India - Second Andhra Pradesh Irrigation Project

Document of The World Bank FOR OMCIAL USE ONLY CA. :/2 e-- -2 Reort N. P-4238-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROFOSED LOAN IN THE AMOUNT EQUIVALENT TO US$131.0 MILLION AND A PROPOSED IDA CREDIT OF SDR 127.5 MILLION TO INDIA FOR THE SECOND ANDHRA PRADESH IRRIGATION PROJECT February 27, 1986 This doemleo hs a restlted dslhim mid may be _Id by recipients only in the perfoumance of I their sacal dude.. lbs coueb may mm ohemwise be disclosed witou Wod Bak xihorlzdom.  CURRENCY EQUIVALENTS (As of February 11, 1986) US$1.00 = Rs 12.51 Rs 1.00 = US$0.080 Rs 1 million = US$79,936 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 13.00. FISCAL YEAR April I - March 31 ABBREVIATIONS AND ACRONYMS AP - Andhra Pradesh APAU - Andhra Pradesh Agricultural University ARDC - Agriculture Refinance and Development Corporation (IU and CADD) - Irrigation Utilization and Command Area Development Department CADD - The commonly used contraction for IU and CADD CWC - Central Water Commission GOAP - Government of Andhra Pradesh GOI - Government of India NABARD - National Bank for Agriculture and Rural Development NARP - National Agricultural Research Project O&M - Operation and Maintenance SMS - Subject Matter Specialist SRBC area - Srisailam Right Branch Canal Subproject SRS area - Sriramasagar Subproject TMC - Thousand Million Cubic Feet T&V - Training and Visit (system of agricultural extension) VEO - Village Extension Officer WALAMTARI - Water and Land Management Training and Research Institute WCRC - Water Charges Review Committee  FOR OmCiL USE ONLY INDIA SECOND ANDHRA PRADESH IRRIGATION PROJECT CREDIT, LOAN AND P8OJECT SUMKARY Borrower: India, acting by its President. Beneficiary: The State of Andhra Pradesh Amounts: IBRD Loan: US$131.0 million IDA Credit: SDR 127.5 million (US$140 million equivalent) Terms: IBRD Loan: Repayment over 20 years, including five years' grace, at the applicable rate of interest. IDA Credit: Standard On-lending Terms: From the Government of India (GOI) to the Government of Andhra Pradesh (COAP) as part of Central assistance to State development projects on terms and conditions applicable at the time. GOI would bear the foreign exchange risk. Project Description: The objective of the proposed project is to increase agric-ltural production in the command areas of the Sriramasagar (SRS) and Srisailam Rigbt Branch Canal (SBBC) Schemes. Towards this end, the project would help to modernize and complete the existing irrigation network in 165,000 ha under the SRS scheme and extend its irrigable area by a further 163,000 ha. It would also help in the development of 65,000 ha in the SRBC Scheme. Improved design and operation principles would be introduced under this project to ensure a reliable and equitable irrigation service to farmers through (i) the introduction of new planning and design concepts; (ii) changes in irrigation system operation; (iii) improved management and maintenance standards; and (iv) the provision of training facilities for operation and maintenance staff and contact farmers. A possible risk is that GCOAP may face budgetary constraints resulting in a delay in project implementation. However, GOAP's capability to finance the project has been reviewed and the project implementation period suitably adjusted to match funding availabilities. Assurances were also obtained from GOAP that annual budgetary allocations would be made to provide the necessary funding for completion of the project as planned. Furthermore, with both GOI/GOAP's emphasis on the completion of ongoing projects before nev projects are taken up, it is expected that the required funding would be provided in a timely manner. Another risk is that GOAP may have difficulty in enforcing water allocation and management procedures planned for the project. However, given GOAP's commitment to this objective, as is evident from actions taken successfully in a previous project, this risk is expected to be minimal (para 79). The risk of not being able to store water in the Mannair reservoir site if the This document hs a retricted distribution and may be used by recipients only in the performance of their officim dutes Its contents may not otberwie be discbsed whout World Dank authoridtion.  villagers refuse to vacate the area above the dead storage level is considered acceptable since the resettlement of affected families is already in progress (under a resettlement program already begun by GOAP prior to this project) with additional provision being made for them under the proposed project. Moreover, in the event that the remaining villagers do not relocate, it is still possible to convey water down the Mannair river bed to serve the needs of the Sriramasagar subproject (para. 79). (USS Million Equivalent) Estimated Cost: 1/ Local Foreign Total Sriramasagar Subproject 125.2 34.7 159.9 Srisailam Subproject 151.0 20.1 171.1 Training 2.1 0.2 2.3 Monitoring and Evaluation 1.5 0.1 1.6 Other Support Services 0.9 - 0.9 Total Base Costs 280.7 55.1 335.8 Physical Contingencies 28.1 5.5 33.6 Price Contingencies 90.6 15.8 106.4 Total Project Costs 399.4 76.4 475.8 Financing Plan: 1/ (US$ Millions) Local Foreign Total GOI/GOAP 204.8 - 204.8 IBRD Loan 54.6 76.4 131.0 IDA Credit 140.0 140.0 Total 399.4 76.4 475.8 1/ Includes US$22.8 million equivalent in taxes and duties.  -iii- Estimated Disbursements: 1/ (US$ Millions) FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 Annual 6.6 28.6 36.2 46.9 46.8 44.0 35.3 26.6 Cumulative 6.6 35.2 71.4 118.3 165.1 209.1 244.4 271.0 Rate of Return: About 22Z Appraisal Report: No. 5883-IN, dated February 27, 1986. 1i By IBRD/IDA fiscal year.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO INDIA FOR THE SECOND ANDHRA PRADESH IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan and development credit to India for US$131 million and SDR 127.5 million (US$140 million equivalent) respectively, to help finance an irrigation project to increase agricultural production and farmers' incomes by increasing the irrigated area and maximizing the utilization of available water supplies in the State of Andhra Pradesh. Amortization of the Bank loan would be over 20 years including five years of grace. The IDA Credit would be on standard terms. The Government of India (GOI) would on-lend the proceeds of the loan and credit to the Government of Andhra Pradesh, in accordance with GOI's stand- ard terms and arrangements for financing state development projects. The exchange and interest risks would be borne by GOI. PART I - THE ECONOMY 1/ 2. An economic report, "India: Structural Change and Development Perspectives" (5593-IN, dated April 24, 1985), was distributed to the Executive Directors on Nay 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 mil- lion (in mid-1985) and an average per capita income of about US$260. Agriculture continues to dominate the economy, accounting for 36Z of GDP, 23Z of exports and about two-thirds of employment. The steady increase in population, which continues at a rate of 2.2X a year, has put increasing pres- sure on natural resources, in particular cultivable land. By the mid-1960s, nearly all productive land had been brought under cultivation. While irriga- tion 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 employment 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 1.4X p.a. and close to one-half of India's population continues to live below the poverty line. The pervasiveness and intensity of poverty is such that its alleviation has been and remains at the core of India's development strategy. 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the NABARD Credit Project (No.P-4225-IN), dated February 3, 1986.  -2- 4. During the 1950s and 1960s, India's economic performance was generally characterized by slow economic growth, moderate inflation and a sustainable external position. CDP rose at about 3.52, with agriculture and industry growing at 1.8% and 4.8% respectively; imports increased by 4.6Z and exports by 5.8% a year. India was able to reduce its dependence on foodgrain imports from a peak of 14Z of total foodgrain consumption in 1966/67 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 designed to stimulate exports. This resulted in a large increase in export growth to about 7.3% per annum in the 1970s compared with only 2.2Z per annum between 1950/51 and 1969/70. While expanding world markets, particularly in the Kiddle 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 Oil 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 p^sition 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% to 5.2% per annum while adjusting the country's external balance to the adverse price develop- ments 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  -3- the early 1980s. During the Sizth Plan period, GDP grew by 5.1Z per annum, 1/ well above India's long-term growth rate of 3.6Z. 