for determining the success of each sub-project would be implemen- tation of system management satisfying the water management objective. The main criteria for assessing the success of the construction activities would be: (i) design to standards which would facilitate system management and minimize operational costs; and (ii) high quality of works to ensure durability and minimize maintenance costs. Project Description Construction Activities 49. Medium Irrigation Sub-Proiects. Funds would be provided for comple- tion of 22 on-going MIPs and to start implementation of one additional sub- project, the Zankhari MIP. Works on each of the 23 MIPs include: (i) construction of a storage dam, usually earthfill with a gated reinforced concrete spillway and canal headworks; (ii) full lining of the canal network which delivers water through outlets serving 8 ha subchaks; and  -16- (iii) construction of a drainage network. These works are at various stages of construction. Of the 23 dams, 16 have been substantially completed and work on 6 is underway. All except the Zankhari and Sipu dams are expected to be completed under the project. The Zankhari main works are expected to start in 1986 and to be completed in 1992. 50. Modernization. Funds would be provided to complete modernization works now underway on six sub-projects. The works include the lining of existing main and branch canals, and the unlined distribution system originally designed to serve 40 ha chaks. The systems are being extended with fully lined minors to supply regulated outlets serving 8 ha subchaks. Provision would be made for improved control structures and also for modification of storage facilities involving the construction of an auxil- liary spillway. 51G Field Channels. Under the project, unlined field channels would be constructed to link the 8 ha outlet with each individual holding or where the holding is smaller than one ha, to groups of holdings averaging about one ha. 52. Drainage. The project would finance drainage works in 6 of the 23 sub-projects which have heavier soils and are located in the higher rainfall area to the south. Provision has been made for drainage improvements over 30,000 ha. 53. Roads. All weather access roads will be provided along all main and secondary canals down to the 40 ha chak outlet, and motorcycle access to the 8 ha subchak outlet. GOG plans to construct 2,100 km of rural roads in the 7th Plan period giving priority to roads serving the project area. GOG would: (i) by March 31, 1985 furnish to IDA for review and comment a plan including an implementation schedulea for development of project rural roads during the project implementation ptsriod (draft Project Agreement, Section 2.07). Provision would be made for constructing roads, water supply, communication centers and other infrastructural needs in areas where group resettlement is undertaken. 54. Communications and Equipment. The project would include provision for a radio telephone network for each sub-project. Communication within each sub-project would be possible from the dam or diversion down to the 2,000 ha level. Funds would also be provided for equipment including heavy construction plant, small scale compaction machines, operation and main- tenance (O&M) equipment for spillway standby diesel generators, general maintenance equipment, communications equipment and equipment for training. Training and Studies 55. Training. The project would provide funds for training activities. Practical shop floor courses would be conducted for about 26 mechanical technicians in the maintenance of construction plant. The training would provide key maintenance personnel with direct contact with manufacturers approved maintenance, overhaul and repair methods. Short training courses would also be conducted for those concerned with irrigated agriculture in the sub-projects. About 200 professional level, 400 field level and 8,800 progres- sive farmers would be trained. The facilities of the demonstration farm at Thasta would be improved to make it suitable for training farmers in RWS.  -17- Vocational training will be given to displaced persons who wish to acquire skills outside the agricultural sector. 56. Studies. Under the project, studies would be carried out concerning the Zankhari sub-project and would cover alternative concepts such as linking the reservoir with the Doswada reservoir; preparing detailed soil surveys; and examining the feasibility of fishery and high value crops like sugarcane and irrigated eucalyptus. O&M costs for all projects and monitoring and evaluation activities would also be reviewed. 57. Technical Services. The project would provide funds to finance the services of universities and other specialized institutions and groups for introduction of computerized systems, data analysis and other specialised tasks. Specialist technical services of individual short-term consultants are also expected to be provided. Organization and Project Implementation. 58. The primary responsibility for implementation of the project would rest with the Irrigation Department (ID), which would plan, design and con- struct the sub-projects and would have responsibility for their operation and maintenance after completion. The ID has an adequate cadre of well-trained engineers already in post to carry the project work load. The head of the department is the Secretary of Irrigation who administers the department through two special secretaries and six chief engineers. The ID has been recently divided into three wings: (a) Irrigation Projects - responsible for all design and construction to the 8 ha outlet (under the direction of a secretary), (b) Command Area Development (CAD) - responsible for Command Area Development Authorities (CADAs) and all CAD works as well as for O&M of all irrigation projects (under the direction of a secretary); and (c) Narmada Development - under the direct control of the Secretary of Irrigation. The most important feature of the new organization is the separation between O&M and construction functions. 59. Under the project, the ID would be strengthened, especially the sections dealing with design of the minor distribution system, quality con- trol and operation. A new Minor System Design Cell would be created in the Central Design Organization to: establish uniform design standards for minor systems; monitor regularly the designs produced by the field design offices; and conduct training workshops on the layout design of the minor systems. Where necessary, consultants would assist. Quality control over the entire State is undertaken by the central Quality Control Unit (QCU) at Gandhinagar. Under the project the QCU will develop a methodology for random checks of the quality of minor system works and conduct such checks through regular biweekly visits of each sub-project. The QCU will be provided with ten additional Executive Engineers (EEs) and support staff and vehicles (draft Project Agreement, Section 2.06). 60. GOG would establish a Water Management Unit (WMU) under the Chief Engineer (CADA) consisting of one SE and five EEs assisted by support staff. The unit would oversee the introduction of the Rotational Water Supply procedures. The rotational schedule among the farmers would be fixed for each season and every farmer would know in advance the hour and the day of each week he would receive water. GOG would: (i) begin irrigation deliveries  -18- to Village Service Areas (VSAs) and chaks, only if appropriate rotational water allocation procedures agreed with IDA are in place, and establish such procedures as soon as construction of field channels has been completed in chaks where water deliveries have already begun; and (ii) in modernization sub-projects establish appropriate rotational water deliveries agreed with IDA in VSA and chaks promptly after completion of modernization works (draft Project Agreement, Sections 2.09 and 2.1C). 