India - Second National Agricultural Extension Project

Document of The World Bank FOR OFFICIAL USE ONLY HLE jtu v Report No. P-3983-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT IN AN AMOUNT OF SDR 50.26 MILLION TO INDIA FOR THE SECOND NATIONAL AGRICULTURAL EXTENSION PROJECT March 5, 1985 This document has a restricted distribution and may be used by recipients only in the perfennance of their official dutie Its contents may not otherwise be dilosed without World Bank authoriuaton.  CURRENCY EQUIVALENTS (As of February 22, 1985) US$1.00 = Rs 13.12 Rs 1.00 = US$ 0.076 Rs 1 million = US$ 76,219 The US dollar/rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 12. FISCAL YEAR April 1 - March 31 ABBREVIATIONS AEO - Agricultural Extension Officer(s) CAEP - Composite Agricultural Extension Project DAO - District Agricultural Officer(s) DOE - Directorate of Extension GOI - Government of India GOG - Government of Gujarat GOH - Government of Haryana GOJK - Government of Jammu and Kashmir GOK - Government of Karnataka MOA - Ministry of Agriculture M&E - Monitoring and Evaluation NAEP I - National Agricultural Extension Project NARP - National Agricultural Research Project SAU - State Agricultural University/Universities SDAO - Subdivisional Agricultural Officer(s) SMS - Subject Matter Specialist(s) T&V - Training and Visit System tons - Metric tons VEW - Village Extension Worker(s)  -iv- Estimated CosL 1/ (USs million equivalent) Local Foreign Total [ncremental Staff 22.0 - 22.0 Civil Works 22.3 1.1 23.4 Vehicles and Equipment 5.3 1.5 6.8 Incremental Operating Costs 12.6 0.4 13.0 Training 1.4 0.1 1.5 Subtotal 63.6 3.1 66.7 Physical Contingencies 2.6 0.2 2.8 Price Contingencies 13.8 0.3 14.1 Subtotal 16.4 0.5 16.9 TOTAL 80.0 3.6 83.6 Financing Plan: (US$ million equivalent) GOI/States IDA Total Haryana(GOH)/GOI 4.3 6.3 10.6 Karnataka (GOK)/GOI 8.6 12.3 20.9 Gujarat (GOG)/GOI 13.5 18.6 32.1 Jammu and Kashmir (COJK)/COI 8.2 11.8 20.0 TOTAL 34.6 49.0 83.6 Estimated Disbursements 2/ (USS miLlion equivalent) FY86 FY87 FY88 FY89 FY90 FY91 Annual 3.9 6.9 10.2 9.0 9.7 9.3 Cumulative 3.9 10.8 21.0 30.0 39.7 49.0 Rate of Return: Not applicable. Appraisal Report: No. 5254-IN, dated March 7, 1985. 1/ Includes taxes and duties of US$0.88 million equivalent. 2/ According to IDA fiscal year.  INIEI4NATI ON.Ai. !rVEKLOPMENT ASSOCTATI N REPORT ANP' P::Cl M!MFN:A! I ilN (OF THE PRESIDE-ANT TO THE EXU'ITTIVIP l.1idRECTORS OtN A PROPOSE!D CREDIT rTo INDIA FOR TIE :;F! ';!N NA'T! "N,; . AfR tR! _I.T'iA.i .X1NCS i'JN ROJECT 1. T submit tin- t',l!nw;nri rvrt'r( r a1sd rertmmendation on a proposed develop- ment credit to India for SDH1 'fUbt6 mill ion (uS$49.0 million equivalent) on standard IDA terms, tto h-1p finance a nat ional agricultural extension project for the purpose of reorganizinig ani(i strengthening agricuiltural extension serv- ices in the States of Gujarat, Ilarvana and Karnataka and introducing the T&V extension system in the State- of Jaimma and Kashmir for the first time. The proceeds of the credit would be channeled to the State Governments concerned in accordance with the Government of India's (GOI) standard terms and arrangements for the financing of State development projects. The foreign exchange risk would be borne by COT. PART_1_- TUE ECONOMY 1/ 2. An economic report, "Situation and Prospects of the Indian Economy - A Medium Term Perspective" (4962-IN, dated April 16, 1984), was distributed to the Executive Directors on April 23, 1984. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 750 mil- lion (in mid-1984) and an annual per capita income of US$260. The economy is dominated by agriculture which employs more than two-thirds of the labor force. Rowever, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those who own little or no land. Growth of value-added in agriculture -- 2.2% since 1950/51 -- has been slower than growth of industrial value-added (5.3% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 52% in 1950151 to about 33% in 1981/82, while the share of industry rose from 20% to around 26%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress, with per capita income rising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased markedly since 1950/51: the gross national savings rate more than doubled from 10.8% of GDP (at factor cost) to 22.7% in 1983184, while the gross domestic investment rate rose from 12.5% of GDP to 24.87 in 1983/84. Foreign savings (balance of payments deficit on current account) have never financed a major 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the West Bengal Minor Irrigation Project CNo.P-3962-1-N), dat;d FebrU3ry 2t,. 1085.  -2- portion of domestic investment: a peak of about 20% was reached during the eurly 19609. Currently, foreign savings account for about 8% of investment. External assistance haa been low both as a percentage of GDP and in per capita Lerms, never rising above 3% of GDP and averaging )'elow 12 for the past five years. Net use of foreign savings has never risen above 3% of GDP. and pr-euently stands at 2.1%. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of lndia's exports grew on average about 7.3% per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby Middle East, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added substantially exceeded the historical 30-year trends (paragraph 3) averaging 5.3%, 3.3% and 8.1%, respectively, during the 1975176 to 1978/79 period. In 1979/80, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sbarp fall in foodgrain production, a decline in GDP, and the opening up of a relatively large trade deficit. Severe inflationary pres- sures also emerged after several years of virtual price stability. These setbacks coincided with the preparation of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, remov- ing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2% per annum. Recent Trends 7. Despite the effects of two aevere droughts ia 1979/80 and 1982/83, India's economy in the early 1980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 5% per annum, while between the two recovery years (from 1980/81 to 1983/84), it was 4.5% per annum -- substantially higher than India's long-term growth rate of 3.6%. Continued rapid economic growth has resulted from a development strategy which includes higher investment levels and liberalized policies on imports, industrial licensing, prices, and commer- cial borrowing. These policies, by easing constraints on the supply of infrastructure and basic commodities, were a determining factor in the improved performance of the economy and the industrial sector. This overall improvement in performance, combined with a more restrictive monetary policy in 1981/82 and 1982/83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from over 18% in 1980/81 to only 2.6% in 1982/83, but roze to over 9% in 1983/84, mainly due to the effect of the 1982/83 drought on food prices. Further improvements in the policy euvironment vill be required to maintain these higher levels of economic growth and investment  W itli 0lt pI]tt I KI *:.-.. i . -, :: - I.... . r -- viving infla- t ionar' eM-. t tt 8. Fciin'.v:. , _, . -- .;-- ............... -.mlainlly because of the efi e , .u..... - : :e . f I Al!. t I 'I; j1rig the period. In 1980/81 a.,d Itr,a1.;n : -i , .--r- frtan! the 1979 drought, with rv:e f.L' r _1 .. . ., - r. :i'- :V,-]v. While industrial oiutp.a -.-i:; : .i<- ,(I -iH : 82, recovery was particuIar!y i .il.n 1 ,- . o : ..,p..J eutput to rise by more thaii ' .I "* : , - . : ' * 1' powe:-, coal, and rail transport. alrtea.ld Tr.; I .! ''-. - 'X11aiI.it-d il 1981/82, recording growt h : !r t ! * L r r' .t pt - n ' r-spett ively . This over- * all improvement I: n . t -ti.,. : - :.; . .'.t1 i ' liH y a severe drought in mid-1982 which, rdlf; :i . broutght down the GDP growth ratea tO i *ii ' [1:1_*i ..!!1:' - '-.iz .tdly dtificult balance of payment. .anTd d-n;;.-.* i . - : -u - . '- :n;r ' v 1mxIZ!ementation of various economaiic polit-it r. ::Viorrain rts. pro.curement and distribution, arld tli., .t . '. .. t- . .. it 'I ro1 ps mitigated the otherwise very di st r.t;!