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 1981182, the economy substantially recovered from the 1979 drought, with real GDP grow- ing by 7.6Z and 5.3:, respectively. The recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15Z in 1980/81 and 5.5Z 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 CDP growth to only 1.8Z, and put further strains on the balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain 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 perfor- mance of the infrastructure sectors, in particular coal and transport, led to a recovery of the economy in 1983/84. Agricultural output rose by 91, industrial output by 4.5Z and overall GDP by 7.4%. 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 2.61 a year-sufficient to 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 and encourage efficient use of other agricul- tural 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 40Z. Maintenance of ample, balanced operat- ing stocks to ensure smooth operation and even expansion of the public dis- tribution 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 1.7Z 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 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 4.5Z GDP growth per annum and 3.31 annual agricultural growth between 1980/81-1983/84 (two "normal" years) are more representative of the growth rates during the period.  -4- Bombay, reduced the growth of industrial output to 1.7Z in that year. Following the excellent monsoon in 1983/84, industrial output gained momentum and grew by 5.0X. Preliminary 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 8.7Z, 6Z and 2.5Z a year respectively, oil and gas production increased by 22.6Z. The rapid expansion of domestic oil production is largely the result of India's oil development program. Backed by substantial financial commitment, performance under the program has been excellent with real invest- ment 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 consumption 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 their mdture stage, further increases in domestic oil production will have to come mainly from new discoveries. 1I. 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 negligible levels to an average of 2.1Z of GDP in 1980-85. Gross domestic capital forma- tion increased from an average of 22.6Z of GDP in 1975-80 to 24.7Z in 1980-85 while gross national savings remained constant at an average of 22.6Z of GDP in both periods. The increase in capital formation 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 maintaining infla- tion under control. However, the Sixth Plan period was characterized by sig- nificant budgetary resource constraints. Despite massive additional resource mobilization efforts, public sector deficits exceeded 72 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. Hajor reasons BWhind the large deficits were continued losses by mos- 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 sub- sidies which are estimated to have reached 2.8% 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 averaging US$3.5 billion and 2.1Z of GDP during 1980-85. Several developments con- tributed to these relatively large deficits. First, the terms of trade  -5- 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' remittan- ces stagnated (reflecting slower developanent 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 stagnatioa 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 2.6Z 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 19R3/84. 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 ptices including increased imports of important agricultural commodities (sugar, jute, coconut oil and others), releases of sugar 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.GDP growth, external adjustment, and increased investment. The experience 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 neither 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 regain- ing 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 challen- ges provides the context for an assessment of development prospects and policies.  -6- 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 5X. 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 substitution where economically justifiable and the removal of infrastructural bottlenecks. 17. Achieving a GDP growth of around 5S a year will place heavy demands on policy adjustment and entail major 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 expansion of the country's irrigable area through completion of ongoing irrigation projects, as well as selective investment in new undertakings. Besides creating new irriga- tion potential, the efficiency of irrigated farming will have to be enhanced through the improvement of water management practices in existing irrigation systems. Greater mphasis 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 institutions 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 wake it necessary that this competitive pressure come mainly from within the domes- tic economy. An important complement, however, will be greater exposure to foreign trade to stimulate domestic competition as well as to induce tech- nological 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  -7- 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 initia- tives to stimulate efficient indigenization of 'sunrise' industries (energy exploration equipment, computers, telecommunication 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 reouired 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 througb 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 con- stitute about one-third of total investment in India, and the efficiency with which these investments are managed has an important bearing on the efticiency of total investment and the growth rate of the entire economy. There is sub- stantial evidence that better planning and management of public investments in power, coal, railways and irrigation could improve returns and lower the cur- rent 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 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 con- tinue to be well-founded demands for expansion of current and capital expendi- tures in the public sector, the burden for a reduction in the savings invest- ment 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 CDP 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 1/ Monopolies and Restrictive Trade Practices Act, 1969.  -8- 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 5S per annum will need to be complemented by measures which assure a viable balancc of payments position. Acceleration of industrial growth will lead to a substan- tial increase in import requirements, even after allowing for continued 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 ezport growth rates appear to be reasonably good because India's share in total world exports in value terms is only about 0.4%, 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 8Z export growth, the 5% 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. 26. In the event that official development assistance does not increase significantly from recent levels, 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 service 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 even- tualities 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 .he past, there are, of course,  limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. While 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 quan- titative 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 3.6Z per annum. If the rate of population growth can be brought to below 2.0% per annum, a 5.0Z growth rate would mean a doubling of the trend rate of growth of per capita income of 1.4Z per annum. Success in these efforts would make a significant dif- ference 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 achiev- ing 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 - BANK GROUP OPERATIONS IN INDIA 29. Since 1949, the Bank Group has made 91 loans and 182 development credits to India totalling US$8,487 million and US$13,753 million (both net of cancellation), respectively. Of these amounts, US$1,544 million has been repaid, and US$7,360 million was still undisbursed as of September 30, 1985. Bank Group disbursements to India in the current fiscal year through September 30, 1985 totalled US$179 million, representing an increase of about 5 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1985. 