India - Second National Agricultural Research Project

Documnt of The World Ban3k FOR OMCAL USE ONLY Rewt No. P-4154-IN REPORT AND RECOMMENDATION OF TBE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND NATIONAL AGRICULTURAL RESEARCH PROJECT September 26, 1985 Tbb domaet ls a resiied d_tbud" mi may be sad by dpipests wiy I the pefornce S ther ECidd d&u lb coui may no oterwise be dscloed widhou Wiwd lank sihbrlntion.  CURRENCY EQUIVALENTS (As of September 11, 1985) US$1.00 = REs 12.32 Rs 1.00 = US$0.081 Rs 1 million = US$81,169 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 R.s 12.00. FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS CIMMYT - Centro Internacional de Mejoramiento de Maiz y Trigo (International Maize and Wheat Improvement Center) CIP - Centro Internacional de la Papa (International Potato Center) GOI - Government of India IARI - Indian Agricultural Research Institute IBPGR - International Board for Plant Genetic Resources ICAR - Indian Council for Agricultural Research ICRISAT - International Crops Research Institute for the Semi-Arid Tropics IRRI - India Rice Research Institute ISP - Interdisciplinary Scientific Committee PFC - Project Funding Committee PU - Project Unit SAU - State Agricultural University(ies) SMS - Subject Matter Specialist  FOR OMCIL USE ONLY rNDIA SECOND xATIoNAL ARrICULTURAL RESEARCH PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiaries: The Indian Council for Agricultural Research (ICAR) and State Agricultural Universities (SAUs). Amount: SDR 69.6 million (US$72.1 million equivalent) Terms: Standard On-lending Terms: From the Government of India (GOI) to ICAR, and from ICAR to SAUs, as a grant. GOI will bear the foreign exchange risk. Project Description: The project would strengthen the capability of SAUs to conduct location-specific research in the main agro-ecological zones in India initiated under the first National Agricultural Research Project (NARP I) and further extend its scope to include the priority research needs of these zones under rainfed, and irrigated farming conditions. The project would support the following activities: .(a Completion of NARP I research subprojects; 1/ (b) (i) New areas of research such as irrigated farming, animal-drawn farm implements, horticulture and commercial field crops, agroforestry, and animal nutrition, (ii) development of programs for field testing and refining research results, and (iii) strengthening of training facilities at Regional Research Stations. (c) Individual research activities on priority topics emerging or identified during project implementation and not covered under (b) above; (d) Strengthening of research administration in two SAUs; and I/ Only those subprojects that have not completed five years of operation. IThis documcnt has a rmkesrcd disuibudion and may be used by rcpientS only in the perfomuuce of| |their officia duties. Its contents may not otherwise be disclosed without World Bankc authorizton |  - ii - (e) Continued funding of ICAR's Project Unit established under NARP I, including the provision of training for research scientists. Benefits: Major qualitative improvements in research program planning and in the quality of experiments and findings - particularly as they relate to specific farming situations and to extension activities - are expected to result from the project. There is already increasing evidence (under NARP I and the Bank-supported extension projects) of gradual, but significant improvements in the extent and quality of support provided by the research institutions to the reformed extension services. A recent ICAR review has indicated substantial improvements in the capacity of Research Stations and scientists to: identify farming situations and constraints to increasing production, determine research priorities for individual agricultural sub-zones, improve the quality of individual experimen.s, conduct field testing of on-station research findings, and establish closer linkages and contacts with extension staff and farmers. The review also indicates that tcchnology recommendations are increasingly more refined and appropriate to suit farmers' needs and constraints and that extension workers are now better equipped than before with relevant technical messages and are able to advise farmers with greater confidence. The project would also contribute to institution building and be instrumental in solidifying the transformation of India's agricultural research system into an efficient and farmer-responsive research service. It would support broadening of the research effort to include all identified priority needs in each agroecological zone and strengthen the research system's capability to provide support to agricultural extension services through the development of economically viable technologies and their adaptation to the differing resource endowments and risk situations of farmers. In addition, it would bring about significant improvements in the efficiency of resource utilization in agricultural research, through its emphasis on effective research management. Risks: There is the possibility that the research results generated may not be adequate to meet farmer needs under actual farm conditions, or that these resuLts may not be satisfactorily transmitted to farmers. To counter these risks, the project provides for regional decentralization; emphasizes research on location-specific farmer needs,  - iii - field-testing and adaptation, increased cooperation and communication between extension staff and farmers, and the prompt feedback of research results. The Bank's support of improved agricultural extension services and promotion of close cooperation between agricultural research institutions and State extension services would help to ensure the early adoption of research results by farmers. The administrative and organizational changes initiated under NARP I and the careful preparatory work undertaken for this project should be adequate to ensure that implementation risks are at a minimum. The decision to implement the project over a seven year period reflects greater realism concerning the pace of implementation of agricultural research projects and is aimed at the completion of the project on schedule.  - iv- (US$ Million Equivalent) Estimated Cost: 1/ Local Foreign Total Civil Works 26.58 - 26.58 Equipment and Vehicles 12.35 1.37 13.72 Incremental Salaries 29.94 - 29.94 Incremental Operating Costs 7.44 0.94 8.38 Base Costs 76.31 2.31 78.62 Physical Contingencies 1.58 0.10 1.68 Price Contingencies 30.01 0.62 30.63 Total Costs 107.90 3.03 110.93 (US$ Million Equivalent) Financing Plan: Local Foreign Total IDA 69.07 3.03 72.10 GOI Grants 38.83 - 38.83 Total 107.90 -3.03 110.93 Estimated Disbursement: 2/ (US$ Million Equivalent) FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 Annual 4.0 6.0 9.0 12.0 12.0 13.0 13.0 3.1 Cumulative 4.0 10.0 19.0 31.0 43.0 56.0 69.0 72.1 Rate of Return: Not applicable Appraisal Report: No. 5469-IN, dated September 20, 1985. 1/ Includes about US$0.4 million equivalent of taxes and duties. 2/ According to IDA fiscal year.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND NATIONAL AGRICULTURAL RESEARCH PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for SDR 69.6 million (US$72.1 million equivalent) on standard IDA terms to help finance a project to strengthen and improve agricultural research in the various agroecological zones in the country. The proceeds of the credit would be channeled to the indian Council of Agricultural Research (ICAR) as a grant. ICAR would in turn provide these funds on the same basis to participating SAUs for carrying out approved research subprojects. The foreign exchange risk would be borne by the Government of India. PART I - THE ECONOMY 2. An economic report, "India: Structural Change and Development Perspectives" (5593-IN, dated April 24, 1985), was distributed to the Executive Directors on May 1, 1985. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 760 million (in mid-1985) and an average per capita income of about US$260. Agriculture continues to dominate the economy, accounting for 36% of GDP, 23% of exports and about two-thirds of employment. The steady increase in population, which continues at a rate of 2.2% a year, has put increasing pressure on natural resources, in particular cultivable land. By the mid- 1960s, nearly all productive land had been brought under cultivation. While irrigation continues to increase total cultivable area, an increasing share of the labor force will have to be absorbed in non-agricultural activities. Industrial development has not progressed rapidly enough to provide employ- ment opportunities for the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result the long-term growth of per capita income has only averaged about 1.4Z p.a. and close to one-half of India's population con- tinues to live below the prverty line. The pervasiveness and intensity of poverty is such that its alleviation has been and remains at the core of India's development strategy. 4. During the 1950s and 1960s, India's economic performance was generally characterized by slow economic growth, moderate inf'.ation and a sustainable external position. GDP rose at about 3.5Z, with agriculture and industry growing at 1.82 and 4.8Z respectively; imports increased by 4.6Z and exports by 5.8Z a year. India was able to reduce its dependence on foodgrain imports from a peak of 14% of total foodgrain consumption in 1966167 to 4.5% by 1969/70 through improvements in agricultural production, but progress in poverty alleviation was slow mainly because of continued high population growth. 5. In the early to mid-1970s, in response to a sharp deterioration in India's terms of trade, the Government introduced various policy measures  -2- designed to stimulate exports. This resulted in a large increase in export growth to about 7.3Z per annum in the 1970s compared with only 2.2% per annum between 1950/51 and 1969/70. While expanding world markets, particularly in the Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. The success in the export expansion effort coupled with continued import substitution, particularly of foodgrains resulted in a surplus on current account between 1976/77 and 1978/79, which was further enhanced by increased concessional aid flows. India was thus in a relatively favorable position to deal with the increases in international oil prices, the sharp deterioration in the terms of trade and a series of poor harvests. The comfortable foreign exchange position also played a major role in the Government's decision to initiate import liberalization. 