- * lu; .iw.'o.. Tue economy recovered in 1983/84, le-d by a g*o.. t .; . '. --- - t ew by about 6.5Z to 7% with agricultural pr.. ..I r*: t'.- i- l r .in.g and industrial growth of 4.5%. Th- ma'r ,i:. t,_.. . ': ;;!-.i ero.neinc performance during 1983/B4 war.- t!' - . : :.. - . *.-!;iI! I. ilh a.equate agricultural policies and progr.ms ,.'11. j *.. r : * I : * :.- cw1 ' he coal and transport sectors. The powebr Sv.t 'rr, ::..-. i, * * l waln is a constraint on higher growth, especiall! in !ii:lI; Tr: 9. Agriciltuial lla t iU l * !U:,Ii sit roza: I y iu 1 983/84 in response to the monsoon, improved t.-,c- Ci i.nutut expallsisut of irrigation. Overall foodgra in prodin t- ie-n r-s4. 2 '!::--1 r2Ve r the previous year, reaching a new record of 142-144 !,1' 1 .! t-,': t lnt , i.rcroase over the previous peak of 133 miilliOn til- m'- I -' t!'.i7' welt.!if-r variations, foodgrain product inn:iTI? ca ;' .;t w a i .1 t :-lndl oi 2 t? per annum--sufficient to maintain a broad ba Link t- t- %t i-l. sup: I i,,tnd t 'Iad 1ii increasing domestic demand. Nonetheless, th- hal iit1- ' ---alns delicate, and the need for foodgrain imports to maintain con.;tIer m . s ar ;i.!'-.;;3;it O'Ife('r stocks could arise from time to time. Thus. ald- -pi:it- *TiP-i * Tr r t sf iorad-rain stocks and programs to expand irrigatl '-t, *. i... <.2 - *-.lr.i:t the efficient use of other agricultural inDm:tS -(]ITI i3it l- I -. uVe high priority. 10. Basic intrastr-ii. t,-- .i trn. --. i.ic .. i .11 ..rm.lrt in 1983/84, partially because at sf TIn iI i.:T ii;:.:11 y') dtii i ng the first half of the year but also duie ti a .3 :.:: - !"i:;i:' thi, productivity gains of 1980-82. Electricitv crin.rar !-r gr u- I v Ihv aloiit. 3.1I due to low reservoir water levels during th1t tirs.I !;il l! i. vcdt, dt-lays in the coumissioning of new capacitv, and a titotI 1i.--ar:tic-. 1: *,p;ai;tv uLti!izatican in thermal plants. As a result, power gener:iti.n w.~!!-.nt i * be!ow requiremeuits and con- stituted a major bottleneck in the Pconomy. Kev industries which we-e adver- sely affected by power constr:aints incltided steel, fertilizers, cement, and coal. To improve pvert S-f:-.i-.p I:. --r .--t-r, t' h.-overnment recently increased incentives f. I.; 'I.ip-- .-:a.aaia tm,nt productivity in thermal planits. Railway froit-e 'T?M . m.- asL!red in tfn-kins. grew bv only 0.5% in 1983/84, reflecti;ng s1Iuudi ;h 8- -toip.. . - - ia ;relucu ito. *increased by about 6.5% in 1983i8& ra.c-b.-t. '- . , - : ;-: : stocks already avail- able this lov--v - . - t.- :e:nrively siow demand  -4- growth. Infrastructural constraints would have emerged much more sharply had the pace of industrial growth and demand been more rapid. It is therefore critically important that India maintain the pace of investment in these key sectors, mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross invest- ment and national savings increased from negligible levels during the late 1970s to an average equivalent to 2.1% of GDP in 1980-84. India's gross national savings rate, which averaged 22.6% of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substan- tial increase in the savings rate is therefore quite limited. If India is to maintain investment at about 25% of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. This would also allow a marginal decline in the use of foreign savings from the recent 2.1x-2.3% of GDP to 1.5Z-1.8%, to ensure a sustainable external debt service burden. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses from 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.12 of GDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and 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. Faced with severe infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth rate from its historical level of 3.6% to 5.22 while adjusting the country's external balance to the adverse price developments in the world markets. The main elements of this strategy, which is being successfully implemented, are export promotion, import substitution where economically justifiable, implemen- tation of a coherent energy policy designed to meet the eaergy needs of the economy while curbing the growth of oil imports, and continued movement toward a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. 13. A positive development in India's balance of payments is the reduction in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1983/84 despite unfavorable world market conditions and import liberalization. Export volume growth and import substitution of oil and petroleum products, metals and fertilizers more than offset the substantial increase in "other" imports. These "other" imports consist mainly of industrial imports and capi- tal goods which historically have been in chronic short supply and which are of critical importance to capacity utilization, product quality, and plant modern- ization and expansion. A major factor in the decline of the trade deficit was the lower net import bill for petroleum, which dropped from US$6.7 billion in  -5- 1980/81 to USS3.4 billion in 1983/84 in response to a successful oil develop- ment program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a significant degree the result of India's develop- ment and adjustment efforts over the past three years. It is expected that the balance of payments will continue to be under strain for the next several years, since the adjustment strategy will continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need external capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the structural adjustment process. Faced vith a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (IMF) and commercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983/84, India drew SDR 3.9 billion from the Extended Fund Facility of the IMF. In addition, India bor- rowed significant amounts on comercial terms from the Euro-dollar market and increased the use of suppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borroving has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrovings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This larger commercial borrowing and transfer of funds under the arrangement with the IMF has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. DeveloDment Prospects 15. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a vide variety of consumer and capital goods. Basic infrastructure - irrigation, railways, telecommunications, power, roads and ports - is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India also has a wide range of institutions capable of fostering development and is well- endowed with human resources. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 16. The Government is currently preparing the Seventh Plan which will lay down the development strategy for 1985/86-1989/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economically justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real investment projected to be about 30% higher than in the period 1975-80-a creditable performance indeed. The Sixth  -6- Plhi11 xpu.ndiLure targets, however, will not be fulfilled an resource mobi- Il.Jt.n L,y tLie public sector will fall short of the financing requirementL of 'idtlned public investment. Actual aggregate real investment is projected to be ab.'uL iX below the original target for the period 1980-85, private investment be:ng 5% to 10 higher and public investment about 20% lower in real terms than akti;ally projected. In terms of meeting Plan expenditure targets, the perfor- mIalrtt ot the Central Government is considerably better than that of the State G(v(IItmeLsts. The Central Government's Plan outlays are likely to reach about 80Z tr0 9n% of the original Plan allocation in real terms, while the States' will probably achieve only about 50Z of their targets, due principally to shottzalls in resource generation. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real invest- ment shortfalls relative to original Plan allocations. . 