30. Since 1959, IFC has made 35 commitments in India totalling US$301 million, of which a total of US$168 million has been repaid, sold, terminated or cancelled. Of the balance of US$13 million, US$126 million represents loans and US$7 million equity. A summary statement of IFC disburse- ments as of September 30, 1985, is also included in Annex II (page 5). 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 impertance have been investments in irrigation, extension and on-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil  -10- imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of medium- and small-scale industrial enterprises, primarily in the private sector, through its support of develop- ment finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 32. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the 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 promot- ing greater efficiency and faster development of the industrial sector, increased assistance will be provided for industriaL development. Third, in line with the stress which the Seventh Plan gives to the expansion and more efficient use of basic infrastructure capacity and to the development of India's indigenous hydrocarbon resources, the Bank Group will continue to provide substantial support to the development of the energy, transport and telecommunications sectors to alleviate critical shortages which constrain output in both the agricultural and industrial sectors. Fourth, support of urban development and other GOI basic social services programs for the poor will also continue in light of the growth in population which, despite succes- ses 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 sup- port 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 comwunity, India successfully adjusted to the changed world price situation of the mid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade environment, and to sustain the relatively higher investment and growth raLes achieved during the Sixth Plan period. As in the past, Bank Group assistance ior 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. 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 billion in FY80, mostly due to funding constraints related to IDA. The amount of IDA  -11- 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 15.2% 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. 35. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1970/71, the Bank Group accounted for 22Z of total commitments, 11Z of gross disbursements, and 10% of net disbursements as compared with 68Z, 38% and 47%, respectively, in 1984/85. In 1984/85, about 26.3% of India's total debt service payments were to the Bank Group. On March 31, 1985, India's outstanding and disbursed external public debt was estimated to be about US$26.5 billion, of which the Bank Group's share was USS11.1 billion or 42% (IDA's US$8.9 billion and IBRD's US$2.2 billion). As of September 30, 1985 outstanding loans and credits to India held by the Bank totalled US$20,696 million, of which US$7,360 million remain to be disbursed, leaving a net amount outstanding of US$13,336 million. PART III - AGRICULTURE AND IRRIGATION IN ANDHRA PRADESH Background 36. Andhra Pradesh (AP) is India's fifth largest State. It covers an area of approximately 277,000 sq. kilometers and has a population of about 55 million, of which about 76% is rural. Agriculture contributes about 50% of the State's income and employs about 702 of its work force. Between 1970/71 and 1980/81, the rate of growth of AP's agriculture, forestry and mining sec- tors was about 3.2Z. The rate of growth in the State's secondary and tertiary sectors during the same period was about 4.0% and 7.0% per annum respectively, compared with the national average for these sectors of about 3.6% and 6.9%. The per capita income in AP (about Rs 1,267) approximates the national average. Climate and Soil 37. The State lies on the fringe of the equatorial zone, between latitude 12 37' and 190 54'. It has a 1,000 km coastline on the Bay of Bengal. Two of India's largest rivers, the Godavari and the Krishna, cross the State, creating large deltas at their outlets. AP has three seasons: the monsoon (kharif from late June to October), the dry season (rabi from November to February) an_ the hot, summer season (March to about mid-June), which is mostly  -12- rainless. The State has three distinct regions: (a) the Coastal region, comprising largely the Godavari and Krishna river deltas, which is agricul- turally the richest and best developed, with rainfall well in excess of 1,000 mm; (b) the Telengana region, north and west of the coastal zone with rainfall ranging from about 700-900 -m; and (c) the Rayalaseama region, occupying the south-western segment of the State with rainfall between 550 and 750 mm per annum, making it the poorest and least developed of the three regions. Irrigation in Andhra Pradesh 38. The main sources of irrigation water in AP are the Godavari and the Krishna rivers and their tributaries, supplemented with supplies from minor tanks and groundwater sources. About 3.0 million ha, out of a total cultivable area of 11.3 million ha, are irrigated. The irrigation potential of AP is estimated to be about 9.2 million ha. During the past 35 years, AP has invested heavily in the provision of irrigation. In the Fifth (1974/75-1979/80) and Sixth (1979/80-1984/85) Five Year Plan periods, invest- ments in irrigation accounted for 35% and 27Z of total development expenditures respectively. The Project Area 39. The project encompasses the command areas of the Sriramasagar (SRS) and Srisailam Right Branch Canal (SRBC) schemes (see Maps attached). The SRS scheme in the Telengana region on the Codavari river, has a total irrigation potential of about 679,000 ha. Under the proposed project, the irrigation network in about 165,000 ha in SRS would be modernized and completed, and the irrigable area extended by a further 163,000 ha. The SRBC scheme, in the Rayalaseama region, is in the Pennar river basin, on the right bank of a tributary, the Kundu. Its command area is approximately 77,000 ha. Under the proposed project, funds would be provided for the development of 65,000 ha of this command area. Climate, Topography and Soils 40. Rainfall averages about 700 mm in the SRBC area, and about 930 mm in the SRS area. Both areas are in the single-monsoon belt, although occasional storms occur during the northeast monsoon (November to February). Temperatures are fairly even throughout the year except for the very hot season (late March to early June). The SRBC area is fairly level, with gentle slopes and little segmentation; the SRS area has several secondary catchments and some quite large seasonal rivers on which there are cascades of minor tanks. The SRS area also has several granitic and basaltic outcrops typical of the Deccan plateau. The soils in practically the whole of the SRBC, and some 60% of the SRS area to be irrigated under the proposed project are black vertisols; the balance are red alfisols. Cropping Pattern 41. Drought-resistant crops, such as sorghum and pulses, prcai'inate in the project areas. Mainly rice, so-ghum and groundnuts grow in the tank com-  -13- mand of the SRBC area and rice in the SRS command area. The dugwells, mostly electrified, typically command 2 ha and are used to supplement rainfall in the wet season (kharif from June-October). In the dry season (rabi from October to February), they irrigate about 1 ha of high-value crops: cotton, groundnuts, and hybrid sorghum for seed. At present there is no surface irrigation development in the SRBC command, while development is partial and incomplete below the Mannair Dam in the SRS command. Upstream of the Mannair Dam the major irrigation network is nearly completed on about 120,000 ha and is under construction on a further 45,000 ha. However, in