India - Fourth Railway Project

RESTRICTED FIE ~Report N o.P20 F IL E C0uPY ., . This' report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ONA PROPOSED LOAN TO INDIA FOR THE INDIAN RAILWAYS July 6, 1959 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $ 50 million to help finance the foreign exchange cost of the Railways' program in Indiats Second Five-Year Plan. PART I - HISTORICAL 2. The Bank's first railway loan to India was made in August 1949 for the reconstruction and improvement of the Indian Railways. Since the beginning of Indiars Second Five-Year Plan (1956-61), the Bank has made five loans totalling ' 175 million to help finance the Railways' part of the Plan. Four loans amounting to 5 90 million were made in July 1957 and another loan of $ 85 -,illion was made in September 1958. These loans were fully disbursed by the end of the last fiscal year (March 31, 1959). The bulc of the proceeds of the proposed new loan of 8 50 million would be used to finance payments falling due during the current fiscal year 1959/60. 3. In April 1959, the Bank made a ` 25 million loan for the Koyna hydroelectric project. Disbursements from that Iran and the proposed new railway loan, expected to be about $ 65 million in total, would constitute the Bank's contribution to Indiats foreign exchange requirements during the fourth year (1959/60) of the Second Plan, as discussed last March with representatives of Canada, Germany, Japan, the United Kingdom and the United States. I circulated a note on these discussions to the Executive Directors on March 23, 1959 (See M-9-57). 4. Negotiations on the proposed loan were opened on June 22 in Washington with two members of the Indian Railway Board, Mr. J. Dayal, Financial Commissioner, and Mr. K. B. Mathur, Member for Transport, and with Mr. M. V. Rao, Joint Director of Finance. 5. Assuming that the second ICICI loan is approved (see my Report and Recommendations, 957 of even date) the proposed loan would be the Bank's twenty-third loan to India and would bring the total amount of Bank loans to India to $ 592 millions net of cancellations. The status of the previous loans is as follows : As of May 31, 1959 ($ million) Totall/ (net of cancellations) 32.1 Less amount sold 49.5 Amount repaid 32.0 Less repayments to third parties 18.6 13.4 Net amount held by the Bank 469.2 The proposed loan would increase the net amount held by the Bank to $ 529.2 million (including the second ICICI loan). 1/ Including 7 25 million not yet effective and $ 83.7 million not yet disbursed. - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The proposed loan would be used to help finance the foreign exchange cost of the Railways program of modernization and expansion which is an important part of India's Second Five-Year Plan. Other particulars of the proposed loan are as follows : Borrower: India Amount: $ 50 million equivalent in various currencies. Interest: 6% per annum, including the 1% commission. Term: 20 years, including a grace period of 31 years. Amortization: 34 semi-annual payments, beginning January 15, 1963 and ending July 15, 1979. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 7. A draft Loan Agreement between India and the Bank is attached (No. 1). Its provisions are substantially the same as those applicable to each of the last five loans for the Indian Railways in the Loan Agree- ments of July 12, 1957 and September 16, 1958. 8. The Report of the Committee provided for in Article III, Sec- tion h(iii) of the Articles of Agreement of the Bank is also attached (No. 2). PART IV - APPRAISAL OF THE PROPOSED LOAN Description of the Project 9. A report, "Third Appraisal of the Indian Railways' Program in the Second Five-Year Plan' is attached (No. 3). 10. The Indian Railway system comprising about 35,000 miles is the fourth largest in the world. It is owned by the Government and managed and operated by the Railway Board, a part of the Ministry of Railways. 11. During India's First Five-Year Plan (1951-56), originating freight carried by the Railways rose by.one-fifth to 114 million tons in the final year. The Railways' program under the Second Five-Year Plan, 1956-61, will increase originating freight capacity by S4 million tons to 16L million tons and passenger capacity by 15%. 12. The approved expenditures on the Railvays' program under the Second Plan are Es. 11,215 million ( 3 2,355 million equivalent), of which Rs. 7,365 million would be required in local currency and Rs. 3,850 million ($ 809 million equivalent) in foreign exchange. Actual and estimated expenditures for the first three years of the program amounted to Rs. 4,222 million in local currency and Rs. 2,536 million in foreign exchange. This leaves Rs. 3,1I3 million in local currency and Rs. l,31 million (equivalent to $ 276 million) in foreign exchange to be financed for the last two years (beginning April 1, 1959) of the Railways' program in the Second Plan. The local currency cost is being and will be financed by Government appropria- tions and the Railways' own resources. Of the foreign exchange requirements of $ 276 million, 3 46 million will be financed from U.S. sources and the Colombo Plan, leaving a gap of $ 230 million to be met by the Government or new foreign assistance. Justification of the Project 13. The railways are the most important form of transport in India and carry large volumes of long haul traffic that roads, river and coastal shipping cannot handle. The Railways' program of modernization and expan- sion is Vit2l to the success of India's Second Five-Year Plan. 1h. The Railways continue to be well managed and maintain a high level of efficiency. The planned increase in freight capacity by 5h million tons to 168 million to,.s during the Second Plan is reasonable; it is based on estimated productio,: by 1961. The Railways' program is being carried out approximately on schedule, while the progress of other sectors has lagged behind. This factor and the falling off in economic activity in 1958 owing to the poor harvest and import restrictions have caused an excess of freight car capacity. This excess capacity is considered to be only temporary and should be absorbed by the end of the Second Plan in March 1961 or shortly thereafter. Method of Procurement 15. The Indian Railways will continue to place orders for imported equipment on the basis of international competition. Economic Situation 16. The last economic report on India was circulated to the Executive Directors on February 20, 1959 (Sec.i59-4o). A note on the Central Govern- ment's budget for 1959/60, which was presented to Parliament at the end of February, was included in my Report and Recommendations on the proposed loan for the Koyna hydroelectric project (R 99 - 26), dated March 31, 1959. 