6. Towards the end of the 1970s, India again faced considerable domestic difficulties. In 1979/80 it experienced one of the country's worst droughts which caused a large reduction in agricultural production. In addition, industrial production, plagued by labor unrest and a vicious circle of supply shortages (coal, power and transportation), failed to expand. These events coincided with a second round of international oil price increases. As a result, the current account reverted to a deficit position and the remarkable price stability that the Indian economy enjoyed after 1975 came to an abrupt end. The Government responded by mounting an adjustment program, which was embodied in the Sixth Five Year Plan (1980/81 - 1984/85). The program aimed at raising the GDP growth rate from its historical level of 3.6% Lo 5.2% per annum while adjusting the country's external balance to the adverse price developments in world markets. The major elements of the program were alleviation of infrastructure and supply constraints, increased energy independence, improved efficiency in resource use, promotion of exports and efficient import substitution. Economic Performance Under the Sixth Plan 7. Overall the Government's adjustment program has been effective despite the severe drought in 1982/83 and a worsening of the external environment in the early 1980s. During the Sixth Plan period, GDP grew by 5.1% per annum, 1/ well above India's long-term growth rate of 3.6%. However, overall growth during the first half of the 1980s has not been steady, mainly because of the effect of uneven rainfall on agricultural production. In 1980/81 and 1981/82, the economy substantially recovered from the 1979 drought, with real GDP growing by 7.6% and 5.3%, respectively. The recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15% in 1980/81 and 5.5% in 1981/82. A severe drought in mid-1982 brought the economic recovery to a halt. Agricultural output declined by 4Z, which in turn reduced GDP growth to only 1.8%, and put further strains on the balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain 1/ Actual GDP growth rate during the 1979/80-1984/85 period was 5.1Z per annum. However, this figure overstates the trend in recent years because of the relatively low base year (1979/80). The 4.5% GDP growth per annum and 3.3% annual agricultural growth between 1980/81-1983/84 (two "normal" years) are more representative of the growth rates during the period.  -3- imports, procurement and distribution, and the increased allocation of power to irrigation pumps mitigated the adverse effects of the poor monsoon. An excellent monsoon combined with satisfactory performance of the infrastruc- ture sectors, in particular coal and transport, led to a recovery of the economy in 1983/84. Agricultural output rose by 9%, industrial output by 4.5% and overall GDP by 7.4Z. The power sector, however, emerged again as a constraint on higher growth, especially in industry. In 1984/85, despite a mediocre monsoon and difficult political circumstances, the aggregate growth of the economy is likely to range between 4 and 4.5%. 8. During the Sixth Plan period, foodgrain production continued to grow at an average annual rate of 2.6% a year-sufficient tc maintain a broad balance between supply and steadily increasing domestic demand. The progress achieved is an indication of the effectiveness of programs to expand irrigation, strengthen extension .id encourage efficient use of other agricultural inputs which are being implemented. Bountiful harvests have led to record foodgrain stocks in recent years. Over the past year, Government held stocks have increased by more than 40%. Maintenance of ample, balanced operating stocks to ensure smooth operation and even expansion of the public distribution system remains a top priority of Indian agricultural policy. Yet, the financial cost of foodgrain storage and subsidies represent a rapidly growing burden on the budget. 9. Growth of the industrial sector during the Sixth Plan period was slow and uneven. Industrial growth averaged about 3.4% a year-below the growth rates achieved in the 1960s and 1970s. An inadequate policy environment, coupled with depressed domestic demand, power and raw material shortages, as well as labor unrest are the main causes for the slower than anticipated growth of the industrial sector. After the severe drought in 1979/80, manufacturing output grew at 1.7% in 1980/81 and 3.3% 1981/82. The drought in 1982/83, which led to widespread shortfalls of agro-based raw materials and a sharp drop in the demand for consumer durables, combined with a prolonged textile strike in Bombay, reduced the growth of industrial output to 1.7% in that year. Following the excellent t.monsoon in 1983/84, industrial output gained momentum and grew by 5.0%. Preliiinary estimates place the growth of the manufacturing sector at about 5.5Z in 1984/85. 10. The performance of the infrastructure sectors was mixed under the Sixth Plan. While electric power generation, coal production and railway traffic grew by R.7%, 6Z and 2.5Z a year respectively, oil and gas production increased by 22.6x. The rapid expansion of domestic oil production is lar- gely the result of India's oil development program. Backed by substantial financial commitment, performance under the program has been excellent with real investment and oil production levels running well ahead of Plan targets. In 1984/85 domestic oil production is estimated to have reached 29.4 million tons. While the gap between domestic consumption of petroleum and production remains large, India's dependence on oil imports dropped from 63Z of consump- tion in 1979/80 to 30Z in 1984/85. About two-thirds of current output comes from offshore fields around Bombay High. As most of these fields have now reached tLeir mature stage, further increases in domestic oil production will have to come mainly from new discoveries. 11. India's economy has reverted from a situation of a resource surplus in the late 1970s to an aggregate resource deficit during the Sixth Plan period. The gap between gross investment and national savings increased from  -4- negligible levels to an average of 2.1% of GDP in 1980-85. Cross domestic capital formation increased from an average of 22.6Z of GDP in 1975-80 to 24.7% in 1980-85 while gross national savings remained constant at an average of 22.6% of GDP in both periods. The increase in capital farmation mainly resulted from an increase in the public investment rate, but it was largely a financial rather than a real phenomenon since prices of investment goods increased considerably faster than the general price level. 12. The basic thrust of fiscal policy during the Sixth Plan was to provide sufficient resources for growth and planned investment while main- taining inflation under control. However, the Sixth Plan period was charac- terized by significant budgetary resource constraints. Despite massive additional resource mobilization efforts, public sector deficits exceeded 7% of GDP as compared to only 4-5% of GDP during the mid-1970s. The shortfall was met by additional market borrowings, both domestically and from abroad and by deficit financing. Major reasons behind the large deficits were continued losses by most departmentally-run undertakings, unsatisfactory performance of the two major non-departmental undertakings of the States (the State Electricity Boards and the State Road Transport Corporations), and the increasing importance of subsidies which are estimated to have reached 2.8Z of GDP in 1984/85. Of these, fertilizer accounted for more than 0.8% of GDP, and food subsidies nearly 0.5% of GDP. 13. Developments in the savings-investment balances were mirrored in the balance of payments. Thus, India's current account balance, which had recorded surpluses between 1976/77 and 1978/79, reverted to deficits averag- ing US$3.5 billion and 2.1% of CDP during 1980-85. Several developments contributed to these relatively large deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and continued to move against India during the first three years of the 1980s. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remittances stagnated (reflecting slower development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Fourth, export growth was sluggish partly due to growing domestic demand, and, perhaps most significantly, due to depressed foreign markets and prices. Faced with a growing need for external capital inflows and stagna- tion in the availability of concessional assistance, India drew SDR 3.9 billion from the Extended Fund Facility of the IMF and borrowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. 14. Price performance during the Sixth Plan period has been mixed. The overall improvement in economic performance in the early 1980s, combined with more restrictive monetary policies in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from 18% in 1980/81 to only 2.6% in 1982/83. The lagged effects of shortages of foodgrains in 1982/83 and of other agricultural products and industrial goods in 1983/84 coupled with a rise in the domestic cost of imports and rapid liquidity growth, gave a boost to inflationary pressures towards the end of 1983/84. The annual average growth of wholesale prices rose to over 9% in 1983/84, and the rate of growth of consumer prices exceeded 12%. In September 1984, the Government took a number of measures to dampen pressure on prices including increased imports of important agricul- tural commodities (sugar, jute, coconut oil and others), releases of sugar  -5- stocks for distribution through fair price shops, and a reduction in wheat prices for flour mills. These measures, together with a decline in cereal prices as a result of the bumper crop in 1983/84 and a generally restrictive budgetary policy, led to a slowdown in the rate of increase of wholesale prices to about 7.1% in 1984/85. 