these areas, because of the poor design of the minors and field channels, deficient control structures, the absence of lining except for the main canal, and the lack of effective opera- tional control, tail enders on the distributaries do not receive an adequate irrigation service and the lower-lying areas by the head and middle reaches of the distributaries get waterlogged. Agricultural Support Services 42. Agricultural Extension and Research. The Agriculture Department is responsible for extension work in the project area. The IDA-assisted Training and Visit system of agricultural extension, which began in Andhra Pradesh in 1974 under the AP Composite Irrigation Project (Ln 1751-IN), was extended statewide in 1982 under the AP Agricultural Extension Project (Credit 1219-IN). The ratio of staff coverage for extension work averages one Village Extension Officer (VEO) per 1,500 farmers, but coverage is even less intensive in parts of the proposed project area. Moreover, VEOs require more training to deal with problems encountered by farmers under irrigated farming conditions. The extension service coverage in the upstream 165,000 ha of the SRS scheme is adequate with VEO/farmer ratios of about 1:800. It would however, be required to develop appropriate farming systems and technologies to meet the demands of both irrigated and rainfed farming conditions. 43. The principal institution conducting agricultural research in the project area is the AP Agricultural University in Hyderabad. Under the First National Agricultural Research Project (NARP I; Credit 855-IN), a Zonal Research Station was established for the Rayalaseama region through an expan- sion of the existing Nandyal Research Station, and a new zonal station was set up to cover the Telengana region. Both research stations are fully staffed and are in the process of initiating research programs to serve their respective regions. In support of the proposed project, the scope and direction of this research would be further strengthened with funds provided under the recently approved NARP II Project (Credit 1569-IN) to further refine appropriate tech- nologies to serve the needs of irrigated agriculture (para. 61). 44. Agricultural Inputs. The seed, fertilizer and pesticide marketing system is well developed in the project area, as elsewhere in the State. There are sufficient well organized private and public suppliers of fertilizers within easy reach of farmers. Seeds are supplied through private growers who produce good quality hybrid sorghum, cotton, and groundnut seeds. The main users of pesticides are cotton and paddy farmers.  -14- 45. Agricultural Credit. The State-owned commercial banks, and cooperative and land development banks provide agricultural credit. Their network is adequate to service the project areas. Cooperative banks provide short and medium term credit to farmers, and are organized on a three-tier basis with the AP State Cooperative Bank as the apex bank at the State level, followed by a number of central cooperative banks at the district level, and numerous primary cooperative credit societies at the village leveL. Long term credit (up to 15 years) is provided by the State Land Development Bank (SLDB) which operates through branches and affiliated offices located in sub-districts. Recovery performance of the primary cooperative credit societies is at present about 75Z, while for the SLDB, it was about 90% in 1983/84. 46. Marketing, Processing and Sto'rage. Wholesale marketing is regulated under the Agricultural Produce Market Act (1965). The provision of marketing facilities has kept pace with increasing production. Excess rice produced within the State is either procured by COI agencies or bought by private traders. Pulses and groundnuts find a ready market. Processing facilities in the project area are adequate. Rice husking is a well developed cottage and large-scale industry, and high-capacity modern solvent plants for process- ing groundnuts are growing in number. Most large towns, including Warangal in the SRS area, have plants to process maize into starch and oil. Cotton ginning facilities are adequate in the SRS area, but not in the SRBC area. However, the private sector could be expected to provide the necessary ginning units when cotton growing becomes significant in the region, as previously experienced in other areas. Storage facilities are provided in the public sector by the State Warehousing Corporation, the Central Warehousing Corporation, and the State Marketing Federation. Some cooperatives also have their own storage facilities. In addition, many private grain and produce merchants' stores are available. Bank Group Strategy and Previous Lending for Irrigation in Andhra Pradesh 47. The Bank Group's strategy for the agricultural sector in States such as Andhra Pradesh is to support the Government's efforts to increase both rainfed and irrigated production and productivity in order to accelerate economic growth. This calls for the provision of: (i) assistance to agricul- tural extension and research aimed at increasing farm productivity and the income of farmers by simultaneously addressing constraints to the generation of new agricultural technology and the dissemination of the results of research to farmers; (ii) credit to enable farmers to finance on-farm investments; and (iii) irrigation to enable multiple cropping and higher yields. These three fields of assistance are interlinked. The provision of irrigation in particular, considerably increases the demand for extension and credit services. It helps to open the way to the introduction of new varieties and crops and the use of improved farming practices, thus requiring intensive support by extension/research. Also, improved farming practices cost more and therefore require improved credit facilities. The State of Andhra Pradesh has benefited considerably as a result of this strategy. Its extension and research efforts are being assisted through the provision of IDA funding for NARP I and II (Cr. 855-IN and Cr. 1569-IN) and the AP Agricultural Extension Project (Cr. 1219-IN) which would lend support to the achievement of the objec-  -15- tives of the proposed project (paras. 43 and 61). The credit requirements of AP farmers for on-farm developments have been continuously supported under a general line of credit through a series of Agriculture Refinance Development Corporation (now named NABARD) Projects, and will continue to benefit through the recently approved NABARD Credit Project. 48. The Bank Group's assistance to irrigation in AP has focused on (i) the continued introduction of improved technology through better design and con- struction standards; (ii) improved operation and maintenance; (iii) effective water management; and (iv) modernization of existing irrigation systems. A significant contribution has been made to the development of AP's irrigation sector by Bank Group participation in a number of projects. The Pochampad Irrigation Project (Credit 268-IN, 1971, US$39 million), since renamed the Sriramasagar Project, supported works to complete the Sriramasagar dam and develop a part of its command area. It achieved its primary objectives of inter alia, (i) bringing under irrigation 100,000 ha of land; (ii) intensifying agriculture in a area which had been dependent upon uncertain rainfall; and (iii) enabling high yielding varieties of rice and maize to be introduced. (Project Performance Audit Report (PPAR) No. 3499). The Codavari Barrage Project (Credit 532-IN 1975, US$45 million) assisted in the replacement of a century-old weir by a modern barrage to enable the diversions and the distribu- tion network in the Godavari delta to go on functioning. The Andhra Pradesh Irrigation and Command Area Development Composite Project (AP I; LN 1251-IN, US$145 million), which was approved in 1976, hastened the construction of the canal network and thereby the utilization of water impounded in the Nagarjunasagar reservoir, and extended the water distribution network down to the farm. To minimize seepage losses and to achieve better water control, the project provided for a major canal lining component. The Nagarjunasagar com- ponent of the project was extensively reformulated in 1979/80. The reformula- tion provided for more lining of major canals, distributaries and minors than originally envisaged; introduction of a rigid water allocation system to enable full irrigation of the project area; and a comprehensive system of flow measurements to further refine and trace the utilization of water releases. With respect to cost recovery within the project area, the average assessment of water charges is about Rs 60/ha. However, collection amounts to approximately 58Z of assessments. In addition to water charges, GOAP intro- duced a betterment Levy to cover a portion of the capital costs of AP I. This levy was subsequently challenged in the courts and its collection suspended. As a partial substitute, GOAP imposed a special land tax of Rs 500/ha in 1976. However, recoveries under this tax have been negligible. Consequently, under the proposed project GOAP has agreed to substantially increase revenues through a doubling of direct water charges (from Rs 60/ha to Rs 120/ha) by May 30, 1986, (para. 71). 