17. The main development since then is the excellent results of the 1958/59 agricultural year which is now coming to an end. Final figures for the rice harvest of last autumn confirm that this was a record at almost 30 million tons, over 19 per cent higher than the previous year. The results of the winter crops, mainly wheat and pulses were also good. The provisional figure of total foodgrain production is 73 million tons, which compares with 62 million tons in 1957/58 and 68 million tons in 1956/57, the highest total of any earlier.year. These good harvests, and continued deliveries of foodgrains under U.S. PL 480, should provide more adequate food stocks. 18. Industrial production in 19)8 increased by only 1.5 per cent, compared with 3.5 per cent in 1957 and about 8 per cent in each of the two preceding yearso This poor showing is mainly attributable to the cotton textile industry which suffered a recession in both the internal and external markets for much of the year. Apart from cotton textiles, industrial production increased during 1956 by more than 4.5 per cent; paper and paper board, tires, pig iron and ferro-alloys, and soap all did particularly well, production increasing by 10-20 per cent. Cement production increased by over 8 per cent and electricity generation by 13 per cent. More moderate increases were scored by the cigarette, coal, jute textile and tea industries. By contrast, production of cotton yarn and cloth, finished steel, sugar and automobiles ,was lower tha in 1957. 19. The recent "busy season" (November to April) was rather more active than in previous years, no doubt mainly as a result of the better agricultural perfornance. However, there appears also to have been a revival of activity and confidence in private industry and commerce, and this has been reflected in a minor boom in the stock exchange. Bank credit to the private sector expanded considerably and there was also the normal rise in bank credit to the Government toward the end of the fiscal year. Also, the foreign exchange reserves of the Reserve Bank were increasing until the end of 1iarch. Thus there were a number of factors at work to increase the money supply with the public; these were offset only to a moderate extent by a rise in the time liabilities of the banking systemo Nevertheless, wholesale prices and the cost of living have bean virtually stable since the turn of the year, indicating that the inc--ease in the money supply has been matched by the available supply of goods and services. 20. The export situation of recent months has not been encouraging. The market for Indian cotton textiles has continued to be subdued, and India's exports of jute goods during the first four months of this year were somewhat lower than in the same period of 1958. Tea exports have been doing about the same as last year. According to an official estimate made in January of this year, it had been hoped that export earnings would increase by some 3 per cent during the present year, but it is doubtful now whether they will exceed the earnings in 1958/59. 21. India's foreign exchange reserves stood at the end of the fiscal year, March 31, 1959 at $691 million, and have since declined steadily to $652 million on June 26, 1959, owing partly to seasonal factors and partly to larger imports following the restoration of part of the severe import cuts made in the spring of 1958 when the reserves began to decline at a rapid rate. There is still a substantial undisbursed balance of the Governmental loans and grants offered to India following the meetings convened by the Bank in August 1958 and March 1959; against this, India has to deposit 850 million with the IF in payment of the gold portion of its increased subscription. On balance, it appears likely that there will be some further decline in the reserves during the next few months. PART IV - PROSPECTS OF FULFILLMENT OF OBLIGATIONS 22. In January 1959 Indiars external debt repayable in foreign exchange totaled l,7865 million. This amount includes $251 million of suppliers' credits to the public and private sectors which the Government had sanctioned by that time but not all of which may eventually be con- cluded. Annual service payments on the debt outstanding at January will reach a peak of nearly $250 million in 1961 and average some $160 million a year for the next ten years, or about 10 per cent of India's current foreign exchange earnings. 23. In April 1959 the Bank made a $25 million loan to India for the Koyna hydroelectric project, which will add approximately $2 million a year to the country's annual service payments from 1965. India has also con- cluded, or will shortly conclude, a number of other credits repayable in foreign exchange, full details of which have not yet been reported to the Bank, They are as follQws :- a) Credits totaling 223 million ($64 million) in the United Kingdom to finance a pipeline for Assam oil. It is understood that ,20 million of this is likely to be for 15 years and the balance for a shorter term; b) Credits amounting to the equivalent of $53 million and $30 million offered by the United Kingdom and West German Governments, respectively, following the meeting on India in March 1959 at the Bank; c) Credits from the U.S.S.R. to finance the setting up by that country of a plant, costing 80 million roubles, to manufacture pharmaceutical products. 24. Annual service payments on the proposed loan to India for the Railways add about $h.5 million to India's foreign exchange obligations from 1963. The proposed loan to the ICICI, which I am also presenting to the Executive Directors, would add approximately $1.5 million to India's service payments from the same year. PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed loan complies with the require- ments of the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 26. I recommend that the Bank make a loan to India in an amount in various currencies equivalent to $50 million for a term of 20 years at -6- an interest rate of 6% per annum and on such other terms as are specified in the draft Loan Agreement attached, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 4). W. A. B. Iliff Vice President Washington, D.C. July 6, 1959 for Eugene R. Black President