15. Developments in the Indian economy during the Sixth Plan underscore the progress that has been made in recent years towards accelerated CDP growth, exter al adjustment, and increased investment. The experien.e of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. It is a tribute both to the fundamental soundness of key policies and programs, particularly in agriculture, and to the strength and effectiveness of public administration, that neithee the serious political disturbances in Punjab, nor the assassination of Prime Minister Indira Gandhi, resulted in significant disruptions to the performance of the economy in the last year of the Sixth Plan. But the results during the Plan period also highlight the disappointing performance of industry, the continuing shortfalls in electric power generation, the rising public sector deficits, the importance of regaining and sustaining momentum in export growth and the need for continued prudent economic management so as to avoid a resurgence of inflation while generating adequate resources for development. This mixture of achievements and challenges provides the context for an assessment of development prospects and policies. Development Prospects and Policies 16. To deal effectively with its dual challenges of alleviating pervasive poverty and expanding employment opportunities for a growing labor force, the Seventh Plan is expected to aim at sustaining an annual rate of growth of CDP of at least 5%. The Seventh Plan which will lay down the development strategy for 1985/86-1989/90 is also likely to continue the emphasis on agriculture, energy development, export promotion, domestic import substitu- tion where economically justifiable and the removal of infrastructural bottlenecks. 17. Achieving a GDP growth of around 5Z a year will place heavy demands on policy adjustment and entail ma4or challenges. India will need to: (a) maintain the recent higher rate of expansion of agricultural production; (b) accelerate industrial production and export growth through policy changes which enhance competition and efficiency; (c) expand supply capacities in the economy by improving basic infrastructure services and the availability of energy; (d) improve the efficiency with which resources are used, including particularly the existing capital stock in infrastructure and industry; and (e) further improve the already high resource mobilization effort. 18. Agriculture. Despite an impressive performance under the Sixth Plan, Indian agriculture faces many challenges in the second half of the decade. As possibilities for extending cultivated acreage shrink, agricultural growth will depend on finding new ways of increasing the productivity of land through further development of irrigation, better water management, more intensive use of new technology, efficient delivery of inputs and services, and appropriate pricing policies. High priority must be given to the expan- sion of the country's irrigable area through completion of ongoing irrigation projects, as well as selective investment in new undertakings. Besides creating new irrigation potential, the efficiency of irrigated farming will  -6- have to be enhanced through the improvement of water management practices in existing irrigation systems. Greater emphasis should also be given to obtaining higher yields under rainfed and dryland farming conditions. Finally, even greater efforts must be made to build and strengthen institu- tions to ensure the efficient delivery of agricultural services, input supplies, credit and technology. 19. Industry and Trade. Prospects for raising India's GDP growth rate will, to a large extent, depend on more rapid industrial production and export growth to be attained through improved productivity and efficiency. A key requirement will be greater competitive pressure on industry than has been the case in the past. The size and domestic orientation of the Indian economy make it necessary that this competitive pressure come mainly from within the domestic economy. An important complement, however, will be greater exposure to foreign trade to stimulate domestic competition as well as to induce technological innovation and modernization. 20. To increase domestic competition, domestic policies will need to allow freer entry and exit of firms in the industrial sector and greater reliance on market price signals. While the Government has taken various initiatives in the above directions during the past several years, the most significant were announced in the context of the 1985/86 Budget. These include the broadening of licensing categories for certain industries, delicensing for others, increases in the size limits for MRTP 1/ and small- scale industries, reductions in the incentive for small-scale industries to stay small and various initiatives to stimulate efficient indigenization of 'sunrise' industries (energy exploration equipment, computers, telecommunica- tion equipment, motor vehicles and parts, general electronics). These are significant advances that need to be sustained in future years. 21. Changes in external trade policy will also be required to stimulate export growth which is essential not only for current financing of imports, but to enhance borrowing capacity, to service debt, to provide an impetus to the economy from the demand side, and to expose entrepreneurs to the quality- consciousness of competitive external markets. While some changes have been recently introduced, there remains a need to: (a) provide greater access to imported inputs and capital goods through continued import liberalization (b) review tariffs, eliminating anomalies and lowering their overall level; and (c) modify trade policies in such a way that the net impact of incentives is more neutral between exports and import substitution. 22. Infrastructure Sectors. Investments in these sectors currently constitute about one-third of total investment in India, and the efficiency with which these investments are managed has an important bearing on t'e efficiency of total investment and the growth rate of the entire economy. There is substantial evidence that better planning and management of public investments in power, coal, railways and irrigation could improve returns and lower the current capital-output ratios. For example, more efficient use of investment could be achieved by better water management in irrigation projects, improved load factors in thermal power generation, better capacity 1/ Monopolies and Restrictive Tr.l.e Practices Act, 1969.  -7- utilization in the fertilizer industry and improved efficiency in railway transport. 23. Resource Mobilization. India's gross national savings rate (22.6% in 1980-85) is already high for a country at India's level of income. Nevertheless, the investment required to sustain the relatively high GDP growth rates realized during the Sixth Plan period-while holding foreign savings as a share of GDP at prudent levels-will require some further increase in the aggregate savings rate especially in public savings. Because there will continue to be well-founded demands for expansion of current and capital expenditures in the public sector, the burden for a reduction in the savings investment gap has to be put on the revenue side. Increasing tax rates beyond their current high levels would be counter productive. Thus, economically efficient pricing policies in public enterprises, supported by improvements in their operational efficiency, are to be preferred over tax increases as vehicles for increased public resource mobilization. The sheer size of past and present public enterprise investment indicates that if proper returns were made even only a part of them, an increase in revenues of about 3% of GDP would be attainable. In a number of sectors, e.g. thermal power, railways, and fertilizer, concerted efforts are being made--with Bank assistance-to increase efficiency and reduce costs. These efforts need to be improved and expanded into new areas. 24. Balance of Payments. A policy of sustained GDP growth of 5Z per annum will need to be complemented by measures which assure a viable balance of payments position. Acceleration of industrial growth will lead to a substantial increase in import requirements, even after allowing for con- tinued import substitution of key bulk commodity items. Bank staff estimates place the export volume growth necessary to support these growing import requirements without excessive increases in external borrowing at about 8% a year over the Seventh Plan period. Prospects for India to attain the needed higher export growth rates appear to be reasoxYably good because India's share in total world exports in value terms is only about 0.4Z, leaving ample room for growth. Furthermore, India's exports are relatively less sensitive to fluctuations in demand in the OECD industrial countries because exports are well diversified with respect to both products and markets. Nevertheless, success in India's export drive will depend heavily on changes in domestic policy to improve the supply and profitability of exports. 25. Even assuming favorable export performance, India will continue to need substantial external capital flows to augment its own resources for the foreseeable future. Even with 8% export growth, the 5Z GDP growth implies an increase in gross capital inflows from US$17.5 billion to US$34.5 billion between the Sixth and Seventh Plan periods. In the past, the bulk of this financing was provided in the form of official development assistance. In more recent years the availability of concessional assistance to India has declined. Total bilateral grants and concessional loans declined from a level of about US$1.3 billion per annum over the years 1979/80-1981/82 to US$1 billion in 1983/84. Moreover, there was a large deterioration in the terms of aid from multilateral sources. For example, while total lending from the Bank Group continued to increase in nominal terms, the grant element declined from 71% to 41% as new commitments of IDA declined from a peak of $1,535 million in FY80 to $673 million in FY85.  -8- 26. In the event that official development assistance does not increase significantly from recent lcvels, nearly the full additional financing required would have to be provided from additional non-concessional borrowing from official and commercial sources. This will increase India's debt serv- ice ratio from the present level of 15.5% to 21.6% by 1989/90. Provided India can in fact, expand export earnings along the lines described earlier, and provided India's past record of prudent borrowing and debt management continues, the country should be able to raise the projected amounts. While its foreign resource requirements would be manageable, the increase in its external debt exposure would leave it with little cushion to deal with unfavorable eventualities and with the risks of policy change. 27. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of the growth strategy described earlier. 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. White therefore a greater volume of both official concessional and non- concessional assistance is warranted, concessional assistance, in particular, will be invaluable in moderating the build-up in India's debt service burden. Apart from the quantitative arguments for concessional aid, there remains the imperative to assist India in addressing the problems of pervasive poverty. While India is now better placed than other poor countries to tackle its development problems, the mobilization of additional resources to address poverty problems is heavily constrained. Concessional assistance can also play a very important role in relieving this constraint. 