61. Sub-projects would be managed by an Assistant Engineer (AE) and support staff. The AE and his staff would be assisted by a Water Management Committee (WMC) consisting of: (i) farmer representatives; (ii) relevant GOG officers; and (iii) the Chairman of the Planchayat Samiti (local elected body). The project AE would be the Chairman of WMC. A Service Area Committee comprising representatives of each chak would also be established in each VSA. The committee would resolve disputes between farmers and VSA, oversee water scheduling and allocation principles, supervise RWS discipline and organize maintenance of filed channels. GOG would: (i) maintain a suitably qualified assistant engineer at each sub-project; (ii) establish and maintain a WMC not later than 12 months before the beginning of irrigation, and if irrigation has already begun, by I)ecember 31, 1984; and (iii) estab- lish and maintain a Service Area Committee in each VSA not later than 12 months before the beginning of irrigat:ion or by December 31, 1984 if irrigation has already begun (draft: Project Agreement, Section 2.08). 62. The Central Water Commission (CWC) is the highest technical authority for water resources development in India. Its responsibilities include review of all major and medium irrigationi projects before they are submitted for approval to the Planning Commission of GOI. Under the project, the CWC will increase the intensity of its supervisions and extend the duration of supervision visits to individual sub-projects to enable greater coverage of minor system design and construction, system operation and introduction of RWS. GOI and GOG would ensure thal: the progress of each sub-project would be monitored by CWC using procedures and staffing agreed with IDA (draft Credit Agreement, Section 3.02). Operation and Maintenance 63. For new irrigated areas in which RWS is being introduced the current total budgetary allocation by GOG for O&M is over Rs 200/ha which is adequate for the next two to three years. For thes long; term, GOG is conducting a detailed study to determine the appropriate composition and level of O&M expenditures in the project's MIPs. GOG will: (i) submit its findings to IDA for comments by June 30, 1985; and (ii) starting April 1, 1986, base O&M budget provisions for MIPs on the recommendations of the study (draft Project Agreement, Section 3.03). Cost Recovery 64. Gujarat is one of the most progressive States in India with regard to the collection of water charges, and has ariong the highest rates in the country. The charges are uniform throughout the State, varying by crop and season and currently range from Rs 120/ha of paddy in kharif season to Rs 1,250/ha of sugarcane. The level of water charges takes into account  -19- capital and operational costs as well as farmers' capacity to pay. GOG aims at collecting 5% and 12% of the value of food and cash crops respectively. An inter-departmental water review board reviews the structure of charges every two years. In addition to water charges, farmers pay land tax and cesses of between Rs 10-22/ha of dry land and about double that amount for irrigated land. Sales tax is levied at 4.4% for cash crops, and a purchase tax of 6% is levied on sugarcane. 65. GOG plans to establish, wherever possible, water-users' associations which would purchase irrigation water from ID on a volumetric basis and sell it to the farmers, thus undertaking the main water charge collection function. Initially, management capability is likely to be the major con- straint to large scale establishment of effective associations. Consequently, the development of the water users' associations would be closely monitored in order to accelerate the establishment of these associations. GOG would: (i) review the level of water charges annually; (ii) maintain water charges at levels sufficient to cover O&M expenditures and to the extent possible, capital costs; and (iii) by September 30, 1984 select three sub-projects in which water users' associations are to be established as soon as possible (draft Project Agreement, Sections 2.14 and 3.04). Rehabilitation 66. Under Phase I of the project about 8,500 displaced families (as of November 1983) were rehabilitated. The number of displaced families still requiring compensation is estimated at 10,600. Negotiations with many of these are at an advanced stage. GOG aims at ensuring that the displaced persons regain