1.. Although Sixth Plan expenditure targets will not be met, India's capi- tal formation rates have increased from 22.6% in 1975-80 to 24.7% of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure services which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As discussed in greater detail in our recent economic reports, performance in the basic service sectors can be improved through better plan- ning and management, thus leading to higher productivity and capacity utiliza- tion throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth. 18. Under the Sixth Plan, India has an ambitious oil development program backed by substantial financial commitment. Performance under the program has been excellent with real investment and oil production levels running well ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. While the gap between domestic consumption of petroleum and production remains large, India's dependence on oil imports dropped from 63% of consumption in 1979/80 to about 41% in 1983/84 and is expected to decrease to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. At the same time, the increases in domestic petroleum prices have helped encourage conservation and slow demand growth. 19. India-s development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and 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, improve- ment of economic efficiency, and investment in infrastructure, supported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, including an increased emphasis on commer- cial borrowing, will be necessary to cope with the balance of payments conse-  -7- quences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of conces- sional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. Although India is currently in a position to increase borrov- ing 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. Nevertheless, with a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, India is demonstrating that it can sustain a rate of growth closer to 5.0X per annum than to the long-run trend of 3.6Z per * annum. If the rate of population growth can be brought to below 2.0Z per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of 1.42 per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2% per annum in the 1970s despite a measurable decline in fertility rates. The population growth rate failed to decline in the past decade due to a reduction in the infant mortality rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it implies a greater strain on the economy and re-emphasizes the need for continuing efforts to strengthen the health and family planing programs in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from its estimated 1979/80 level of about 23% to over 35% by 1984/85. The Government is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family planning, health, education and literacy programs aimed at reducing fertility rates. 21. Reduction of poverty remains the central goal of Indian economic and social policy. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. About 51% of the rural population and 40Z of the urban population subsist below the poverty line. Significant reductions in poverty will depend primarily on an acceleration of economic growth, particularly in agriculture, combined with effective implementation of poverty alleviation programs. India's poverty alleviation strategy appropriately recognizes that production-oriented programs, which aim at accelerating the overall pace of economic growth, and poverty alleviation programs, targetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (MNP), the Integrated Rural Development Program (IRDP), and the National Rural Employment Program (NREP). The IRDP and NREP are targeted programs aimed at increasing the incomes of the poor rapidly, either through the transfer of productive assets or direct employment. The HNP, aims at broadening the provi- sion of social infrastructure and basic services which enhance the human capi- tal of the poor and improve living standards. These programs represent a vitally important commitment of the Government to address the needs of the poorest. The scale of the poverty problem in India, combined with the inherent  -8- diflicultieu in implementing poverty programs in any countiy, imply the need for continued efforts to enhance the effectiveness of Lhese programs. PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 82 loans and 165 development credits to lndia totalling USS6,526 miLlion and USS12,268 million (both net of cancellation), respectively. Of these amounts, US$1,524 million has been repaid, and USS6,207 million was still undisbursed as of September, 30, 1984. Bank Group disbursements to India in the current fiscal year through September 30, 1984 totalled US$171 million, representing a decrease of about 40 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1984. 23. Since 1959, IFC has made 29 commitments in India totalling US$223 million, of which USS34 million has been repaid, US$56 million sold and US$34 million cancelled. Of the balance of US$98 million, US$91 million repre- sents loans and US$7 million equity. A summary statement of IFC disbursements as of September 30, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in ita support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs Lo 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 telecomunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of develop- ment finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan and in the approach being taken by GOI in the preparation of the Seventh Plan. First, high priority will continue to be given to GOIVs agricultural program. While India has made significant progress in agriculture, productivity growth will have to be sus- tained 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 assis- tance will be provided for industrial development. Third, the review of per- formance 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 telecommunications sectors to alleviate critical shortages which constrain output in both agricultural and industrial sectors.  -9- Fourth, support of urban development and other GOI basic social services programs for the poor vill 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. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign aLsistance both to uffset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth rates achieved during the first four years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture and irrigation. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of tne Bank Group assistance to India in the past vas provided from IDA. However, IDA lending to India is declining from a peak of US$1.6 billion in FY82, 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 sup- plement 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 15.2Z in 1984/85. This ratio is projected to rise to around 20Z 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 con- siderably above historical levels, they are still manageable and will not adversely affect India's creditworthiness. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 34Z of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with 62%, 33Z 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 USS9.6 billion or 36% (IDA's US$7.8 billion and IBRD's US$1.8 billion). As of September 30, 1984, outstanding loans and credits to India held by the Bank totalled USS17,271 million, of which USS6,207 million remain to be disbursed, leaving a net amount outstanding of US$11,064 million.  -10- PART IIl - ACRICULTURE AND ACRICULTURAL EXTENSION IN INDIA A6ri culture 2'9. A major objective of agricultural policy in India during the past ;5 years has been to achieve self-sufficiency in foodgrains and to izicrease farm incomes in an equitable manner. Significant progress has been made: there has been a remarkable increase in foodgrain production with India attaining self-sufficiency, although a shortage of edible oils persists. Nevertheless, continuing efforts to improve agricultural productivity are essential to meet the increase in demand for food for a population 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 cuuntry have shown little growth in agricultural production. The projec- tiuns of demand for foodgrain by 1990, the last year of the Seventh Five-Year Plan, call for foodgrain production of 168-170 million tons annually, compared with the production of about 151 million tons in 1983/84; these projections require an annual growth of about 2.7%, com- pared with the growth rate of about 2.5% per annum over the past 15 years. 