28. Summary. India has demonstrated that it can sustain a rate of growth closer to 5.0% per annum than to the long-run trend of 3.6% per annum. If the rate of population growth can be brought to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 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 growth than in the past. This will require the continuation of the current development strategy which assigns high priority to export promotion, public finance discipline, improvement of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. PART II - BANRK GROUP OPERATIONS IN INDIA 29. Since 1949, the Bank Group has made 84 loans and 174 development credits to India totalling US$6,818 million and US$12,934 million (both net of cancellation), respectively. Of these amounts, US$1,465 million has been repaid, and US$5,909 million was still undisbursed as of March 31, 1985. Bank Group disbursements to India in the current fiscal year through March 31, 1985 totalled US$787 million, representing a decrease of about 27 percent over the same period last year. Annex II contains a summary statement of disbursements as of March 31, 1985.  -9-. 30. Since 1959, IFC has made 32 commitments in India totalling US$265 million, of which a total of US$145 million has been repaid, sold, terminated or cancelled. Of the balance of US$120 million, US$113 million represents loans and US$7 million equity. A summary statement of IFC disbursements as of March 31, 1985, is also included in Annex II (page 4). 31. 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 agricul- tural productivity, and efforts to improve the availability of basic agricul- tural 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 development 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. 32. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan and in the approach being taken by GOI in the preparation of the Seventh Plan. First, high priority will continue to be given to GOI's agricultural program. While India has made significant progress in agriculture, productivity growth will have to be sustained to improve the balance between food demand and supply and to contribute to poverty alleviation and employment. Thus, the Bank Group will continue to support irrigation, fertilizer production and distribution, and agricultural extension and credit. Second, alongside GOI's efforts in promoting greater efficiency and faster development of the industrial sector, increased assistance will be provided for industrial development. Third, the review of performance under the Sixth Plan confirms the high priority that should continue to be given to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources. Accordingly the Bank Group will continue to support the development of the energy, transport and telecom- munications sectors to alleviate critical shortages which constrain output in both agricultural and industrial sectors. Fourth, support of urban develop- ment and other GOI basic social services programs for the poor will also continue in light of the growth in population which, despite successes in lowering birth and death rates, still increases by about 16 million each year. 33. 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 both to offset the overall deterioration in the world trade environment, and to  -10- sustain the relatively higher investment and growth rates achieved during the Sixth Plan period. 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 competitive- ness 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. 34. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from IDA. However, IDA lending to India is declining from a peak of US$1.5 bil- lion in FY80, mostly due to funding constraints related to IDA. The amount of IDA funds available to India is likely to remain small in relation to India's needs for external support. Thus, this requirement for additional assistance will have to be met, in part, through larger Bank lending. Given its development prospects and policies, India is judged creditworthy for Bank lending to supplement IDA assistance. A continuation 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. India's debt service ratio is estimated at about 15.2% in 1984/85. This ratio is projected to rise to around 20% by 1989/90, mainly due to the hardening structure of India's debt; and to increase slightly over this level through the mid-1990's. Although the projected debt service ratios are considerably above historical levels, they are still manageable and will not adversely affect India's creditworthiness. 35. 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 12Z of net disbursements as compared with 62%, 33% and 37Z, respectively, in 1983/84. In 1983/84, about 19.0% of India's total debt service payments were to the Bank Group. On March 31, 1984, India's outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the Bank Group's share was US$9.6 billion or 36% (IDA's US$7.8 billion and IBRD's US$1.8 billion). As of March 31, 1985 outstanding loans and credits to India held by the Bank totalled US$18,288 million, of which US$5,909 million remain to be disbursed, leaving a net amount outstanding of US$12,379 million. PART III - AGRICULTURAL AND RESEARCH IN INDIA General 36. Agriculture is the most important sector in the Indian economy accounting for about 36% of GNP. It provides employment for about 70% of the country's labor force and accounts for about 24.5% of its exports of merchan- dise (1982/83). The remarkable increases in foodgrain production in recent years has resulted in India's attaining self-sufficiency, although a shortage of edible oils persists. Nevertheless, further efforts to improve agricul- tural productivity are needed to meet future demand increases for a popula- tion that is growing at about 2.2% per annum. Moreover, in recent years the rate of yield increases has been falling, and parts of the country (i.e., the Eastern States, Assam, Orissa) have shown little growth in agricultural production. The projections of demand for foodgrains by the terminal year of  -l- the Seventh Five-Year Plan (1990) call for annual foodgrain production of 168-170 MT, compared with a 1983/84 production of about 151.5 MT. This represents an annual growth rate of about 2.7Z, compared with the growth rate of 2.5Z per annum over the past 15 years. 37. Nearly 90% of food production increases in the post-Green Revolution period have come from wheat and rice, predominantly in irrigated areas. Less impressive results are expected in the future because cultivated areas benefiting from high-yielding technology are beginning to experience problems not confronted previously, including increasing incidence of pests and dis- ease and micro-nutrient deficiencies, demanding more sophisticated technology. Moreover, most of the future increase in foodgrain production would have to come from rainfed regions, which are expected to constitute more than 50% of the area under cultivation, even after the nation's irriga- tion potential has been fully developed. Hence, greater problems can be anticipated, both in developing the improved technology needed for such heterogenous agroclimatic conditions and in transferring this technology and know-how to farmers. 38. The future pattern of agricultural development in India thus points to the crucial role that improved agricultural research and associated extension services would have to play in helping the country sustain its self-sufficiency in foodgrains. The improvement of these services remains a major, yet relatively low-cost means, of increasing agricultural productivity, of making more effective use of past investments in infrastruc- ture and research, and of reaching all farmers, especially small farmers. Agricultural Research syo 39. Constitutionally, agriculture is a state assigned subject in India, and thus agricultural research is primarily a state responsibility. State Agricultural Universities (SAUs) undertake this function on behalf of the State Governments and receive the main part of their financial support mostly in the form of grants. The Indian Council of Agricultural Research (ICAR) serves as a national coordinating and supporting agency and assists SAUs in the performance of their duties. 40. The success of the research programs supported under the proposed project would be positively influenced by the close association that has developed between SAUs, ICAR and the international research institutions (CIMMYT, IRRI, CIP, ICRISAT, and IBPGR) 1/. Collaboration in research between these international institutions and SAUs has led to the free flow of genetic material into SAU research programs, the exchange of staff and information, and the regular attendance by SAU staff at research seminars and conferences. This cooperation is strong and effective. and adequate for the support of the agricultural research to be initiated under the proposed project. 11 See Abbreviations and Acronyms section.  -12- Indian Council for Agricultural Research (ICAR) 41. The ICAR was originally established by GOI in 1929. In 1966, it was reorganized following the recommendations of a national review committee on agricultural research and education. The reorganization of the ICAR was undertaken in recognition of the need to consolidate all centrally supported research and higher education in agriculture, animal sciences and, fisheries, including the various central agricultural research institutes. The Council was also made responsible for providing central guidance and financial sup- port to the SAUs and colleges and -or developing linkages with international research institutions. The Union Minister of Agriculture was made the Chairman of ICAR. Its Governing Body was placed under the chairmanship of the Director General, who was chief executive of the Council. Since 1973, the Director General has been designated Secretary to GOI for the Department of Agricultural Research and Education, Ministry of Agriculture, thus ensur- ing closer liaison with GOI. 42. The Director General is assisted by four Deputy Directors' General (crop sciences; animal sciences; soils, irrigation, and agricultural engineering; and education), a secretariat, and additional staff as required. ICAR's staff of scientists number over 5,500. Fifteen scientific panels covering various subjects are responsible for considering the various research schemes and projects supported by the Council, for advising the Governing Body on technical matters, and for drawing attention to gaps in current research and training efforts. 