India - Uttar Pradesh Tubewell Irrigation Project

CIRCULATING COPY R E S T R I C T E D TO BE RETURNED TO ARIC'YES D!VISIOT Report No. P (IDA) 9 This. report was prepared for use within the Association. It may not be pub- lished rnor may it be quoted as representing the Association's views. The Association accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR A TUBEWELL IRRIGATION PROJECT IN THE STATE OF UTTAR PRADESH August 29, 1961  INTERMATIONPJL DEVELOPMENT ASSOCIATION REPORT AND RECC1IENDATICNS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE GOVERZENT OF INDIA FCR A TUBEWELL IRRIGATION PROJECT IN THE STAT'E OF UTTAR PRADESH I su'bmit herewith the following report and recommendations on a proposed development credit to the Government of India in an amount in various currencies equivalent to $6 million to assist in financing an irrigation project for the drilling and equipping of 800 tubewells in the State of Uttar Pradesh during the first 3 years of the Third Five-Year Plan. :2. The proposed credit would be the Association's second operation in India. With the credit of $60 million for the National Highways program, this would bring the total of the Associationts credits to India to an equivalent of $66 million. PART I - HISTORICAL BACKGROLUD 3. During the Third Plans India proposes to spend about $1,900 million on irrigat.on and flood control, drainage and anti-waterlogging schemes. The emphasis is to be on medium sized projects which can yield quick benefits rather than on large schemes. Among those put before the Assoc- iation, the Central Government requested the Association to investigate programs for irrigation by the drilling of tubewells. Of all the States in India, Uttar Pradesh has the longest experience in the construction and operation of tubewells and during the Third Five-Year Plan it will have a rmuch larger tubewell project than any other State. The mission which vrisited India early this year therefore concentrated its investigation on the tubewell program of Uttar Pradesh State. Negotiations with repre- sentatives of the Indian Government and the State of Uttar Pradesh began on July 27 and were concluded on August 21, 1961. PART II - DESCRIPTION OF THE FROPOSED CREDIT 14. Purpose : To finance one half of the total cost of drilling and equipping 800 tubevells in the State of Uttar Pradesh for the irrigation of 320,000 acres of land. A portion of the proposed credit equiva- lent to $1.3 mill.ion would fir.nce the import of equipment. lThe balance of $4.7 million would be applied to the local costs and disbursed on the basis  -2- of a percentage of total local currency expenditures as they are made over the period of the project's execution. Borrower : India, acting by its President. Amotmt : The equivalent in various currencies of $6 million. Tern and Amortization The term of the credit would be 50 years, with no amortization for 10 years. From November 1, 1971 one half of 1 per cent of the principal amount would be repay- able semi-annually for 10 years and 12 per cent semi-annually thereafter, to May 1, 2011. Service Charge : 3/4 of 1 per cent per annum on the principal amount of the credit disbursed and outstanding. Payment Dates : May 1 and November 1. Project Agreement : The Association would enter into a Project Agreement with the State of Uttar Pradesh which will construct and operate the tubewells. PART III - LEGAL INSTRUIENTS AND LEGAL AUTHORITY 5. Attached are a draft Development Credit Agreement between India and the Association (No.1) and a draft Project Agreement between the State of Uttar Pradesh and the Association (No.2). 6. In Section 2.03 of the Project Agreement, Uttar Pradesh undertakes to make arrangements with the users of irrigation waters for the repayment of the monies invested, and to set water rates at levels which would cover all operating and maintenance costs of the project. 7. The recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association is attached (No.3).  - 3 - PART IV - APPRAISAL OF THE PROPOSED CREDIT The Project 8. A detailed appraisal of the project (T.O.(IDA)9d) is attached (No.h). Increasing the production of food grains and other crops for a rapidly growing population, which counts about one agricultural inhabitant per cultivated acre, remains one of the most serious of India's development problems. The Third Plan calls for a 30% increase in the production of food grains and a 31% increase in the production of other crops. 