30. Nearly 90% of the recent increases in food production have come from wheat and rice, predominantly in irrigated areas. Less impressive results are expected in the future because cultivated areas benefitirng from high-yielding technology are beginning to experience problems not confronted previously, including increasing incidence of pests and disease and micro-nutrient deficiencies, demanding even more sophisticated technology. Moreover, most of the future increase in foodgrain production will have to come from rainfed regions, which are expected to constitute more than 50% of the area under cultivation, even after the nation's irrigation potential has been fully developed. Hence, greater problems, both in developing the improved technology needed for such heterogenous agroclimatic conditions and in transferring this technology and know-how to farmers can be anticipated. 31. The future pattern of agricultural development in India points to the crucial role that improved agricultural extension and research will have to play in helping the country sustain self-sufficiency in foodgrains. The improvement of agricultural extension remains a major, yet relatively low-cost means of increasing agricultural productivity, of making more effective use of past investments in infrastructure and research, and of reaching all farmers, especially small farmers. Agricultural Extension 32. Soon after independence in 1947, the Government of India (GOI) began sponsoring a number of programs designed to meet the need for more effective, country-wide agricultural development, but these programs mostly met the needs of larger farmers. In order to achieve a more broadly based increase in agricultural output and in response to changing rural conditions, GOI introduced in 1977, with IDA assistance, a different  l-11 approach to agricultural extension through the training and visit (T&V) sysLem. The T&V system aimed at increasing farm productivity and the income of farmers by simultaneously aadressing constraints to the transfer ot new agricultural technology, the dissemination of the results of research, and obtaining feedback on actual farm problems. It did so by providing farmers, on a reguLar and systematic basis, with up-to-date advice on proven farming practices best suited to their specific conditions. These objectives were accumplished by a fixed schedule of training and visits by field staff supported by professional advice from state-level institutions. 33. Organizationally, the T&V system has sought to establish a single Line of command from the State Director of Agriculture to the Village Extension Worker (VEW) and to merge the VEWs and aLl agricultural field staff into a unified extensicn service, employed exclusively on agricul- tural extension. Between 700 and 800 families are served by a VEW, work- ing through selected contact farmers. An Agricultural Extension Officer (AEO) supervises about eight VEWs and works with them during field visits. Subdivisional staff include a Subdivisional Agricultural Officer (SDAO), with an Assistant SDAO in larger units, to ensure satisfactory supervision, training, and guidance to about 6 - 8 AEOs. To strengthen technic.' support and training, a team of Subject Matter Specialists (SMS) at the sub-divisional level instructs VEWs in agronomy, plant protection and related topics. At the district level, a District Agricultural Officer (DAO) supervises the work of subdivisional staff. World Bank Activities in Agricultural Extension 34. World Bank assisted projects have introduced the T&V system of agricultural extension in 13 Indian States. 1/ However, introduction of 1/ The Orissa Agricultural Development Project (Cr. 682-IN, April 1, 1977); the Madhya Pradesh Agricultural Extension and Research Project (Cr. 712-IN, June 1, 1977); the West Bengal Agricultural Extension and Research Project (Cr. 690-IN, June 1, 1977); the Assam Agricultural DeveLopment Project (Cr. 728-IN, June 30, 1977); the Rajasthan Agricultural Extension and Research Project (Cr. 737-IN, November 14, 1977); the Bihar Agricultural Extension and Research Project (Cr. 761-IN, January 6, 1978); the Composite Agricultural Extension Project (Cr. 862-IN, February 16, 1979 - 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) supports foLlow-up extension work in the States of Madhya Pradesh, Rajasthan and Orissa bringing the total World Bank assisted T&V system projects to 14.  -12- Lhe T&V system has not been easy. The shitt from a system based on multi- purpose functionaries to one based on professional agricultural extension carried out by single-purpose extension workers involves major administra- tive and conceptual reform that inevitably encounters bureaucratic, poliLical, and logistical hurdles. The new system also calls for major attitudinal changes on the part of farmers and concerned Government oilicials. The early years of implementation of the T&V system have highlighted a number of underlying problems in agricultural extensinn projects financed by the World Bank in India which need urgent attention. These include: the involvement ot extension staff in non-extension activities; insufficient research-generated technology; poor feedback from field to research institutions; weak incerministerial and interdepartmen- tal coordination; and poor monitoring and evaluation. The continuing involvement of extension staff in non-extension activities and the problems concerning relevant technology being extended to farmers, which are the two most intransigent constraints, are being addressed under the National Agricultural Extension Project (NAEP 1) 1/ and would be given equal attention under the proposed project. 35. Indicators of the impact of completed five-year, IDA-supported agriculturaL extension projects are favorable. Recent monitoring and evaluation studies 2/ undertaken in Gujarat, Haryana and Karnataka under the Composite Agricultural Extension Project (CAEP) (Cr. 862-IN) have shown that some 90% of contact farmers and 70% of non-contact farmers knew their VEW by name, and that over 75% of contact farmers received regular visits tram extension staff. These studies have also consistently indi- cated a positive relationship between the frequency of VEW farm visits and technology adoption. While the direct impact of the T&V system on agricultural production is difficult to quantify, appreciable improvements in oLutput and the adoption of recommended practices have been achieved. In Gujarat, average foodgrain production during the period 1978/79-1982/83 increased by about 25%, compared to the five-year average of the preproject period. Increases were also registered in the average yields of pearl millet (47%), sorghum (24%), wheat (22%) and pulses (11%) during the same period. In Karnataka, agricultural production has increased measurably over the past few years. In 1983/84, a year of unusually favorable weather conditions, Karnataka reached record production levels in foodgrain (7.1 million tons), pulses (0.9 million tons), oilseeds (1.3 million tons), and sugarcane (14.0 million tons). As a result, the State moved from being a traditionally foodgrain deficit area to one reporting a marginal surplus. In Haryana, Eertilizer consumption almost doubled from 1977/78 to 1982/83 and pesticide usage increased by 65%, with resulting gains in average foodgrain production during 1980/81-1982/83 being 25.6% above the average level of 1976/77-1978179. Furthermore, a special study 1/ Credit 1523-IN of October 2, 1984. 2/ Monitoring and Evaluation Reports for Rabi Season (October-February) 1982/83 and Kharif season (June-September) 1983/84 for Karnataka, Haryana and Gujarat.  - 13-- carried out in Haryana 1/ has aLso shown that since 1981 wheat yield increases of 2% per annum are directly attributable to the effects of improved extension. More significant for the longer run, there have been important changes in cropping patterns in Karnataka and Gujarat which are clearly the consequence of extension advice given to farmers. Although it is difficult to ascertain and quantify which of these improvements are directly attributable to extension, it is not unreasonable co expect that some of them have resulted from improved extension services and from closer links between extension and field-based research activities. 36. Overall, the World Bank's experience with improving agricultural extension services in India has been positive. There is growing evidence of its favorable impact and it has received wide support from the farming community and State Departments of Agriculture. Experience also shows that the system adopted for technology transfer is fundamentally sound and that the impact on production, even in the short term, can be substantial. In several States, the extension service is able to identify constraints at the farm level and the agency responsibLe for their alleviation. It is also exerting considerable pressure on the research support network to re-orient its research priorities to meet the needs of farmers. Hence, it is intended that the World Bank continue supporting the introduction of the T&V system of extension in the States that currently operate a dif- ferent system but wish to change. Moreover, since extension reorganiza- tion is still institutionally immature in many States which have accepted the T&V system, it is essential that the technical and supervisory support of the Bank be sustained. PART IV - THE PROJECT 37. The proposed project was prepared by the Government of India and the State Governments of Gujarat, Haryana, Jammu and Kashmir, and Karnataka. The project was appraised in June 1984. A report entitled "Staff Appraisal Report - National Agricultural Extension Project II" (No. 5254-IN, dated March 7. 1985) is being distributed separately to the Executive Directors. Negotiations were held in Washington, D.C. in February 1985. The Government of India and the participating State Governments, were represented by a delegation coordinated by Mr. Prithvi Singh of the Department of Economic Affairs, Ministry of Finance. A Supplementary Project Data Sheet is attached as Annex [II. Project Objectives and Rationale 38. During the initial years of an extension project emphasis is usually placed on the establishment of an administrative framework for extension and the provision of an information service focussed on low-cost technology. Under che proposed project, this would be the objective in 1/ The Impact of Agricultural Extension. A case study of the T&V System in Haryana, India by Gershon Feder and Roger H. Slade.  -14- iHie itaTt* nt Jammu and Kashmir in which the T&V extension system would be iWr,du,td for the tirst time. At the same time, while current extension pr,ijects have helped to establish more professionaL extension services and lbroaden the coverage of the farming population, further strengthening and .leepelning of the extension effort is required to help to firmly establish the r&v extension system on a continuing basis in the States already ct,vered. In addition, more attention needs to be given at both the Center anrd State levels to moniLoring and e-aluation of the impact of extension activities. Thus the proposed project would build upon the inscitutional base developed under the Composite Agricultural Extension Project (CAEP) (Cr. 862-IN) in the States of Gujarat, Haryana and Karnataka to improve Lhe coverage, depth and quality of their respective extension services. Through IDA's involvement in the project, state governments would be assisted in providing a more sophisticated and complete extension system which wouLd be capable of addressing all aspects of farm improvements and ensure strong linkages with agricultural research currently being sup- ported by IDA under the National Agricultural Research Project (NARP I). 39. The project seeks to achieve the following specific objectives: (i) Administrative Consolidation and Institutional Development. While the T&V extension system has already been successfully introduced in three of the participating States (Gujarat, Haryana and Karnataka), its benefits can be further increased. The project aims to consolidate the administrative changes introduced under CAEP (Cr. 862-IN) and to sustain the commitment among decision-makers and extension staff in the par- ticipating States to a full acceptance and improved effectiveness of T&V extension. The project would thus provide an important incentive for ensuring the continuation of extension reform in these States. In addition, the proposed project would introduce the reorganized extension service along with related training, adaptive research, and monitoring and evaluation in the State of Jammu and Kashmir based on the experiences gained in previous State extension projects in India. (ii) Expanded Coverage. Experience gained thus far from existing State projects has identified the need for more specialized extension support in order to meet the needs of aLl farmers to provide more relevant and usable recommendations, and thus to realize the potential production increases which could be achieved through expanded coverage. The project is designed to address this need by broadening the technical subjects covered under agricuLtural extension to include, inter-alia, soil and water management, farm management, horticulture and farm forestry. More emphasis would also be given to tribal and hiLly area communities, and small and marginal farmers. The project would also expand extension services into new agriculturaL areas not previously covered under the Composite Agricultural Extension Project (Cr. 862-IN). (iii) Quality Improvement. The project would seek to ensure improve- ments in the quality of extension services. In addition to training programs required to establish reorganized extension in the State of Jammu and Kashmir which is seeking to change its existing service, special emphasis would be placed on expanded and improved training programs to  -15- address the additional Lechnical subjects to be covered. The Directorate ot ExLension (DOE) of COI's Ministry of Agriculture would help to develop the capability ot the States and guide them in coordinating extension approaches, improving the roLes ot SMSs, AEOs and contact farmers; estab- lishing close permanent links with research, and in implementing fieLd trials and adaptive research on which to base relevant Location and resource-specific technical recommendations. Other areas which require qualitative improvement incLude Lhe development of more responsive and specialized training, and information/communications support, including improved utilization of mass media to complement the T&V extension system. (iv) Extension/Research Linkages. Although research is providing increasingly effective support to extension, improvements are needed in adaptive research and field trials related to actual farming conditions, and in better communication between extension and research staff on farmer needs and research priorities. The project would aim to improve research/extension Linkages by ensuring farmer/extension staff participa- tion in the identification of research programs and by encouraging the State Agricultural Universities (SAUs) to adopt research strategies designed for differing farm situations. At the Central level, the Indian Council of AgriculturaL Research (ICAR) staff would participate in the Extension Technical Advisory Committees, to be established under NAEP I, and join regular field visits of extenson staff to review actual farming conditions and activities. 