43. ICAR is not only active in managing research programs of its own, it also serves as the apex national coordinating body for research carried out in the states. To this end, ICAR: (a) provides overall guidance to research and helps in setting priorities; (b) provides financial support for the establishment of new SAUs, including the setting of appropriate academic and research standards; (c) makes available financial and technical support for the development of education and research at SAUs, including the development of regional research capability; (d) finances and manages 38 centrally con- trolled agricultural research institutes, five project directorates, and about 60 national coordinated research schemes; (e) conducts national demon- strations that promote the transfer of improved technology; and (f) funds operational research projects, a national lab-to-land program, and Krishi Vigyan Kendras (farm science centers) scattered throughout the country. ICAR also acts as a channel in ensuring cooperation for the exchange of scientific information, genetic material, and technical know-how with agricultural research institutions and international organizations. Agricultural Universities 44. The present system of agricultural universities in India (23 SAUs in 17 states) has evolved over the past 20 years or so with the objective of creating a system of scientific education and research serving the needs of the farming community. The basic objectives of the SAUs are similar to those established under the United States of America's Land Grant College System (i.e., to integrate research and teaching). Their development has neverthe- less been somewhat uneven, resulting from differences in the local political situation, the strength of initial leadership, and the support accorded by state governments. Most SAUs have, however, now developed sufficient  -13- capability to be able to effectively address the agricultural problems con- fronting farmers in India's varying agro-ecological zones. Main Achievements of Indian Agricultural Research 45. Central, state, and international cooperative research has achieved major advances in foodgrain production during the past 20 years, the most notable achievements being for wheat and rice. Since the early 1960s, wheat production has increased almost threefold and rice production has gone up by more than 50x. Significant, but less spectacular, were the gains made with pearl millet and sorghum. Although the earlier momentum in the production of hybrids of pearl millet received a setback from disease (downy mildew and ergot), new sources of resistance have been identified and hybrids and com- posites that resist these diseases have been made available to farmers. Suitable sorghum hybrids to be grown in the kharif (monsoon) season in the Deccan have also been developed. Similar success has been achieved for the cotton crop. 46. The above examples illustrate the fact that India has the institu- tional base, management system, and scientific capability of making substan- tial progress toward the development of the appropriate technology required to meet the present and future demands of agriculture. This capability has, however, not been adequately developed in a number of areas, and much basic research infrastructure is still lacking at the SAU level. Moreover, there is scope for greater progress in adapting the new technology to suit the varying socio-economic conditions of farmers and in meeting the specific needs of the diverse agroecological zones encountered in a country as large as India. Previous Bank Activities in the Sector 47. While SAUs have resp-nsibility for research and generation of appropriate technology, the State Departments of Agriculture are responsible for extension. In order to achieve a more broadly based increase in agricul- tural output, GOI introduced in 1974, with IDA assistance, a different approach to agricultural extension through the training and visit (T&V) system. The T&V system is directed towards increasing farm productivity and the income of farmers by simultaneously addressing constraints to the trans- fer of new agricultural technology and to the dissemination of the results of research, as well as by obtaining feedback on actual farm problems. The earlier T&V projects in the States of Orissa, Madhya Pradesh, West Bengal, Assam, and Rajasthan included research components to strengthen SAU research facilities at regional stations. Research funds were provided in state government budgets but in the absence of a free flow of funds to SAUs, the research programs had a minimum impact in these States. With the growing demand for IDA assistance in reforming statewide agricultural extension  -14- systems on the one hand, 1/ and the need to narrow the gap between ongoing research programs and the requirements of farmers for new technology and information on the other, there was an urgent need to expand the scope of agricultural research and to involve ICAR fully in this effort. Toward this end, it was decided to support agricultural research at the state level through the medium of a National Agricultural Research Project (NARP I), (Credit 855-IN, 1978). 48. NAPP I was designed to strengthen the capability of SAUs to conduct zonal research in support of the reformed agricultural extension system. The project focused on the research needs of the country's main agroecological zones and placed special emphasis on foodgrains (cereals and pulses) and oilseeds grown under rainfed conditions, as well as on the integration of cropping patterns and animal husbandry practices. NARP I has helped to provide the foundation for future agricultural research through a strengthen- ing of the institutional capability of SAU campuses to conduct basic research in topics critical to the long-term agricultural deve'lopment of the State. It has also provided for essential infrastructure to support research activity at SAU main research stations and substations, for the strengthening of SAU research administration, and for the organization of regional com- modity and discipline oriented training workshops. 49. Program achievements under NARP I include the detailed Research Reviews completed for 16 States. These reviews have identified the general constraints to increasing production, provided information on yields and yield potential, and contain a detailed review of present research efforts, needs, and future priorities of the main agroecological zones within each State. The Reviews are supplemented by Status Reports on subzones within each of the agroecological zones prepared by a multidisciplinary group of scientists interacting with farmers and the extension service. These Reports provide: (a) a clear identification of different farming situations (topography, soil types and depths, rainfall, irrigation, etc.); (b) a review 1/ The Bank has assisted in the financing of the following agricultural extension projects in 14 Indian States: The Orissa Agricultural Development Project (Cr. 682-IN, April 1, 1977); the Madhya Pradesh Agricultural Extension and Research project (Cr. 712-IN, June 1, 1977); the West Bengal Agricultural Extension and Research Project (Cr. 690-IN, June 1, 1977); the Assam Agricultural Development Project (Cr. 728-IN, June 30, 1977); the Rajasthan Agricultural Extension and Research Project (Cr. 737-IN, November 14, 1977); the Bihar Agricultural Extension and Research Project (Cr. 761-IN, January 6, 1978); the Composite Agric-itural Extension Project (Cr. 862-IN, February 16, 1979-covering the States of Gujarat, Haryana and Karnataka); the Kerala Agricultural Extension Project (Cr. 1028-IN, June 25, 1980); the Maharashtra Agricultural Extension Project (Cr. 1135-IN, May 7, 1981); the Tamil Nadu Agricultural Extension Project (Cr. 1137-IN, May 7, 1981); the Second Madhya Pradesh Agricultural Extension Project (Cr. 1138-IN, May 7, 1981); and the Andhra Pradesh Agricultural Extension Project (Cr. 1219-IN, May 5, 1982). The National Agricultural Extension Project (Cr. 1523-IN, October 2, 1984) covering the States of Madhya Pradesh, Rajastnan and Orissa, and the Second National Agricultural Extension Project (Cr. 1569-IN, March 26, 1985) covering the States of Gujarat, Haryana, Karnataka, and Jammu and Kashmir.  -15- in each farming situation of cropping patterns, existing yields and yield potential gaps; (c) an analysis of available meteorological data so as to develop "contingency plans" for cropping in different rainfall situations and (d) information on production constraints and priorities for research. 50. SAU scientists have made use of the finuings of Research Reviews and, more recently, Status Reports in the design of three broad groups of experi- ments to determine: (a) the suitability of present crop varietiea and prac- tices in different farming situations; (b) the development of farming systems for farming situations requiring multi-disciplinary experimentation on the interaction of soil and water management practices, cropping systems, and cultivation methods; and (c) adjustments to recommended practices, especially recommendations on the type of fertilizers that suit farmers' resources and skills, and to other extraneous factors such as vagaries of monsoon rains, reliability of irrigation supply, input availability among others. 