at least their previous standard of living. However, because of shortage of land, many of the oustees will be paid cash compensation which will enable them to purchase land at their own preferred locations. Under the project, arrangements for compensation would include full utilization for rehabilitation purposes, the fisheries potential in the reservoirs, the cultivation potential in the peripheral areas of the reservoirs and employ- ment opportunities in project construction work. The project would finance vocational training for oustees who would like to be rehabilitated in non- agricultural sectors. The scope of compensation would be expanded to include full compensation to all landless oustees. IDA approval of comprehensive resettlement plans in respect of the nine most affected MIPs, where there are more than 300 families per MIP requiring to be resettled, and Zankhari MIP, in which works have not yet started, would be a condition of disbursement for these HIPs (Paragraph 4(c) of Schedule 1 of the draft Credit Agreement). GOG would maintain a Rehabilitation Committee in each CADA (Section 2.12(a) of the draft Project Agreement). Monitoring of rehabilitation would be under- taken by the Project Planning and Monitoring Cell which would be strengthened by an economist and a sociologist. In addition, evaluation studies of the rehabilitation process in five Project Planning sub-projects would be under- taken by a qualified institution.  -20- Monitoring and Evaluation 67. The ID, through its Project Planning and Monitoring Cell, would coordinate monitoring and evaluation activities. The monitoring and evaluat- ing activities would focus on: (i) assessment of progress and constraints in the sub-projects; (ii) carrying out and/or supervising studies; (iii) rehabilitation of displaced persons; (iv) preparation of annual work plans; and (v) preparation of progress reports. The performance of the water users association would be closely monitored, a special irrigation interim survey would be conducted and special studies aimed at evaluating the effec- tiveness of the RWS would be carried out in at Least three sub-projects. An interim evaluation survey would be conducted in each sub-project two years after the beginning of irrigation focussing on: reliability and equity of water supply; utilization of the irrigation potential; and irrigation benefits. Evaluation of the rehabilitation process would include analysis of the standard of living of the resettled persons after rehabilitation. GOG would submit semi-annual and annual progress reports (draft Project Agreement, Section 2.16(b)(iii)) and would submit to IDA a project completion report within six months after the closing; date (draft Project Agreement, Section 2.16(d)). Project Cost and Financing 68. Total project costs are estimated at US$344.1 million equivalent including taxes and duties which are insignificant. Foreign exchange costs are estimated at US$45 million (about 13% of total costs). Physical contin- gencies amount to about US$24.2 million while price contingencies of about US$47 million are based on expected annual price increases for local expenditures, of 8%, 7%, 7%, 7%, 6% in the years from 1984-88 respectively, and 3.5%, 8%, 9%, 9%, 9% for foreign expenditures for the same years. 69. The proposed IDA credit of US$172 million equivalent would finance about 50% of total cost including 100% of foreign expenditure and about 42% of local costs. The balance would be borne by GOI and GOG. In order to avoid interruption in works between Phase I and II, retroactive financing not exceeding US$15 million would be provided for eligible expenditures incurred after February 1, 1984. Procurement and Disbursement 70. Annex IV, attached, details the manner in which items would be procured under the project. Civil works (US$269.4 million) would be packaged wherever possible. However, none of the construction activities could be grouped in packages of a size that would interest foreign bidders and hence, these works would be procured under local competitive bidding (LCB) proce- dures satisfactory to IDA. Some