40. To enable participation in the proposed project, the governments of the four project States have made adequate financial provision to cover the first year of project costs in their 1985/86 State Plans and confirmed that their projects would be included in their future annual State Plans with sufficient funds to cover all project costs. Beginning July 15, 1986 and each year thereafter, the project states would furnish their Project annual budgets to the Association for its review (para. 6, Schedule 2 to the draft Project Agreement). Each state has also made suitable arrange- ments with its SAU regarding the SAU's role in project implementation. The States ot Gujarat, Haryana, and Karnataka have utilized all proceeds of Credit 862-IN or have made satisfactory arrangements for the disposal of any balance of funds available under it. They have also submitted draft completion reports covering these investments. The individual elements of Lhe project components are summarized below. Project Description 41. Incremental Staff Requirements. Beyond the staffing levels required under the Composite AgriculturaL Extension Project (Credit 862-IN), the three states of Gujarat, Haryana, and Karnataka would require additional field staff, supervisory personnel, and SMSs to meet the needs of the broader coverage and increased specialization provided for under the proposed project. The additional SMSs would be required to handle new technologies. such as water and soil management, and the development of tribal areas in Gujarat; and dry-land farming, horticuLture, mechanisation and plant protection in Haryana and Karnataka. In addition, lower ratios of farm families to VEWs are justified in cer-  -lf. tnin ran', *iuch a!} 1n newly irrigated areas, and tribal and hilly areas requlring more ntenlqivp extensiun coverage. In Lhe State of Jammu and Kaqhmir (J&K), an thi TI&V system is introduced, agriculrural. extensinn, adaptive research and training activities would need strengthening. The stafE numbers, disciplines and training required have been based on the experience with similar 1&V projects in other states. Due to the hilly terrain in J&K, the r&v system would be suitably modified in areas where travelling and contacLing a specified number of farmers (8-10) on a daily basis is difficult. incremental staffing requirements vary among the four participating States. [n each, incremental staff positions created under the project would be tilled by staff with satisfactory qualifications and experience in accordance with an agreed schedule (para. 4, Schedule 2 to the draft Project Agreement). Furthermore, all extension staff under the project would be used exclusively for agricultural extension activities, and the emoluments, benefits and promotional prospects of staff assigned to the extension service would not be adversely affected as a result of such assignment (para. 2, Schedule 2 to the draft Project Agreement). Moreover, by September 30, 1987, each participating State wouLd furnish IDA for its comments, a mid-term review of project execution focussing especiaLly on the adequacy of extension field staff arrangements and adjust the staff and facilities deployed to the extent found necessary by the review taking into account IDA's comments (para. 5, Schedule 2 to the draft Project Agreement). 42. Infrastructural Facilities (a) Buildings. The availability of appropriate housing within the field workersirareas of operation is critical to effective extension. Low-cost housing would be provided to meet these needs where they are required. However, all participating States would continue to encourage the use of rented accommodation by field staff wherever this is possible. The project would also provide for additional office buildings and train- ing facilities in each State. (b) Transport. Effective agricultural extension is based on a system of regular and frequent farm visits by field staff. Adequate transport would be provided to maintain fixed visit schedules and to enabLe supervisory staff to reach the field easily and frequently. Motorcycles, mopeds, and bicycles would also be provided on a loan- purchase basis under satisfactory terms to meet project needs and to ensure their use by field staff. Accordingly, the project States would provide its staff with credit for the purchase of vehicles and financial incentives, including appropriate travel allowances, to encourage their optimal use (para. 3, Schedule 2 to the draft Project Agreement). (c) Equipment. To meet the needs of expanded coverage of exten- sion activities and increased training, the project would provide funds for the incremental costs of office equipment and furniture and for audio- visual aids to support extension operations. 43. Training. Given the increased sophistication and specialization of extension services in the States of Gujarat, Haryana and Karnataka,  -17- training programs tollowed under the Composite Agricultural Extension Project (Cr. 862-IN), would be further intensified. The extension educa- tion wings of the Agricultural Universities of Cujarat, Haryana and Karnataka would continue to be responsible for the in-service training of SMSs and other higher level extension staff through regular monthly workshops. Courses would be developed to cover the new areas of specialization such as watershed management, horticulture, farm forestry and soil conservation. To improve project implementation and supervision, training courses in monitoring and evaluation, and extension management would also be added to the training curricuLum. The induction and in- service training needs of the State of Jammu and Kashmir would be organized by its Department of Agriculture (DOA) in collaboration with its State Agricultural University and include induction orientation and refresher courses, monthly workshops, fortnightly training sessions, additional seasonal training programs and special short courses for VEWs and AEOs. Training programs would also be arranged by DOA and SAU for more senior staff. The training programs in all participating States would support staff development through courses tailored to the needs and qualifications of staff. Additional training facilities (seminar halls, trainee hostels) and training coordinators would be provided to meet participating State needs as required. 44. Monitoring and Evaluation (M&E). In Gujarat, Haryana, and Karnataka, M&E units established in State Departments of Agriculture (DOA) under Credit 862-IN would be strengthened under the proposed project to expedite and improve the quality of analytical work. For this purpose, these units would be provided with additional staff (field investigators, technical officers, agricultural supervisors and agricultural economists) and incremental operating costs as identified during appraisal. A new M&E unit wouLd be established in Jamnu and Kashmir in its DOA with respon- sibility for executing M&E in line with the methodology already estab- lished and agreed for the other participating States. Retroactive financ- ing has been provided for these components (see para. 54) to ensure that the staff of these units would receive early training to undertake their responsibilities under the project (para. 3 of Schedule I to the draft Development Credit Agreement). 45. Adaptive Research. Adaptive rcsearch support for the extension service would be strengthened in Cujarat, Haryana, and Karnataka by the provision of additional funds for the conduct of on-farm trials and new adaptive research facilities would be developed in Janmnu and Kashmir. 46. Operating Costs. The project would provide funds for incremental operating expenses to cover the costs of publicity, training and demon- stration materials, housing and travel allowances and the operation of vehicLes. Project Organization and Implementation 47. At the Central level, the Directorate of Extension (DOE) would be responsible for overseeing project implementation, for policy guidance of extension strategy on a nationwide basis, and for coordination with  -18- r,1.it.d Govvrnment departments and other institutions, particularly in ,-ipcL -it training. DOE would also be responsible tor providing the pri]ect States with such technical assistance as they may require, as well as tor monitnring and evaluation of extension activities (Section 3.04 of ihe draft Development Credit Agreement). 