51. The constant interaction with farmers and extension workers has resulted in an overall improvement in the quality of experiments, and the earlier emphasis on varietal improvement alone has given place to experiments that have a bearing on farmers' problems under different conditions and on farming systems research. Scme examples of this are: the development of low cost water harvesting techniques on farmers' fields (Gujarat); adjustment of recommendations for fertilizer use based on farmers' resource capability (Gujarat, Andhra Pradesh, Tamil Nadu); simple techniques to overcome poor emergence of pearl millet due to soil crust formation (Rajasthan); evolving gal midge-resistant rice varieties accompanied by appropriate cultural prac- tices (Madhya Pradesh); advancing soyabean sowing dates (under rainfed conditions) to ensure double cropping (Madhya Pradesh and Rajasthan); farming systems research (rainfed areas) to develop a seed-cum-fertilizer drill for proper placement of fertilizer in the wheat crop (Madhya Pradesh); mixed cropping of sorghum with legumes to overcome the parasitic weed, striga (Karnataka); developing a low cost groundnut sheller (Andhra Pradesh); and minimum tillage in paddy/wheat rotation (Punjab). PART IV - THE PROJECT 52. The proposed project was prepared by the Indian Council of Agricultural Research (ICAR). It was appraised in October/November 1984. Negotiations were held in Washington in August 1985, with the Government of India represented by a delegation coordinated by Mr. Prithvi Singh, Director of the Department of Economic Affairs, Ministry of Finance. A report entitled "Staff Appraisal Report -- National Agricultural Research Project II" (No. 5469-IN, dated September 20, 1985) is being distributed separately to the Executive Directors. A Supplementary Project Data Sheet is attached as Annex III. Project Objectives and Rationale 53. The proposed project would help to broaden the scope of agricultural research undertaken by ICAR to include irrigated farming, particularly under field conditions in command areas; agricultural implements to suit both irrigated and rainfed farming conditions; horticultural and commercial crops; agro-forestry for hilly regions, marginal and submarginal soil conditions, and animal nutrition. In doing so, the proposed project would supplement and help to strengthen the research activities begun in 82 of the 121  -16- agroeclogical zones identified under NARP I in 17 Indian States, and support the implementation of new research subprojects in the balance of the 39 zones not previously covered. Through its involvement in this project, the Bank would also complement its efforts in agricultural extension (see para. 47) by ensuring that appropriate technology is developed and linkages are screngthened between research and extension organizations. Research results specific to India's diverse agroecological zones are needed to develop appropriate messages for dissemination through the extension services cur- rently being strengthened and reorganized with Bank assistance. The proposed project would contribute to the reorientation of India's agricultural research efforts which previously (prior to NARP I) emphasised on-campus work under controlled conditions toward applied research activities conducted in research stations and actual farm situations in the country's main agroecological zones. The project would seek to achieve its objectives through the following investments: (i) Research Subprojects 54. Approximately US$81.94 million of total project costs including contingencies would be devoted to financing three types of research subprojects. These include: (a) supplemental subprojects designed to broaden the scope of activities undertaken at Regional Research Stations established under NARP I; (b) new subprojects designed to establish 39 more Regional Research Stations and (c) special research subprojects. 55. (a) Supplemental Subprojects: Under the supplemental subprojects, the research support provided by ICAR to the 82 agroecological zones covered under NARP I would be broadened where necessary to meet the priority agricul- tural research needs of each zone. Additionally, the subprojects would emphasize new research related to irrigated farming, animal-drawn agricul- tural implements, horticultural and commercial field crops, agroforestry and animal nutrition. Special attention would also be given to developing a field testing/verification program to serve the needs of farming situations not covered by regional stations in each zone and to providing facilities for training Subject Matter Specialists (SMS) of State Departments of Agriculture. Such research support would be provided on a selective basis, as dictated by the priorities identified by ICAR. 56. (b) New Subprojects: The new Regional Research Stations to be estab- lished would support crop production research under both rainfed and irrigated conditions in the remaining 39 agroecological zones not covered under NARP I. The research program for these subprojects would be closely patterned along the lines of the research activity being undertaken and contemplated for the supplemental subprojects. There would also be provision for testing/verification programs as well as for facilities for SMS training, as with the supplemental subprojects. 57. (c) Special Research Subprojects: While the funds for supplemental and new subprojects would be specifically tied to an identified research program, a small proportion of funds (about US$0.55 million excluding contingencies) would be earmarked for research into special problems likely to be encountered. These ad hoc assignments couLd be either at SAU campuses or in selected zones. The identification and preparation of such subprojects would be done jointly by ICAR, the concerned SAU, and the State Department of Agriculture.  -17- 58. The majority of subprojects would comprise the development of main research stations and substations. Based on the experience of NARP I and recent appraisals, the average unit cost per subproject excluding contingen- cies has been estimated at Rs 3.0 million (four years) for supplemental subprojects, Rs 10.5 million (five years) for a new subproject, and Rs 1.65 million (five years) for a special subproject. The types of investments financed would include civil works (laboratories, office and classroom space, dormitory, staff housing, farm development), equipment, incremental staff and operating costs, and facilities for training of extension staff. Approval and sanction of the research subprojects would be completed in a phased manner by project year three. (ii) NARP I Subprojects 59. Under NARP I, SAU sanctioned subprojects were funded for a period of five years after which the financial burden for the continuation of the research activity became the responsibility of the concerned State Government. There are, however, 90 subprojects under NARP I which were at various stages of implementation at credit closing (September 30, 1985). IDA would continue to support the research activity under these NARP I sub- projects until they complete five years, at which time they would become the responsibility of State Governments. Approximately US$26.90 million of project costs would be allocated for this purpose. (iii) SAU Research Administration Subprojects 60. Under NARP I, subprojects were prepared to strengthen SAU research administration. Of the 23 SAUs in India, administrative subprojects have been sanctioned for n. These administrative units are responsible for coordinating the preparation of research subprojects, monitoring project progress, and providing assistance in procurement. They also maintain a close liaison with the ICAR Project Unit in progress reporting, the provision of statements of expenditure and audit reports, and for arranging training programs. Administrative subprojects for the remaining two SAUs (in West Bengal and Jammu and Kashmir) would be financed under the proposed project (US$0.26 million). These subprojects would strengthen the office of the Director of Research, and would include: (a) incremental staff and related costs for planning and monitoring the university's research program, (b) organization of regional, commodity, and discipline-oriented training workshops for SMS, and (c) the costs of short-term training of scientists at advance centers of research in India. (iv) ICAR Administration 61. The Project Unit (PU) established under NARP I, headed by the Deputy Director General (Education) in ICAR as Project Administrator would assist in the preparation and appraisal of subprojects and be responsible for monitor- ing their implementation. The PU has functioned satisfactorily under NARP I. In order to meet the increased workload resulting from the proposed project, it would be further strengthened and provided with funds to enable the use of local consultant assistance in subproject appraisal and monitoring. Provision would also be made for organizing training workshops for SAU scien- tists and for discipline oriented courses. Apprnximately US$1.83 million of  -18- project costs would be expended on this component over the project implemen- tation period. Project Implementation 62. Under NARP I, a Project Funding Committee (PFC) was set up by ICAR as the executive authority re;ponsible for selecting SAUs to participate in the project, to approve or reject subprojects and research reviews, and to super- vise project execution. PFC is chaired by the Director General of ICAR and is made up of the Agricultural Commissioner, GOI, the Chief (Agriculture) of the Planning Commission, two SAU Vice Chancellors (nominated by the GOI Minister of Agriculture); and the Project Administrator. An Interdisciplinary Scientific Panel (ISP) of agricultural scientists provides PFC with technical advice as necessary, while the PU functions as the PFC secretariat. Both PFC and ISP have played a key role in the implementation of NARP I and would continue to function in the same capacity under the proposed project. Subproject Preparation and Appraisal 63. Responsibility for the preparation of subprojects rests with SAUs. The PU would, however, provide all necessary assistance to ensure their adequate and timely preparation. Subproject proposals prepared in SAU are initially cleared by the State University Board of Management and endorsed by the state government (Ministry of Agriculture) before their formal submission to ICAR. The first four research subproject proposal3 prepared by SAUs (two supplementary and two new) would be made available to IDA for review and comment prior to their appraisal by PU. 64. Subproject appraisal reports would be initially reviewed by ISP (see para 62) which would decide on the importance of the research proposal to the State's agricultural development effort. Among other considerations, ISP would pay particular attention to the capacity of the SAU to execute the subproject, while at the same time ensuring that there is no duplication of the research effort. ISP would also ensure that the eligibility standards established for sanctioning supplementary research subprojects are followed. Following ISP review the proposed subproject would be forwarded to PFC for its consideration. The decision of PFC would be guided by, inter alia, the recomoendations of ISP. PFC would either reject, approve, or defer a deci- sion on each subproject. Those in the latter category would be returned to the SAU concerned either for specified amendment or for extensive modification. Close liaison would be maintained with IDA, which would receive all relevant documents through ICAR. ICAR would make an annual on-site supervision visit to each participating SAU and all subproject sites. ICAR would also submit to IDA a six-monthly report on the physical implemen- tation of approved subprojects. Additionally, ICAR would be responsible for furnishing IDA