49. The main lessons learned from the Bank Group's involvement in irriga- tion projects in AP are: (i) the need to line the main canal at the time of construction (delaying lining disrupts production and is consequently resisted by farmers); (ii) the precautions which should be taken when allocating water in temporary surplus (i.e., during early stages of development); (iii) the need to correctly implement localization procedures (para. 67); (iv) the difficul- ties inherent in the inability to recover ir-v.stment costs through a betterment  -16- levy or special land taxes (this has also been the experience elsewhere in India); and (v) the need for a reliable and equitable water supply as a precon- dition to increased cost recovery through direct charges. PART IV - THE PROJECT 50. The project was appraised in March/April 1985. Negotiations were held in Washington in January 1986, with the Government of India represented by a delegation coordinated by Mr. Sumit Bose, Deputy Secretary of the Department of Economic Affairs, Ministry of Finance. The Staff Appraisal Report entitled "Second Andhra Pradesh Irrigation Project" (No. 5883-IN, dated February 27, 1986) is being circulated separately. A Supplementary Project Data Sheet is attached as Annex III. Project Rationale and Objectives 51. Past Bank Group involvement in the irrigation sector in AP has been focussed on the introduction of improved design and construction standards and on ensuring the timely execution of projects. AP is presently in the process of modernizing the planning, design, implementation and operation of develop- ment projects in the sector. This process calls for changes in established norms and deeply ingrained practices to ensure the achievement of a more effec- tive allocation and management of resources. The most innovative feature of the proposed change would be the introduction of improved system operation procedures which would ensure a reliable supply of water to farmers. Continued Bank Group support to fully establish and consolidate the use of the new proce- dures is critical to the provision of a reliable and equitable water supply to farmers throughout the State. The proposed project includes an appropriate mix of ongoing and new irrigation development works aimed at raising agricultural production and farm incomes through the expansion of irrigated areas and the more efficient utilization of available water supplies in existing systems. Toward this end, the project would assist in the further development of the SRS scheme, and finance the greater part of the SRBC scheme, focusing on the intro- duction of improved design and operation principles to ensure a reliable and equitable irrigation service to farmers in the command areas. Project Description 52. The project would encompass the SRBC (65,000 ha) and SRS (328,000 ha) commands. The main project components for SRBC would be the construction of: (i) about 50 km of the SRBC Canal from the Banakacherla Regulator to the Gorakallu Aqueduct; (ii) the Gorakallu Aqueduct (about 3.5 km); and (iii) about km 100 of the SRBC canal beyond the aqueduct. In SRS, the project would: (i) upgrade and complete km 0-146 of conveyance works of the Kakatiya Canal Comnand (165,000 ha) up to the Mannair dam; (ii) complete on-going works and construct new conveyance works on km 146-267 (about 120 km) of the Kakatiya Canal Command (163,000 ha); and (iii) excavate the tail end section of the Kakatiya Canal from km 267-284 (about 18 km). The following components would be common to both subprojects: (i) block development of about 65,000 ha in the SRBC command area, and the modernization of 165,000 ha and new development of 163,000 ha in the SRS area; (ii) the construction of a feeder and rural road  -17- network of about 260 km in SRBC and 900 km in SRS; (iii) the provision of training facilities and training for professional and support staff, and farmers; (iv) supplementary provisions for the rehabilitation of oustees from Srisailam (SRBC scheme) and Nannair (SRS scheme) reservoir sites; and (v) monitoring and evaluation; technical services and studies in support of perspective planning for future irrigation development in the State. Detailed Features 53. Canal Construction. SRBC, which originates at the Banakacherla Regulator, would be nearly 12 meters deep at the offtake point, to enable a minimum of 750 cusecs to be drawn from the Srisailam Reservoir at the end of the cropping season (March). Beyond the Regulator, the canal would consist of two parts: the first, between km 53.46 and km 112.73, would command 41,000 ha in 11 blocks each served by its own distributary, and the second, between km 112.73 and km 153, would serve a command of about 24,000 ha. Under SRS, on the first 146 km section, the banks of the Kakatiya Canal (8,600 cusecs capacity) would be raised and lined to enable peak water requirements to be delivered to the entire scheme which includes the Pochampad Project (para. 48). On the next three segments of the Canal (about km 146-285), the following works would be completed: (i) the lining and construction of several distributary offtake structures from the Nannair Dam where the canal originates to about km 234 (by Warangal town); (ii) works not yet contracted including lining from about km 234-267; and (iii) the section from about km 267-285 which would be excavated to serve as an escape for water into the Akheru river. 54. Block Development and Upgrading. Each irrigation block would include the following works: (i) distributary and minor canals; (ii) field channels leading to 8 ha units; (iii) farm roads; and (iv) drains. Collector drains from each block, with field drains connected to them would be designed to evacuate a 10-year intensity storm within 72 hours. In the Kakatiya command, distributaries and minors would be lined, additional conveyance channels would be constructed as required, and development of the irrigation blocks for 165,000 ha would be completed. The surface drainage system would connect to the minor tanks thereby augmenting their water supply. 55. Feeder Road Network. A feeder and rural road network of about 260 km in SRBC and 900 km in SRS would be provided through the construction of new roads or upgrading of existing ones. Their maintenance would be by the Roads and Building Branch of the Public Works Department. To ensure that plAnning, design and construction of the road component would progress unhindered, an assurance was obtained from GOAP that by April 30, 1987, and thereafter by April 30 of each subsequent year, GOAP would submit to IBRD/IDA for review its plans for the roads to be constructed in the distributary commands scheduled for development in the following construction season along with design specifications and cost estimates. 56. Communication and Equipment. A comprehensive telecommunication network would be provided in the SRS area with substations at all major canal offtakes and other key points. A simpler system would link key points in the SRBC area. An assurance was obtained that GOI would promptly, as required, issue all necessary authorizations and permits to enable the installation and operation of a telecommunication network by GOAP to serve both schemes. Funds have also  -18- been provided for communicat.ons equipment; equipment for the operation and maintenance of project works, farm and canal service roads; computation equip- ment for design work and operational control; and training equipment. 