works would be done departmentally up to an aggregate of 20% of the disbursement for civil works. Equipment and vehicles (US$11.1 million) would be procured under ICB in accordance with IDA guidelines (domestic manufacturers would receive a domestic preference of 15%). Light equipment and vehicles (US$5.3 million) are readily available domestically. Because of the existing servicing and spare parts facilities considerable advantage would be derived from procuring locally manufactured light equipment and vehicles. These goods would be procured locally under LCB procedures satisfactory to IDA. All bidding packages for works estimated to cost US$0.5 million or more and all ICB packages would be subject to IDA's  -21- prior review of procurement procedures. The balance of contracts would be subject to IDA post-action review. 71. Disbursements would be made for (i) 50% of expenditure for civil works; (ii) 100% of expenditure for field channels and drains by completed blocks; (iii) 100% for rehabilitation infrastructure up to a limit of US$5 million; (iv) 100% of imported equipment and ex-factory costs of local equipment, 70% for other locally procured equipment; (v) 100% of additional costs for introducing rotational water supply; (vi) 100% of the costs of training, pilot operations, monitoring and studies. Benefits. Justification and Risks 72. Quantifiable benefits from the project would derive from an increase in irrigated area by 336,000 ha. The annual incremental agricultural produc- tion at full project development would be for foodgrain about 573,000 tons, cotton 37,200 tons and oilseed 101,300 tons. The total value of production would increase by about US$146.1 million per year. About 94,200 farm families would benefit directly from the project. The project would generate an additional 18.6 million mandays of farm labor employment and project construction activities would generate about 3.7 million mandays of construc- tion employment. About 54,300 farm families in the project area would move out of the poverty classification (about US$114 per capita in 1979/80 prices). 73. The economic rate of return (ERR) for MIPs is about 13% and over 50% for modernization schemes. The overall ERR is about 30%. The results of the sensitivity analysis to determine how deviations from the main assumptions, including incremental benefits and construction costs, would affect the ERR, indicate that only very large deviations would make the project economically unviable. 74. Project benefits, however, could be significantly affected if GOG prematurely diverts financial and manpower resources to the Narmada projects, resulting in implementation delays. However, given the magnitude of the sunk costs, pressures from the project farmers and GOG's commitment to the project, such a premature diversion of resources is unlikely. A second risk would be GOG not effectively launching RWS, resulting in unequitable and unreliable water supply and reductions in the level of irrigation benefits. However, GOG has agreed to execute the project as designed (Section 2.21 of the draft Project Agreement). Environmental Impact . 75. Construction of drainage facilities and lining of canals in the new schemes would reduce areas of stagnant water which are breeding grounds for mosquitoes. Moreover, GOG would take all measures to minimize the risk of malaria and other water related diseases within the project area (draft Project Agreement, Section 2.21). Therefore, the project would have no adverse environmental effect.  -22- PART V - LEGAL INSTRUMENTS AgD AUTHORITY 76. The draft IDA Credit Agreement beitween India and the Association, the draft Project Agreement between the Associatioia and the State of Gujarat, and the Recommendation of the Comittee provi.ded for in Article V, Section l(d), of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 77. Special conditions of the project are Listed in Section III of Annex III. 78. I am satisfied that the proposed credit: would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 79. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachment May 21, 1984  ANNEX I Page 1 of 5 INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVERACES) / 6 MOST (MOST RECENT ESTIMA';''' b "'O/b RECENT LOW INCOME MIDDLE INCOME I960-b 197 STMAl ASIA & PACIFIC ASIA & PACIFIC AREA (THOUSAND SQ. KM) 'OTAL 3287.6 3287.6 3287.6 4GRICULTURAL 1760.7 1780.5 1811.3 GNP PER CAPITA (0S$) 70.0 100.0 260.0 276.7 102.1.6 ENERGY CONSUNPrION PER CAPTTA (KILOGRAMS OF COAL EQUIVALENO) 114.0 165.0 210.0 398.4 792.r POPULATION AUD VITAL STATISTICS POPULATION,MID-YEAR (THOUSANDS) 434850.0 547569.0 690183.0 URBAN POPULATION (% OF TOTAL) 18.0 19.8 23.7 21.5 32.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILL) 1001.3 STATIONARY POPULATION (MILT.) 1838.3 YEAR STATIONARY POP. REACHED 2140 POPULATION DENSITY PER SQ. KMO. 132.3 166.6 205.3 161.7 260.7 PER SQ. KM. AGRI. LAND 247.0 307.5 372.7 363.1 1696.5 POPULATION AGE STRUCTURE (%) 0-14 YRS 40.9 42.7 39.7 36.6 39.4 15-64 YRS 54.5 54.2 57.2 59.2 57.2 65 AND ABOVE 4.6 3.1 3.0 4.2 3.3 POPULATION GROWTH RATE (%) TOTAL 1.8 2.3 2.1 1.9 2.3 URBAN 2.5 3.3 3.7 4.0 3.9 CRUDE BIRTH RATE (PER THOUS) 43.7 40.0 35.4 29.3 31.3 CRUDE DEATH RATE (PER THO'S) 21.8 16.7 13.3 10.9 9.6 GROSS REPRODUCTION RATE 2.9 2.7 2.4 2.0 2.0 FAMTLY PLANNING ACCEPTORS, ANNUAL (THOUS) 64.0 3782.0 6826.0 USERS (% OF MARRIED WOMEN) .. 12.0 23.0 48.1 46.6 FOOD AND NUTRITION INDEX OF FOOD PROD. PER CAPITA (196q-71=100) 98.0 102.0 107.0 111.4 125.2 PER CAPITA SUPPLY OF CALORIES (% OF REQUIREMENTS) 96.0 90.0 87.0 98.1 14.2 PROTEINS (GRAMS PER DAY) 54.0 50.0 47.0 56.7 57.9 OF WHICH ANLMAL AND PULSE 17.0 15.0 13.0/c 13.9 14.1 CHILD (AGES 1-4) DEATH RATE 26.2 20.7 17.0 12.2 7.6 HEALTH LIFE EXPECT. AT BIRTH (YEARS) 43.2 48.1 52.2 59.6 60.2 INFANT MORT. RATE (PER THOUS) 165.0 139.0 121.2 96.6 68.1 ACCESS TO SAFE WATER (%PoP) TOTAL .. 17.0 33.0/d 32.9 37.1 URBAN ,, 60.0 83.07W 70.8 54.8 RURAL , 6.0 20.07W 22.2 26.4 ACCESS TO EXCRETA DISPOSAL (% OF POPULATION) TOTAL , 18.0 20.0/e 18.1 41.4 URBAN .. 85.0 87.0/e 72.7 47.5 RURAL . . 1.0 2.07; 4.7 33.4 * POPDLATION PER PHYSICIAN 4850.0 4890.0 3640.0/f 3506.0 7771.9 POP. PER NURSING PERSON 10980.0/g 8300.0 5380.0/f 4797.9 2462.6 POP. PER HOSPITAL BED TOTAL 2180.0 1650.0 1310.0/d 1100.6 1047.2 URBAN .. .. 370.07W 298.4 651.1 RURAL .. .. 10410.07W 5941.6 2591.9 ADMISSIONS PER HOSPITAL BED .. .. .. .. 27.0 HOUSN EG AVERAGE SIZE OF HOUSEHOLD TOTAL 5.2 5.6 5.2/e URBAN 5.2 5.6 4.87T' RURAL 5.2 5.6 5.37; AVERAGE NO. OF PERSONS/ROOM TOTAL 2.6 2.8 URBAN 2.6 2.8 RURAL 2.6 2.8 ACCESS TO ELECT. (% OF DWELLINGS) TOTAL .. URBAN .. .. RURAL ..  ANNEX I Page 2 of 5 INDIA SOCIAL [NDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) /b /b lb RECEST LOW INCOME MIDDLE INCCME 1960- _ 1970/b ESTlATSLJ ASIA & PACIFIC ASIA 6 PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 61.0 73.0 76.0/f 96.1 101.2 MALE 80.0 90.0 0.07'f 107.8 106.0 FEMALE 40.0 56,0 51.07T 82.9 97.5 SECONDARY: TOTAL 20.0 26,0 218.0/f 30.2 44.9 MALE 30.0 36,0 37.0d7 37.3 50.0 FEMALE 10.0 15,0 .8.077 22.2 44.6 VOCATIONAL (% OF SECONDARY) 2.8 1.,O 0.7/e 2.3 18.5 PUPlL-TEACHER RATIO PRIMARY 46.0 41,0 43.0/f 34.4 32.7 SECONDARY 16.0 21.0 , 18.4 23.4 ADULT LITERACY RATE (9) 27.8 33.4 '16.0 53.5 72.9 CONSUMPTION PASSENGER CARS/THOUSAND POP 0.6 1.1 1.3/f 1.6 9.7 RADIO RECEIVERS/THOUSAND POP 4.9 21.5 44.4 96.8 113.7 TV RECEIVERS/THOUSAND POP 0.0 0.0 1.7 9.9 50.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 10.6 16.2 19.7 16.4 54.0 CINEMA ANNUAL ATTENDANCE/CAPITA 3.2 4.1 3.7/e 3.6 3.4 LABOR FORCE TOTAL LABOR FORCE (THOUS) 195951.0 219194.0 271179.0 FEMALE (PERCENT) 30.7 32.5 31.8 33.3 33.6 AGRICULTLURE (PERCENT) 74.0 74.0 69.3 69.0 50.9 INDUSTRY (PERCENT) 11.0 11.0 13.2 15.8 19.2 PARTICIPATION RATE (PERCENT) TOTAL 42.8 40.0 39.3 42.5 18.6 MALE 57.0 52.4 51.9 54.4 50.7 FEMALE 27.3 26.9 25.9 29.8 26.6 ECONOMIC DEPENDENCY RATIO 1.1 1.1 1.1 1.0 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 51 OF HOUSEHOLDS 26.7 26.3/h 22.2/e 16.5 22.2 HIGHEST 20% OF HOUSEHOLDS 51.7 48.97h 43.47ie 43.5 48.0 LOWEST 20% OF HOUSEHOLDS 4.1 6.777 7.o7e 6.9 6.4 LOWEST 40Y OF HOUSEHOLDS 13.6 17.27h 15.27i 17.5 15.5 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 13'2.0 133.9 194.5 RURAL . . . 