with the PUs annual work program and for preparing a project completion report. Coordination with Irrigation Research 65. Research program formulation and implementation would involve the close cooperation among SAUs, the State Departments of Agriculture and State Irrigation Departments. Towards this end, ICAR would nominate the Secretary, Department of Irrigation (GOI) or his representative as a member of PFC; and  -19- set up a State Level Committee comprising the Secretary, Irrigation Department; the Commissioner, Command Area Authority; Chief Engineer, Irrigation Department; Secretary, Department of Agriculture, the Director of Agriculture and Director of Research, SAU in the concerned state with respon- sibility for: (a) fixing priorities for irrigation projects to be taken up for on-farm research, and (b) deciding on the specific roles played by irrigation, agriculture, and research staff in planning, preparation, and implementation of research programs. At the zonal leveL, coordination would be ensured through the Zonal Research Advisory Committee. The Superintending Engineer of the State Irrigation Department would be a member of the zonal committee and would help in the identification of irrigation research needs as well as coordinate the execution of research programs. Mid-Term Review 66. Given the duration (seven years) and expanded scope of the proposed project, and the priority being given to irrigated farming research, a mid- term review of the project would be undertaken by a joint team from GOI/ICAR/IDA within the first quarter after completion of the third year of the project. The exercise would include a review of progress made in project implementation and provide for mid-course corrections. It would also include the identification of future priorities in agricultural research. Administration of University Research 67. The Director of Research is responsible for the planning, monitoring, and administration of all research programs in the SAU under the direction of its Vice Chancellor. The office of the Director of Research has been strengthened in SAUs participating under NARP I through the provision of incremental staff, resulting in better planning and monitoring of research activities, organization of workshops and training programs and evaluation of the research effort of the university as a whole. At the zonal level, an Associate Director of Research, working under the Director of Research, is responsible for research within each agroecological zone and for developing linkages with the state extension service in the zone. To achieve this, he works through the Zonal Research Advisory Committee, organizes monthly workshops for SMS, and uses other informal mechanisms. He would also be responsible for preparing a Status Report for the identification of farming situations and improvement of existing knowledge of farming constraints under each situation; ensuring a multi-disciplinary effort to research program formulation; and supervising and reporting on the research effort in the zone. These arrangements which have helped to improve the quality of research programs and their execution under NARP I, would continue under the proposed project. Research-Extension Linkages 68. Better research-extension linkages under NARP I have resulted in improvement of the quality of experiments at Regional Research Stations. These linkages would be further strengthened under the proposed project. A number of extension related activities carried out by SAUs, such as Krishi Vigyan Kendras (farm science centers), National Demonstrations, Lab-to-Land Programs,and Farmer's Training Centers would be integrated in such a manner as to provide necessary support to the extension agency. SAU Directorates of Extension would concentrate on providing formal extension training and teach-  -20- ing of training methods to extension staff and be responsible for carrying out on-farm studies in collaboration with the State Department of Agriculture. Project Costs and Financing 69. The total project cost is estimated at US$110.93 million, of which US$3.03 million represents the foreign exchange costs. Physical contingen- cies (US$1.68 million) have been applied to civil works, vehicles, equipment and operating costs. Price contingencies of US$30.63 million have been added to local costs at 8.5% for 1985/86 through 1990/91 and 6% for 1991/92, and for foreign costs at 6.3% for 1985/86, 7.8X for 1986/87, 8.0% for 1987/88 through 1989/90, 6.4% for 1990/91, and SZ for 1991/92. 70. The proposed credit of US$72.10 million equivalent would finance about 65% of total project costs, net of taxes and duties, almost all of it for local costs. The balance of funds (US$38.83 million) required for the project would come from GOI. GOI would make the proceeds of the credit and its own contribution available to ICAR as a budgetary allocation. ICAR would utilize a part of these funds to cover the administrative costs of the Project Unit, and channel the balance as grants to SAUs to finance the cost of approved subprojects. The project provides for retroactive financing of up to US$1.95 million for expenditures incurred after September 30, 1985, to meet the costs of spillover subprojects and the additional staffing require- ments of the Project Unit. ICAR is required to sanction all subprojects to be financed by September 30, 1988 and along with GOI, would be responsible for the provision of funding for the completior. of subprojects that extend beyond June 30, 1993. Procurement and Disbursement 1/ 71. Annex IV attached, details the manner in which items would be procured undei the project. All civil works (US$37.88 million) are rela- tively small and consist of research facilities, housing, and farm develop- ment mostly located at some distance from major cities and would be under- taken over time by different universities throughout the 17 States. It would neither be feasible nor economic to group such works into large contracts for submission to international competitive bidding (ICB). Consequently, all civil works contracts would be awarded on the basis of local competitive bidding. The procurement procedures would be based on those in use at universities whose local competitive bidding procedures have been reviewed by the Project Funding Committee of ICAR, and selectively checked during appraisal, and found to be satisfactory to IDA. These procedures were adopted under NARP I and have been working satisfactorily. 72. The procurement of vehicles and equipment (US$19.66 million) would be undertaken by the participating universities in small quantities and would be distributed over time. Orders would, therefore, be small, and adequate maintenance and availability of spares would be of critical importance. These items would thus not be suitable for ICB but would be procured by 1/ All figures in parentheses are inclusive of physical and price contin- gencies amounting to approximately US$32.31 million.  -21- standard university procedures that are satisfactory to IDA (see para. 71). The balance of project costs (US$53.39 million) would consist of incremental staff costs (US$41.31 million) and incremental operating expenditures (US$12.08 million). 73. The proceeds of the credit would be disbursed against the cost of civil works (65Z of expenditures); equipment and vehicles (10OZ of foreign expenditures, 100% of local expenditures, ex-factory and 61X of items procured locally); and 65% of expenditures on incremental staff costs and incremental operating costs. As SAU subprojects are financed by ICAR on a 1OOZ grant basis SAU would not have to bear any cost of this expenditure during the project period. ICAR would ensure that on completion of five years of operation of each subproject, State Governments/SAUs would continue to finance these costs. Consequently, the necessity for disbursing against a declining share of expenditures on incremental staff salaries and operating costs does not arise. Disbursements to GOI for individual subprojects would be against certified statements of expenditure which would be audited annually. The audit report and supporting documents for zhese expenditures would be retained by ICAR and SAUs for inspection in the course of project review missions. Since most SAUs have insufficient financial resources of their own to pre-finance investments under ICAR schemes, ICAR currently advances funds six months ahead of expenditure on the basis of budget estimates, less amounts unspent from the previous six months period verified according to a certified statement of expenditure. This same procedure has worked satisfactorily under NARP I and would continue under the proposed project. IDA would however, only disburse against actual ICAR disbursements to SAUs as summarized at six-month intervals by ICAR. ICAR would cause SAUs to maintain separate accounts for each subproject. SAUs would also be required to furnish ICAR with a grant expenditure certificate prepared by independent auditors in respect of each subproject not later than nine months after the end of each SAU finaacial year. ICAR woald maintain a separate account of its own project expenditures which would be audited annually and the audit report along with certified copies of its financial statements submitted to IDA not later than nine months after the end of each fiscal year. Benefits 74. Major improvements in research program planning and quality - par- ticularly as they concern specific farming situations and extension activities - are expected from the proposed project. There is already evidence (under NARP I and Bank-supported extension projects) of gradual but significant improvements in the extent and quality of support provided by research institutions to the reformed extension services. A recent ICAR review of the operation of cwo RegLonal Research Stations (Tirupati in Andhra Pradesh and Bawal in Haryana, both with five years of operation) found sub- stantial improvements in the capacity of the stations and its scientists to: identify farming situations and constraints to increase production; determine research priorities for the individual subzones; improve the quality of individual experiments, conduct field testing of on-station research findings, and establish closer linkages and contacts with extension staff and farmers. The ICAR review also indicates that technology recommendations are increasingly more refined and appropriate to suit farmers' needs and that extension workers are now better equipped than before with relevant technical messages and are able to advise farmers with greater confidence. Similarly,  -22- monitoring and evaluation studies of IDA-supported agricultural extension projects in India have shown that: (a) increased fertilizer use by a sub- stantial number of farmers is dependent in large measure on the provision of extension recommendations appropriate to farmers' resources and skills, and (b) the impact of extension is increased considerably through emphasis on low-cost practices and inputs. Both these aspects have been addressed under NARP I and have resulted in the development of research programs and technol- ogy that emphasize farmers' immediate needs. 