57. Training. Pre-service and in-service training of over 1,000 engineers in the design, construction and operation and maintenance M0&M) of irrigation systems would be provided by the Water and Land Management Training and Research Institute (WALAMTARI) near Hyderabad. The project would finance the cost of this training and improvements to WALAMTARI's facilities. Training of semi-professional irrigation staff (e.g., canal inspectors, engineering technicians), Chairmen of Outlet and Minor Canal Committees and farmers would take place in institutions within the project area. One training center would be established in the SRBC area and three in the SRS area. An additional center in the SRS area would be completed. Contact farmers selected by the Agricultural Extension Service would undergo training in on-farm water manage- ment and distribution practices. VEOs and Subject Matter Specialists (irrigation) would also be trained to demonstrate field layout and land preparation methods on farmers' lands. GOAP's training programs for engineer- ing staff, support staff, and Chairmen of the various farmers' committees would be reviewed by IBRD/IDA and thereafter implemented taking into account any comments received. 58. Rehabilitation. There are two problems connected with the implementa- tion of the resettlement/rehabilitation component of previous projects not financed by the Bank which have been addressed in the context of the proposed project. The project also addresses a third problem of providing for the satisfactory resettlement/rehabilitation of families directly affected by the proposed project. The first problem relates to the construction of the Srisailam dam and reservoir site which would supply water to the project- financed SRBC scheme. Site acquisition for the Srisailam reservoir commenced in 1974, and project affected families were fully compensated, but permitted to continue to occupy their villages and farms. With site flooding in 1981, 1/ they were finally required to move, but the compensation based on 1974 land values was inadequate to buy replacement properties at 1981 prices. COAP has provided the affected families with additional financial compensation to alleviate the hardship caused by this problem. It however, recognizes the need for further relief through the provision of additional amenities. Accordingly, GOAP would conduct a survey in the villages where most of the displaced families from Srisailam have moved to determine what additional social amenities (e.g., schools, clinics, drinking water supplies) are required in order to provide them with at least the same level of services they enjoyed before being moved. The findings of the survey would be incorporated in a program to be implemented under the project. 59. The second problem relates to the Mannair dam which was completed in 1985 and would supply water to the project-financed SRS scheme. When the reservoir is eventually filled, it will submerge 7,365 ha, including 16 villages, and affect the livelihcod of about 13,800 families. Unlike the case of Srisailam, resettlement is still in progress here, affording an opportunity 1/ About 27,600 families have been affected.  -19- for providing rehabilitation assistance to the affected families. In addition to conducting a survey to determine what additional social amenities would be required for the families in Mannair, OOAP would also undertake a survey to determine their specific vocational training needs and to formulate a program to assist them in at least regaining the standard of living they were enjoying before their displacement. 60. Finally, COAP would alco determine the number of families who would be directly affected by the proposed project and ensure that they would be provided with land of comparable productive potential, vocational training or stable employment in accordance with their individual preferences. The preparation of a Resettlement and Rehabilitation Program satisfactory to the IBRD/IDA by COAP, which would incorporate the specific details of the assis- tance to be provided to each of the three categories of displaced persons referred to above, is a condition of Loan/Credit effectiveness. The proposed Program would include an Action Plan and a timetable for implementing the Program taking into consideration the results of the surveys to be undertaken. 61. Agricultural Extension and Research Support. For the proposed project, GOAP would by October 1, 1987, designate the right bank commands of the SRS subproject as two agricultural extension units. To meet the needs of the SRBC subproject when the proposed irrigation works are commissioned, GOAP would by October 1, 1988, set up a similar agricultural extension unit. The organiza- tional and staffing arrangements of the proposed units would be satisfactory to the IBRD/IDA. The proposed Training and Visit system of agriculture to be set up for both subprojects would be based on the past experience under AP I which has demonstrated that extension work in irrigated areas is more effective if the ratio of VEOs to farmers is no more than about 1:800. Funds for the three new units would be provided under the ongoing A.P. Agricultural Extension Project (Cr. 1219-IN). Adaptive research support would be provided for the SRBC and SRS subprojects through the zonal research stations in Nandyal and Jagtial respectively (para. 43). For this purpose, the AP Agricultural University would furnish its research proposals to the Indian Council of Agricultural Research by December 31, :986. To provide the Jagtial staff with adequate space and sufficiently representative soil types on which to work, at least two small substations (one on vertisols (black) and one on alfisols (red)) would be established with funds provided under NARP II (Credit 1569-IN). 62. Landshaping. To ensure the availability of integrated landshaping plans, including the proper siting and alignment of field drains, the Irrigation Department (ID) would prepare comprehensive plans to develop entire outlet commands, including landshaping required for each field in consultation with the farmers involved. Loans are available for executing these works whether farmers do their own work or engage the services of the AP Agro-Industries Corporation which is active in this field throughout the State. It would be essential to ensure that farmers' landshaping efforts conform to ID's overall plan. The staff necessary to assist in the planning work involved would be provided under the proposed project. 63. Organization and Management. The primary responsibility for implemen- tation of the project would rest with the Irrigation Department (ID) of GOAP, which would plan, design and construct the subprojects and be responsible for their operation and maintenance. The Secretary, Irrigation administers ID  -20- through an Engineer-in-Chief, to whom nine Chief Engineers (CE) report directly. There is a separate CE each for the SRS and SRBC subprojects. The present design and construction organizations of the CEs heading the two sub- projects would require strengthening to cope with the expected workload. At its peak, the SRBC subproject would require a total of 327 engineers; the SRS 1,472. An assurance was obtained from GOAP that it would: (i) sanction and fill staff positions in accordance with an organizational plan and staffing schedule in consultation with IBRD/IDA; and (ii) train such staff to implement the project and to efficiently operate and maintain the project works. 64. While ID has overall responsibility for the irrigation sector, the operation and maintenance of three irrigation schemes (Nagarjunasagar, Sriramasagar and Tungabhadra) below the chak outlet, as well as agricultural extension work in the command areas of these schemes has been with the Irrigation Utilization and Command Area Development Department (IU/CADD) which is headed by an officer of the rank of Secretary. In March 1985, IU/CADD was placed under the GOAP Minister of Agriculture 1/ who assumed overall respon- sibility for the coordination of support for irrigation work for the above three schemes. The division of responsibility for irrigation work between ID and IU/CADD does not, however, provide for effective manageme t of the irriga- tion sector. Moreover, the arrangements for the control of water deliveries, scheduling and utilization between headworks and chak outlets is cumbersome. 