114.0 111.6 155.0 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. .. .. 178.0 RURAL .. .. .. .. 164.8 ESTIMATED POP. BELOW ABSOLUTE POVERTY INCOME LEVEL (1) URBAN , , . 40.3 43.8 24.4 RURAL . . . 50.7 51.7 41.1 NOT AVAILABLE NOT APPLICABLE N O T E S / /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, "Data for 1960" refer to any year betw.een 1959 and 1961; "Data for 1970" between 1969 and 1971; and data for "Most Recent Estimate" between 1S79 and 1981. /c 1977; /d 1976; /e 1975; /f 1978; /g 1962; /h 1964-65. May 1983  ANNE I Page 3 of 5 ihyiIfilT~S 0t SOCIAL IN'DICATORS totes i ottgh th dateera deat fn sorces- Areo ipjdgat the eatat -tatcadtllai,fshod lo he totedthat they say not be t-teoatoni. ly sof tttoot eeaep It Hgh I, --n" ol aore'gtpaetItdl Int-e North Adtic. and Mtddl. F `L 1- fle'bstoe aeosa. of srne o ttl a Ito-pnan afa on tat adiat . h tata .a...ag ot tott a_ togt ltd tcte dped ot the taabtait otHt and I o onfos toto bosh --nit.lteti-oLI enagsoot dtar foteae. Thaeae-ag-eaa- otlyta-efoLIl-plnuaoitoth.tenaIufonetditat....at.lt -eaastgtetospst MAtt ~lt....andan.-n. Poplolt oaI,rlote-Po ,a o dlolded hy tast P f pe-cot atto Tota -oTtl. suface area cnsoil . ad area and inlatI -atet 1960, pytaaqoife Cntasdoaetoltofosty ee. .910)1 etc i98 dat. dood po ee itn Person- at aodinitded hy naher of pesoslitog ~rlc.ltiri-taiastoCug,uolur -asne Asdte-p--aiinreroenl slattsate... oa. enoI_e, _ai-tentI...e A,patiinrasd it,- orns , petaeet . akaf and k-ncten no-ie- o, to liU flla 19b, n-rtiN ato ll lane * 10111~~~~~q; set IffS aa8o1lto atdsls ta -toal orhan. en- otl...I ltonitai -rtn,andtoaldio led b hr iseteptto noIe o htp l beds GNP pt orr 191- f ran napat et ,Is,ee unt-ent nlethe picet., oalable In potnad pninate ganers n seiler opia t IdO 11. n f1 dens. by et1 .e.. nor physIcIa., tttbllshn...ts p-oading atinolpally c-stdia1 tare are an ittided. toeI hospitlsl, heset.e tolada hasta . td ENlaIdY I1.ttdntii PIt, CoPil - otAI parn nntaoo ofoeselta-I ted me1 center netpeesenntl tafed Hy a phytitian fbat bK' a sed t. into, 1970 and 1980 date,b-h . than 1not -it nlda Idle prnoai e- elhsptl,A sad rural OPUPihT K Mtt IiTli iTATISTICS tyaialitad hap -o r inInlded nItly ondet toa. Tota roa i-to, Mid-teat (thoi oAd-h fJI 1 b.11,adIt doistiontoa toapte ed - Totl oaeeo Idistototlshe data, testaltala dialled by ent et-te oftds rotonp-ojenn~i- - osll otALa_ fagruof Lodniot Z.ft shareItotn _ _rt total Poplaln nsoy tOta nd hemI .o.. iy t feetf: itt h huend o tal c . Ib. po--t.. teplta icc..a -enl, and fettle life esace a-atLielod en d7.h d_tlng,repcini.Oahtgs ati.dann-I__ annttttnorsad yer.M eproeradrerli'rtalntrtreiel c-ecultdaft aln he ~beth coc i snol an, nt deont rae,an olsn thEg dUnloIii ratI_ osan.Ti nit aci,end ol te fertilt ee doidnninioto den ice no tn en- etn lanai nd oin t - eep ito- oe,din ae ...... - n.... ailt end ftesale-en tone -slo ond resale Zooa .o t oa et ooed..ttta.hntat noicic..r.te pa ..Pnlnlon- -oaIld ,,Innoe chailde agdhI 1~inatnef nt npino inth dar00 I ad ennofdcleofoainALlte fr dulfeetI eghs fp dsn adotaLo; fo ttoiny tntnpaeetlanai. --oant-a-hInnn_ora-daannnne..annen-dilieret toalacd lot,1 lOl, ! ndlyf d ataAcriOacualy -f I i f nearsondary)o.epntna oea r pcPuIan, io; 19t0, 1970, ann f191 dot. nuo-oc n a o ncea. tnd- ae- To-Ial tdant ea LtdIn y02latocnotn_toE.phsttlcotI-tn-aldo-tnOrtteoftotoftd- li-eary -inonodany anela dlildedhby no-heraofleaoh-teet h porlatnt on 9-ti- if ,O-I,an 970fl erop ndot te-al .. lritInth Rtan I rano-t --bron- Aulfontfsof 1rantu-.lnetyranh -cet Untate adolis let I to tea- ad o-itlas n I.,tcs o 195D-60, lf6i-71, and19-f.opreng on -ctal aduLt lno attn 15 pears sod ocer Iouano; 1962, 1970, end f aa oasaiolt httgtptOt o ne ISolauet - eare a tee n-roa nepr~.I...ic perIo I at oneeltce pc_eta _- ifucndnfoaor nnmuo coduaLeni -ll tnpa of -eaelrafor radio ttat I_olytcara -neat -nd'ig an 1h, f9Oi, snd --anataaeae poolic per ...tadIo ouain;tnu n of~ ~ ~~~~~Ie tln-cnrldnio cdratpfito r1 at on L tool - plnnn -ccnele,...ihe I mi,tIn.Hei aoornofhlid-hsnlntoe 'It-..tan. Nhooti.inn oltl'ii" 'L-cnl nI .rtte