75. There is also considerable evidence available to show that investment in agricultural research has potentially very high rates of return. 1/ Studies of returns to agricultural research spanning the period of the Green Revolution in India have found that, with lags of 5 to 7 years, the rates of return from investments in agricultural research have ranged from 35Z to as much as 112Z in different states. It is, however, virtually impossible to obtain any reliable ex-ante quantification of economic benefits from this type of project and it is equally difficult to be precise even ex post. 2/ The technology improvements developed, the rate and extent of their adoption by farmers, and the productivity and output gains attributable to their application cannot be predicted with any certainty and are Likely to vary among agroecological zones. Moreover, future gains in agricultural produc- tivity and production would be attributable not merely to the adoption of technological innovations developed and/or adapted to local conditions by the research establishment, but to the combined impact of various supportive services (input supply, extension services, etc.), as well as to that of the economic environment in general (e.g., raising incomes and ability to invest) and of economic policies in particular (e.g., incentive pricing). Delays in farmer adoption of research findings may also be due in large measure to the failure of other support services to provide the inputs and services needed by farmers to adopt recommended practices. No attempt has been made, therefore, to quantify the benefits expected from this project. 76. The project is expected to make a substantial contribution to institution building and be instrumental in solidifying the transformation of India's agricultural research system into an efficient and farmer-responsive research service. It would support a broadening of the research effort to include all identified priority needs in each agroecological zone and strengthen the research system's capability to provide support to agricul- tural extension services through the development of economically viable technologies and their adaptation to the differing resource endowments and risk situations of farmers. In addition, it would bring about significant improvements in the efficiency of resource utilization in agricultural research, through its emphasis on effective research management. 1/ See Agricultural Research (IBRD Sector Policy Paper, June 1981), Annex 3, pp. 64-65. 2/ For a discussion of the difficulties involved and of various models for ex ante estimation of the costs and benefits of agricultural research, see G.E. Schuh & H. Tollini, Costs and Benefits of Agricultural Research: The State of the Arts - World Bank Staff Working Paper No. 360, Oct. 1979.  -23- Employment and Poverty Impact 77. The project would have only a comparatively smaLl direct employment impact, both during construction and during operation. Far more important will be its indirect impact on employment and income generation throughout rural India. Through the dissemination and adoption of improved agricultural production and farm management techniques, the project will lead to increases in on-farm productivity and farm output, thereby generating substantial additional employment and income for farmers, their household members and agricultural laborers on millions of farms of all sizes. About 80Z of India's poor live in rural areas, most of whom are engaged in agriculture either as small farmers or as hired labor. While the new farming tech- nologies developed under the project are more likely to be adopted initially by prosperous farmers, and thus indirectly benefit hired labor, the extensive use of the T&V system of agricultural extension would ensure that these benefits would also accure to small farmers as well. Risks 78. The most serious risk in any agricultural research project is the possibility of research results being irrelevant to farmers' needs under actual 3n-farm conditions. There is also the possibility that these results may not be adequately transmitted to farmers and may therefore fail to gener- ate benefits as early and as fully as desired, or that changes in economic policy may render the adoption of technological advances uneconomic. To counter these risks, the project provides for regional decentralization; orientation of research toward clearly identified location-specific farmers' needs, resources, and sk-lls; emphasis on location-specific research and on field-testing and adaptation; and increased cooperation and communication with extension staff and farmers for intensified feedback on research results. The second potential cause of non-adoption and/or lagging adoption of technological advances is already being effectively dealt with through the Bank's support of improved agricultural extension services throughout India and encouragement of intensive and regular cooperation between the State extension services and agricultural research institutions. Where the T&V extension system has been in full operation, it has proven highly effective in spreading improved cultivation practices and technologies to farmers. The risk of new technologies being rendered unsuitable to adoption by farmers due to changes in economic policies would be addressed through improved research management-mainly at the planning stages when economic policy objectives and research goals and priorities are formulated, including a greater involvement of economists in research planning, monitoring and evaluation. 79. Implementation risks attributable to administrative and/or organiza- tional changes are minimal. The basic reforms initiated under NARP I, which the proposed project would further support and extend, have been strongly supported by both the agricultural research community and administrators. Budgetary support for agricultural research has been provided on an increas- ing scale over the past two decades in recognition of the substantial benefits that could accrue. Staffing problems have eased as increasing numbers of university trained scientists become available every year, and as improved service conditions and incentives for work at the SAUs and their research stations have helped attract and retain scientists. The risk of major delays and/or slippages in physical project implementation are minimal because of the preparatory work that has been undertaken and the experience  -24- gained under KARP I; the institutional framework and procedures for project implementation are well established and problems encountered during the initial phases of NARP I have been resolved. The decision to implement the project over a seven-year period reflects greater realism concerning the feasible pace of implementation. State Government Funding 80. Another potential risk is that of inadequate recurrent expenditure funding for regional Research Stations by state governments after completion of individual subprojects. In most states, this risk is considered minimal, and state governments are fully funding subprojects completed under NARP I. Moreover, adherence to the subproject sanctioning and fund release criteria by ICAR would ensure that subprojects are implemented only if adequate con- tinued state funding can be assured. To further minimize this risk, written undertakings were be obtained that adequate O&M funding would be provided for subprojects to be continued beyond five years (para. 70). Dilution of Research Effort 81. The risk that the establishment of 121 Regional Research Stations in 17 States with additional research capacity may lead to a dilution of the overall agricultural research effort is being carefully monitored under NARP I through a review of 'Status Reports' for each agroecological region. Through an assessment of each zone's agronomic potential and constraints, essential information on research priorities is expected to be provided as the basis for improved research management, including efficient resource allocation and utilization, within each state and each zone. ICAR's own coordinating function for SAU's research efforts and its direct respon- sibility for administering and funding national research schemes should help to ensure that the available resources are appropriately directed to national research objectives. PART V - RECOMMENDATION 82. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. I recommend that the Executive Directors approve the proposed credit. A. i. Clausen President September 26, 1985  ANNEX 1 TAbLE S Page 1 of 6 INDIA - *OCUL INDICATUR DATA NDeIA _ENECE SOPM tWISTErD AVUkMS) '8T CMUn (eIW oaro An) l . CINT LOW l1CSE tWOLZ ENCOOS 19 -b 197oLb zaTmATs: b ASIA & 1PACInc ASIA & PACIIC mu Tmasm .M) TOTAL 32S7.I 3287.6 3297.6 AI;IlCIATlURL 1763.5 V e0.s 1911.4 . Gwnt CAPI (N .. .. 140.0 278.3 1011.1 - mmmwnm a CwI (CILOIU OF aIL SQUVALNT) 79.0 113.0 138.0 285.7 536.8 OA LS aim STmn POPUIATIUN.2SD.TZAR CTWOUSIIN) 434869.0 367569.0 733248.0 _MM POPULATION CI Or TOTAL) 16.0 19.3 26.4 22.3 33.9 POULATIO ifJICONS POPULATION IN lER 2000 (CILL) IV. sTAflOsan FOPUIATION (MILL) 1700.0 POPLTIN -OMN 1.6 POPULATION OSm PER go. la. 132.2 166.6 223.0 173.8 386.9 iR 50. @1 ARI. LA 266.6 3207.S3 95.8 253.3 1591.2 POPUmAT=OS AGmSsT R (2.) 0-1 YIRS 40.6 42.7 39.5 32.3 35.2 15-66 MS 34.4 54.1 36.5 59.4 57.7 65 ASD AMO08 6.6 3.0 3.9 4.3 3.5 PancunoW Gcui mAM CZ) TOTAL I8 2.3 2.2 2.0 2.3 UR1S 2.5 3.3 3.9 4.1 4.1 cums 21m mATs C M iom) 47.7 4LS. 33.9 27.5 30.1 QMMI DUAiI RATZ (CPE STUS) 23.9 17.9 12.5 10.2 9.4 GRSS RUUUCTI RAWE 2.9 2.8 2.3 1.7 1.9 FANXILI PLtJgWC ACCTOS. A_ .L (Cr30S) 66.0 3782.0 68260 k . sRI CZOP o AUCED V1EN) .. 11.7 32.0 49.4 56.5 INX or 8O0 PROD. PER CAPI (1969-71-100) 96.0 102.0 113.0 116.6 126.4 Pa Cair SUPPLY o CALR IE or ORSUIENS) 96.0 91.0 92.0 106.3 115.7 PR-uum (CRAS P DT) 56.0 30.0 50.0 60.1 60.3 wan ANAL D PULSEV 17.0 15.0 13.0 I 14.4 14.1 -UILD (CAa2 1-4) mA Rma 26.3 19.7 11.0 7.3 7.2 LIVE MlCT. AT IRT CEAS) 42.2 *7.3 54.9 60.5 60.6 15AMr MM. RAT CPER TAOas) 165.0 139.0 93.0 69.2 66.9 ACcQS TO SAM WATLS CPOP) TOTAL 17.0 41.0 /c 44.2 46.0 uR 60.0 77.0 lo o 77.2 37.6 AL .. 6.0 3LOA j 34.6 37.1 AC