3OAP has therefore decided to bring ID and IU/CADD together under a single administrative control. The combined department would be made up of an Irrigation Wing responsible for all construction work and a Command Area Development and O&M Wing which would look after O&M of water delivery systems and related matters. For this purpose, GOAP plans to appoint a Merger Cosmittee to determine the exact allocation of responsibilities between the newly established wings, lines of command, etc., when the proposed merger takes place by April 1, 1986. 65. With the integration of ID and IU/CADD, changes would be required in the constitution and functions of the Command Area Development Board which is responsible for formulating programs to be implemented by the Command Area Development Authority (CADA) Working Committees for the above mentioned schemes which includes the SRS subproject (Sriramasagar scheme). Changes would also be necessary in the organization and functions of the CADA Working Committee for the SRS subproject. The Committee which includes the CADA Administrator of the SRS subproject, would be required to monitor the progress of block development and all other works and activities pertaining to this subproject. By April 30, 1987, GOAP would also establish a similar Working Committee for the SRBC sub- project which would include in its membership the CADA Administrator of the scheme. 1/ In June 1985, IU/CADD's extension functions were transferred from the Secretary, IU/CADD, to the Secretary of Agriculture, COAP, Ministry of Agriculture.  -21- Monitoring and Evaluation (M&E) 66. The Project Preparation and Monitoring (PPM) Unit of the combined ID would be strengthened and would, among other tasks, be responsible for (i) monitoring the physical and financial progress of project works including water deliveries, groundwater levels, crop data collection, cropping pattern changes and the evaluation of project works; (ii) monitoring quality control activities; (iii) long-range planning of the irrigation sector in the State; (iv) carrying out or supervising studies by consultants; and (v) commissioning and supervising the execution of works related to the rehabilitation of dis- placed persons. For this purpose, an assurance was obtained that COAP would by December 31, 1986, submit to IBRD/IDA for review and comments its detailed plans for: (i) strengthening the PPM Unit by June 30, 1987; and (ii) for carrying out M&E activities under the project. GOAP would thereafter implement such plans taking into account any comments received. Water Management 67. Irrigated areas in AP are designated as "irrigated wet" and "irrigated dry" under a system of water management known as "localization". While all crops may be grown in irrigated wet areas, rice and sugarcane are specifically banned in irrigated dry areas to ensure that adequate supplies of water reach downstream areas. To ensure an equitable and reliable water supply, and even- tually to serve all commandable lands in the SRS scheme, it would be necessary to discontinue the delivery of the preferentially larger amounts of surface water to "irrigated wet"' areas. To enable this change to be effected, an assurance was obtained that GOAP would, by October 1, 1986, introduce and thereafter maintain a water management plan in the SRS subproject area that would provide water only for irrigated dry regimes. In the SRBC subproject area, a similar plan would be introduced not later than two years before the expected date for the delivery of water. Under the plan, water releases would not be sufficient to enable the cultivation of rice in the SRBC subproject and in the SRS subproject downstream of the Mannair Dam. However, farmers would be free to grow rice if they so desire by supplementing surface water supplies with water from their own wells. 68. Both the SRS and SRBC schemes would be managed as "utilities". Initially the schemes will supply water down to the 40 ha outlet, according to predetermined schedules arranged in consultation with farmers' representatives. Below the outlet distribution would be organized by the Outlet Committees on warabundi 1/ schedules. It is expected that water users organizations would undertake increasing responsibility over time; they may ultimately buy water in bulk from the utility for sale to farmers, collect water charges, etc. Since GOAP's ID has no previous experience with structured system operation and design, there is provision for the hiring of consultants to assist ID with the preparation of the necessary designs and the formulation of operating rules. 11 A system of rotational distribution of limited irrigation supplies.  -22- Cost Recovery 69. Statewide water charges vary from Rs 75/ha for "irrigated wet" crops, to Rs 60/ha for "irrigated dry" crops. In addition to direct water charges, there is also a 4X sales tax on marketed agricultural produce. Indirect char- ges constitute COAP's most important means of cost recovery for its irrigation projects. Water charges presently collected cover about 60% of the total annual O&M expenditures, and the total revenue (direct and indirect charges) is about Rs 110/ha which is about double the present O&M annual expenditure. However, the present level of budgetary allocation for O&M (Rs 50/ha) is less than the sum required to provide effective O&M estimated at about Rs 150/ha. 70. The main factors which inhibit increasing the level and improving recovery of water charges, are the unreliable and inequitable water supply in most of the irrigation projects in the State, since farmers are unwilling to pay for a poor service. Water charges are uniform throughout the State, and thus their overall level has to take into account the repayment capacity of those farmers who benefit the least from irrigation (usually the tailenders). In order to substantially increase the level and improve the recovery of water charges, the reliability and equity of the irrigation service must be improved which is the main focus of this project. 71. Under the project, GOAP would be expected to take measures to improve both the level and collection of water charges. Towarc;s this end, COAP has already issued a Gazette Notification (August 1, 1985), announcing its inten- tion to double present water charges to about Rs 120/ha per irrigated dry crop, starting with the 1986/87 crop season. Assurances were obtained that all action necessary to implement the revised charges Statqwide would be completed by May 30, 1986. Within the project area, the average assessment of water charges is about Rs 60/ha per crop. After the proposed doubling of water charges and with the improved irrigation service and increased cropping inten- sity under the project, the water charges' assessment would reach about Rs 1801ha per year as against the estimated level of annual expenditure for effec- tive O&M of about Rs 150/ha. For the longer-term, GOAP would: (i) constitute an interdepartmental Water Charges Review Committee (WCRC) by March 31, 1987, which would conduct a review of the level of water charges and water related charges, and the method of their assessment and collection under terms of reference agreed with the IBRD/IDA; (ii) submit a report summarizing the results and recommendations of the committee to the IBRD/IDA for its review and comments by September 30, 1987; (iii) and taking into account IBRD/IDA comments, implement such recommendations. Thereafter, commencing July 1, 1989, GOAP would require WCRC to review and adjust water charges and water related charges at least once every two years, in order to ensure that the charges cover full operation and maintenance costs and a reasonable portion of capital costs, taking into account farmers' repayment capacity. Project Cost and Financing 72. Total project costs are estimated at US$475.8 million including about US$22.8 million of taxes and duties. Foreign exchange cost3 are estimated at US$76.4 million (about 16% of total costs). The estimated base costs are in January 1986 prices. Physical contingencies account for about US$33.6 million, while price contingencies of about US$106.4 million are based on expected  -23- annual price increases for local expenditures of 7% for 1986/87 and 1987/88, 7.5% for 1988/89, 7.7% for 1989/90, 7.6% for 1990/91 and 4.5% for 1991/93. Foreign price contingencies have been calculated on the basis of 7% for 1986 and 1987, 7.5% for 1988, 7.7% for 1989, 7.6% for 1990 and 4.5Z for 1991/93. 