48. At the state level, the Secretary of Agriculture and the Director ,it Agriculture would have overall responsibility for implementing SLatewide extension programs. Within each State, an Additional Director ot Agriculture (Extension) would be responsible for the day-to-day manage- ment of the extension service supported by the administrative machinery of the Department. In the case of Jammu and Kashmir, an Additional Secretary o[ Agriculture would coordinate implementation of the project with a Joint Director of Agriculture responsible for day-to-day management in the two divisions of the State. Project Coordinating Committees (PCC) already exist in the Project States of Gujarat, Haryana and Karnataka and a PCC would be established in Jammu and Kashmir by August 31, 1985 (para. 8, Schedule 2 of the draft Project Agreement). The PCC's would be chaired by the Agricultural Production Commissioner or Secretary for Agriculture, with the Additional Director of Agriculture (Extension) acting as Secretary, and the Vice Chancellor of the SAU, Directors of Agriculture and Horticulture, and representatives of concerned departments and agen- cies as members. The Committees would meet at Least twice a year to review progress of project implementation and resolve any problems that may arise. 49. L ordination among extension, research, and allied agencies (input supply, finance, credit, irrigation and the SAU) would be maintained through a series of interdisciplinary committees at State, zonal and district levels, as well as through informal contacts, exchange of staff, workshops, training courses, and collaboration in field testing programs. Programs of research and extension cooperation would be reviewed by exist- ing State Technical or Research Advisory Committees, priorities determined and recommendations formulated for adoption in the next agricultural season. 50. DOE would undertake comprehensive semi-annual field reviews of each State subproject, and together with the States, be responsible for the preparation of semi-annual progress reports. DOE would submit these semi-annual prcgress reports each June and December to IDA, giving for each subproject a summary of activities undertaken during the prior six- month period (Section 3.04(c), draft Development Credit Agreement). The States would also prepare completion reports for their respective sub- projects. Monitoring and Evaluation 51. While continuous monitoring and evaluation (M&E) is an integral part of all ongoing IDA-assisted extension projects in India, participat- ing States have been slow in establishing M&E units and in collecting and analyzing appropriate data. Recognizing this shortcoming, in 1981/82, IDA developed an operational manual designed specifically to strengthen M&E of  -19- T&V extension projectr;. Nevertheless, the quality and relevance of much ot the M&E work being done has remained substandard as many State M&E units continue to suffer from constraints in staffing and other resources. 52. Under the proposed project, monitoring, reporting and analysis of physical and financial inputs would be the responsibility of each State Department of Agriculture. StaLes would undertake monitoring and evalua- tion of the project in accordance with procedures satisfactory to IDA and the summaries of results would be forwarded to IDA (through DOE) at agreed intervals (para. l(b), Schedule 2 to the draft Project Agreement). DOE's Field Extension Unit will also provide technical guidance to State M&E units. Project Costs and Financing 53. The total project cost is estimated at US$83.6 million, of which US$3.6 million represents foreign exchange costs. Physical contingencies (US$2.8 million) of 5% have been applied to civil works, vehicles, equipment, travel expenditures and other operating costs, and 10 for training and vehicle operating costs. Price contingencies of US$14.1 million have been added for local costs at 8.5% for 1984/85-1990/91, and for foreign costs at 3.5% for 1984/85, 8% for 1985/86, and 9% for 1986/87 onwards. 54. The proposed IDA credit of US$49.0 million equivalent would finance about 602 of total project costs, net of taxes and duties, and would cover all foreign exchange costs. The balance of funds for the project would come from GOI and participating State Governments. GOI would channel the Credit to the participating States in accordance with its standard terms and conditions for Central Government development assistance. The project would provide for retroactive financing of up to US$2.0 million for expenditures incurred after September 30, 1984 for essential start-up activities including induction, orientation, and pre- service training of extension staff, as well as the establishment of a monitoring and evaluation unit in Jammu and Kashmir (para. 3 of Schedule I to the draft Development Credit Agreement). Procurement and Disbursement 1/ 55. Annex IV attached, details the manner in which items would be procured under the project. Civil works contracts mostly for houses and training facilities (US$28.5 million) would be small and widely dispersed, both geographically and over time, and therefore would not be suitable for international competitive bidding. Contracts would be awarded on the hasis of local competitive bidding in accordance with existing State Government procedures, which are satisfactory to IDA. Where contractors are not forthcoming to execute the works, small civil works estimated to 1/ All figures in this paragraph are inclusive of contingencies amount- ing to approximately US$16.9 million.  -20- c.iqt US$25,000 vquivaIent or less may be carried out through force account. Vehicles (US$6.1 million) and equipment (US$1.8 million) of various types would be required unter the project. These would be pur- chased in small quantities over several years and their use would be widely dispersed in rural areas. To ensure adequate maintenance and the availability of spare parts, they would be procured by local competitive bidding under Lhe State Governments' normal procurement procedures which are satisfactory to IDA. All contracts for civil works, vehicles, equip- ment and furniture estimated to cost US$100,000 equivalent or more would be subject to IDA review. Orders for the purchase of minor equipment, furniture, and supplies would be bulked wherever possible and purchased according to established local bidding procedures, except where valued at less than US$50,000 equivaLent, in which case they would be purchased by prudent shopping through normal commercial channels. The balance of project costs (US$47.2 million) for che four States would consist of training (US$2.0 million), incremental saLaries (US$28.1 million), incremental operating expenditures for offices and vehicles and travel allowances (US$17.1 million), all of which would not involve procurement. 57. The proceeds of the credit would be disbursed against the incremental costs of civil works (55% of expenditures); vehicles, equipment, furniture and materials (100% of foreign expenditures and 70% of local expenditures); training and research (100% of expenditures); incremental salaries 2/ (66% expenditures); incremental operating expen- ditures (55% on a declining basis). Disbursements against staff costs, operating expenses and payments of less than Rs 300,000 under civil works contracts, and payments under Rs 150,000 for training, localLy-procured vehicles and equipment, would be made against certified statements of expenditure. These statements of expenditure would be audited at least annually and the audit report submitted to IDA not later than nine months after the end of each year. Supporting documents for these expenditures would be retained by State Governments and the DOE for inspection in the course ot project review missions. Disbursements against expenditures for all other items would be fully documented. Copies of all State disburse- ment applications would be provided to DOE prior to submission to IDA. Benefits and Risks 57. The principal benefits of the proposed project would be co increase crop production and. thus farm incomes in the four project States by providing improved extension services to farmers. 58. Attributing a precise level of economic benefit to this type of project is difficult, since it is impossibLe to determine what proportion of benefits expected from improved agricultural practices is due to exten- 2/ Actual disbursements against this category in the States would be made against a proportion of total eligible staff costs (18% for Cuiarat, 6% for Haryana, 53% for Jammu and Kashmir and 3% for Karnataka) as the basis for estimatirg 66Z of incremental salaries.  -21- sion alone and what is due to such other factors as past research efforts, the use of additional inputs, or more work by the farmer. In practice, it is generally the combination of all these factors , with extension serv- ices acting as the catalyst, that brings the desired benefits. Since the incremental cost of the project is very low per hectare and per farm family, even small production increases would generate high rates of return. In areas where the reformed extension system has been in opera- tion for some time, including the States of Cujarat, Haryana and Karnataka, yield increases are indicated which would give a rate of return well in excess of the opportunity cost of capital (12%). 59. In late 1981, a study undertaken by the World Bank in collabora- tion with Haryana Agricultural University 1/ concluded that the T&V exten- sion system is more successful in delivering information to farmers than the traditionaL extension system, achieving significantly more direct contact with farmers and that rates of knowledge diffusion for all farming practices were faster than comparable rates under the previous system. The results of the study suggested that there has been in the case of wheat, a yieLd increase of 2% per annum over the first four years of CAEP (Cr. 862-IN), and even though the results for rice were inconclusive, the wheat yield increase alone would be sufficient to generate an internal rate of return in the range of about 30-40% to the incremental investment in extension. Moreover, there is clear evidence from areas where the T&V system is well established that it is exerting considerable pressure on other support services, particularly research and input services, to improve performance in parallel with extension, which underscores the important lead effect of a strong extension service. 60. As mentioned above, however, maintenance of a reformed agricul- tural extension system is not achieved without difficulty. Direct IDA involvement in the project would decrease the risk that a single-line, single-purpose extension service would be used for non-extension functions and that extension staff would be transferred to handle other administra- tive activities within the Department of Agriculture. Although extension activity would continue to be vulnerable to outside pressures, there is increasing recognition that its primary function must be technical and that it cannot substitute for weaknesses in other support services. To reinforce this concept an assurance was obtained that all extension staff of all Project States assigned to DOA for the purposes of the Project would be used exclusively for agricultural extension work and that such staff would not be adversely attected in respect of their entitlement to emoluments, benefits and promotional prospects (para. 2, Schedule 2 to the draft Project Agreement). 61. To develop professional cadres within their respective fields of expertise is difficult, but nevertheless necessary for achieving higher professional standards and to encourage staff to remain within their 1/ The Impact of Agricultural Extension. A case study of the T&V System in Haryana, India by Cershon Feder and Roger H. Slade.  -22- Iper :i ai ies. rhe training that would be involved, with the increased specialization and expansion at extension services could present ditticulties. There has been considerable improvement more recently i., systematically identifying training needs by drawing up suitable training programs to meet these needs and selecting appropriate staff for training. rhis trend is being further encouraged under NAEP I through the strengthening of the Extension Training Unit of the Directorate of ExLension of COI's Ministry of Agriculture and through the training com- ponent in the State subprojects under the proposed project. 62. Without an effective two-way communication between research and extension, it is unlikely that the technology needed by farmers to increase productivity would be developed and transferred. To promote such a linkage between extension and research, each State participating in the project has provided a written memorandum of understanding between the SAU and the Department of Agriculture spelling out university responsibilities for the support of the extension services. To date, technology has not been a major constraint, but as the backlog of research findings becomes more widely adopted, additional adaptive research, field testing and development of new technology would be required. While early work may be aimed at zonal and district recommendations, ultimately technology development needs to be directed more at meeting the needs of smaLler groups of farmers and those in more remote and difficult areas. The National Agriculture Research Project (for which a second project is under appraisal) would help to strengthen research efforts to provide relevant technology for extension transfer to such farmers. 63. A number of general administrative constraints and policy problems encountered in current extension projects, especially in the early years of implementation could impede development of extension and wouLd require the continuing attention of GOI and IDA. Among these are promotion by seniority, frequent transfers, changes of discipline and failure to imple- ment objective selection criteria for training. Some success has, however, been achieved in other aspects of administration, benefitting extension. These include the installation of a singla-function extension service, provision of additional monthly travel allowances and increased vehicle maintenance allowances to extension staff, as well as Loans for individual purchases of vehicles by staff engaged in extension field work in all participating States. PART V - Legal Instruments and Authority 64. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the States of Cujarat, Haryana, Jammu and Kashmir and Karnataka and the Recommendation of the Committee provided for in Article V, Section ltd), of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 65. Special conditions of the project are listed in Section III of Annex III.  -23- bb. I am satistied that Lhe proposed credit would comply with the Articles ot Agreement ot the Association. PART Vl - Recommendation 67. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President March 5, 1985  ANNEX I Page 1 of 5 T A B LE A INDIA - SOCIAL INDICATORS DATA SHIET IniA kEERENCE GROUPS (WEIGHTED AVERAGES) '. uicT (MOST RECENT ENTIMATE) 'b jqbotb I9Ob RCECNT LOW INCOME YIDDLE IcOME sesbo - i9u0ob ETIMATILb ASIA A PACIFIC ASIA & Prciplr ASIA (TIOUAND Q2. C) TOrTAL 1287.6 3287.6 3287.4 ARICULTURAL 17B3.5 7110.5 1812.3 (MP PRE CAPITA (053) hi.1 1n1U.1 2hO.n 271.6 I303.2 CCC COWSISTIOU PR CAPITA (KILOGRAMII or OIL FIUIVALENT) 79.0 111.0 158.0 272.0 567.3 POWATZO A VITA. TL TI8TICU POPULATION.Mhl1-YZAR (THOUSANDS) 434149.0 547569.0 711915.0 URSAN POPULATION (2 (ur TOTAL) 391.0 39.0 24.3 21.7 34.7 POPULATION PBOJZCTIIl2S PJPULATION IN YrAl 2o00 MI:LL) 994.4 SITATIONARY POPULATION (NILL) 1707.2 POPULATION MOYENTUM 1.7 P-1PULATION DENSITY PER SQ. DI. 132.3 365.6 213.4 166.6 261.9 PER SQ. KM. AGI*. LAND 246.6 307.5 317.1 345.5 1735.1 POPULATION AGE STIUCTUtE (t) 0-i' YltS 40.9 42.7 39.3 35.8 39.0 35-44 YRS 54.5 54.2 57.6 59.6 57.6 45 AND ABOVE 4.6 3.1 3.1 4.3 3.3 POPULATION CROWrTN RATE (X) TOTAL 1.89 2.3 2.2 1.9 2.3 URBAN 2.3 3.3 3.9 4.3 4.3 CRUDE MIRTH RATE CPER THOUS) 47.7 41.4 34.2 27.7 30.1 CRUDE DEATH RATE (PER TIOUm) 23.5 37.8 12.7 10.1 9.5 GRoss REPROoUCTION RATC 2.9 2.8 2.2 1.6 2.LO FAMILY PLANNINC ACCEPTORS. ANNUAL (TrOUSi 64.0 3782.0 6826.0 USERS (2 0F MAr ED WN) .. 11.7 28.0 .. 52.7 INDEX OIP Poo PROD. PER CAPITA (l9b9-73-100) 91.0 302.0 301.0 132.8 123.0 PER CAPITA SUPPLY OF CALOtRIS CZ 07 RKqUIRURNTS) 96.0 93.0 ". 97.7 314.4 F11o11mf (DIMS Pa DAT) 34.0 50.0 46.0 36.8 37.0 OF NHICH ANtKAL AND PUBRR 17.0 15.0 13.0 / 14.9 14.1 CHILD (ACES 1-4) DATH RAE 26.2 20.7 11.0 9.8 7.2 LIFE EXPECT. AT BIRTH (TEARS)