73. The proposed Bank loan of US$131 million and IDA credit of SDR 127.5 million (US$140 million equivalent), would finance about 60% of total cost, net of taxes and duties, including a 100% of foreign expenditures and about 49Z of local costs. The balance would be borne by GOI and GOAP. Procurement and Disbursement 74. Annex IV, attached, details the manner in which items would be procured under the project. Civil works, including contingencies, for the main and branch canal systems would cost about US$378.8 million. About 14 contracts totalling approximately US$252.3 million, would exceed US$6.0 million 'each and would be let on the basis of IBRD/IDA international competitive bidding (ICB) procedures. Eligible domestic bidders would be granted a 7-1/2% martin of preference in bid evaluation. A further 28 contracts (below US$6.0 million) amounting to about US$78 million, and numerous smaller contracts (below US$1.0 million) amounting to about US$44.0 million would be scattered over large areas, would not be of interest to foreign bidders, and would therefore be Let on the basis of GOAP's local competitive bidding (LCB) procedures which are satisfactory to the IBRD/IDA. The balance of civil works (US$4.5 million) would be executed departmentally as they are not likely to be readily con- tracted out. 75. Equipment and vehicles costing about US$4.3 million would be grouped in bidding packages each costing US$100,000 or more, and procured through ICB. Qualified domestic manufacturers would receive a margin of 15% or the applicable customs duty, whichever is lower. Light equipment and small vehicles (about US$1.3 million) of various types would be required under the project. These would be purchased in small ouantities over several years. To ensure the prompt provision of maintenance and the availability of spares these items would be procured under GOAP's LCB procedures which are satisfactory to the IBRD/IDA. All bid packages for works estimated to cost US$500,000 or more, and for goods estimated to cost US$100,000 or more, would be subject to IBRD/IDA prior review. The remaining contracts (about 20% in value) would be subject to IBRD/IDA post-action review. 76. The proceeds of the Loan/Credit would be disbursed against: (i) 65% of expenditures for civil works; (ii) 100% of expenditures for directly imported vehicles and equipment, 100% of the ex-factory costs of locally manufactured vehicles and equipment; or 70% of the cost of vehicles and equip- ment procured locally; and (c) 100% of expenditures for technical assistance, training, rehabilitation and resettlement, and monitoring and evaluation. Disbursements for civil works would be against statements of expenditure itemized by project component. Disbursement for chak development work would be only upon receipt of certificates of completion of the field work. Disbursements for payments of less than Rs 300,000 for works (including depart- mental works), or Rs 150,000 for goods; on-farm development; training; engineering research; monitoring and evaluation, the costs of special surveys and rehabilitation services would be against statements of expenditures.  -24- Documentation for these works would be retained by GOAP and made available for inspection by IBRD/IDA review missions. Full documentation would be required for all other disbursements. The expected rate of disbursement follows the typical disbursement profile in the Indian Irrigation Sector. The project is expected to be completed by December 31, 1993, and disbursements by June 30, 1994. Benefits, Justification, and Risks 77. Quantifiable benefits from the project would derive from an effective increase (taking into account double cropping) in the irrigated area of the SRS scheme by 163,000 ha and the SRBC scheme by 65,000 ha. In the SRS scheme, the annual incremental agricultural production at full project development is expected to be about 352,000 tons of foodgrain, 129,000 tons of cotton and about 93,000 tons of groundnuts. The total value of agricultural production is estimated to increase by about Rs 1,052 million (US$81 million) per year. About 80,200 farm families would benefit directly from this subproject. It would generate approximately 29,800 farm and 7,500 non-farm jobs. Corresponding figures for the SRBC Scheme show an increase in the production of cotton by 62,000 tons and groundnuts by 37,000 tons, resulting in an increase in the total annual value of agricultural production by about Rs 600 million (US$46 million). Approximately 20,900 farm families would benefit directly from the subproject which would provide about 18,000 farm and 4,700 non-farm jobs. Project construction work on both schemes would provide employment to about 15,400 unskilled laborers over a seven and a half year period. As a result of the project, farm incomes in the SRBC area are expected to increase to about Rs 10,200/ha and the incidence of absolute poverty 1/ among farm families would be reduced from about 75% to about 25%. The corresponding impact due to the SRS scheme would be a decline in the Level of absolute poverty from about 85% overall to about 22% in irrigated areas and 30% in rainfed areas. 78. The economic rate of return (ERR) based on the full development of the 77,000 ha which is the potential SRBC scheme area is about 20Z and, for the development of the 203,000 ha of the SRS Scheme, about 23Z. The overall ERR for both schemes combined is about 22%. The results of the sensitivity analysis carried out to determine how deviation from the main assumptions, including incremental benefit and construction costs, would affect the ERR, indicate that only large deviations of construction costs or expected benefits could make the schemes economically unviable (para. 79). Should GOAP delay the completion of the remaining 12,000 ha of the SRBC scheme and 40,000 ha of the SRS scheme not financed under the project beyond 1996, the overall ERR would decline to about 19%. 79. A Likely project risk is that benefits could be significantly affected if COAP encounters difficulty in enforcing water allocation and management procedures in areas to be brought under irrigation to ensure their cultivation as irrigated dry areas. However, due to the Government being fully committed to this objective, having successfully implemented a similar program under the 1/ Defined as Rs 6,850 per family (5 persons) per year.  -25- AP I Project, there is little likelihood of this happening. Moreover, farmers in disadvantaged areas of SRS could be expected to exert sufficient pressure on GOAP to ensure an equitable allocation of water through a phasing out of the designation of "irrigated wet" areas. A second risk is that GOAP may face a budgetary shortfall in executing the project on account of a cutback in its overall Seventh Plan allocation from GOI. To avoid this possibility, the project implementation period has been extended from five to seven and a half years, thus reducing the funding required for the project during the Seventh Plan period from Rs 550 Crores proposed by COAP, to about Rs 380 Crores which is consistent with its Seventh Plan allocation of Rs 1,182 Crores for major and medium irrigation schemes. The balance of funding required for the project would be provided under the State's Eighth Plan. Assurances were obtained that GOAP would provide the necessary funding to complete the project as planned. Finally, there is the risk that it would not be possible to store water in the Kannair reservoir site if the villagers refuse to vacate the area above its dead storage level. However, the risk of thie happening is considered accept- able since the resettlement of affected families is already in progress with additional provision being made for them to receive vocational training under the proposed project. Moreover, should the need arise, water could still be conveyed down the bed of the Mannair river and be diverted to the lower section of the Kakatiya Canal to serve the needs of the SRS subproject. However, under this scenario, the resultant lack of provision for storage water may restrict the future expansion of the comuand area of SRS - an expansion that is outside the timeframe of this project. PART V - RECOMMENDATION 80. I am satisfied that the proposed Loan/Credit would comply with the Articles of the Bank and the Association. I recomend that the Executive Directors approve the proposed loan and credit. A. W. Clausen President February 27, 1986  ANNU 1 T^ANL o- Page 1 of 6 US?T (tISO M" LITiATE) A SCueT ALW ISCO4 Ki(D INCOW 19.ak 1ig7ok