9. One of the principal means of increasing agricultural production is through the supply and use of water for irrigation. Thus irrigation needs figure prominently in the Third Five-Year Plan. 10. Tubewell irrigation has certain advantages over canal irrigation. The water is under the control of the user; it is available when needed; the construction time is short compared with major irrigation works; it can reach areas which cannot be irrigated by gravity from canals. More- over, though more costly to operate, tubewells are much cheaper to construct than large projects for canal irrigation. -L1. The project will be constructed and operated by the State of Uttar Pradesh. Uttar Pradesh is India's most populous State and accounts for about one sixth of India's total population. It is a leading State in the production of agricultural crops. It has had a long and successful experience with tubewell irrigation, and by 1960 had a total of 6,000 tube- wells in operation. L2. The project is financed in its entirety by loans from the Central G;overnment to the State of Uttar Pradesh. Such loans would be extended in rupees with a life of 12 years and interest at -1/8 per cent per annum. These terms would apply to the loans made from both the Central Government's own resources and from the proceeds of the proposed credit from the Associa- tion. The terms of Government lending are reasonable for an agricultural project of this kind and the project becomes self-liquidating within its useful life. The economic benefits are substantial since the increase in the gross value of production per annum is estimated to be nearly twice the cost of the project. The level of water rates in the State of Uttar Pradesh is still low in comparison with the benefits conferred. However, rates were raised by 20 per cent in 1961 and will be reviewed again at the end of the Third Plan. 13. In the past it has taken about five years before farmers have had enough experience of the benefits of using irrigation water to induce them to use al3 the water available from a tubewell. Legislation is now pend'ilg in Uttar Pradesh to alter the stru2cture of water rates so as to encourage earlier and ensure fuller use of water facilities. This would be done by charging all farmers in the area served a basic rate for water  - 4 - whiether used or not, and lower rates for metered water actually used, rather than the present system which is based solely on the amount of water used. Wle have been informed that this law is likely to be passed shortly. J14. Equipment imported and financed by the proposed credit will be puirchased on the basis of international competitive bidding. Economic Situation 1,. The progress of India's economic development was reviewed in the report of March 17, 1961, "Current Economic Position and Prospects of India" (SecMem 61-21). When that report was preparecd, discussion of Indiats Third Five-Year Plan was in its concluding stages. The final version of the Plan, published early in August, is very similar to that described in the March report. 16. The total cost of the "physical programmes" in the public sector is estimated in the Plan at over Rs. 80 billion ($16.8 billion), but the financial limit to public development expenditures is set at Rs. 75 billion ($15.75 billion). Within this total, recurrent expenditures are put at Rs. 12 billion ($2.5 billion) and capital expenditures at Rs. 63 billion ($13.2 billion). Private investment during the five-year period is estimated at Rs. 41 billion ($8.6 billion) which gives a figure for total investment, public and private, of Rs. 1Gh billion ($21.8 billion). The arnount of external assistance assumed remains unchanged at Rs. 26 billion ($5.5 billion) excluding aid under PL 480, although it is noted that "requirements on present estimates add up to a higher figure". 17. The export target for the five-year period, which was first set at the equivalent of $7,245 million, has been raised to $7,770 million, and the target for the final year of the Plan is put at $1,785 million or an increase of one-third over the present level. The revised target "postu- lates fairly favourable conditions abroad, and an overriding priority to exports in domestic policy decisions". 18. Receipts from exports in the first three months of the Plan (April- June 1961) were about $50 million higher than in the corresponding period of 1960, but imports rose faster, so that pressure on foreign exchange reserves was accentuated in spite of an increased flow of aid. In the first four months of the Plan the reserves fell by $80 million, and on July 28 foreign exchange holdings of the Reserve Bank of India, excluding the gold holding of $247 million, were down to $206 million, sufficient, with the gold, to cover little over two months' imports. This figure rose to $321 million on August 4 following transactions with the International Monetary Fund, under which India repaid $127.5 million and drew the equiva- lent of $250 million in various currencies. 159. With a rising flow of disbursements out of the new aid indicated at  the June meeting of the Consortium, and with the noriral seasonal improvern>nt in exports towards the end of the year, India should have adequate resour-,s to tide her over the immedEate balance of payments difficulties. In the long run, much larger exports will be needed to ensure a satisfactory rate of economic prog ess. 20. With new loans and credits indicated at the recent Corsortium Meeting, India's outstanding debt is estimated to rise from the r'2.3 billion at present outstanding to $4.5 billion by April 1, 1963. Even though about $1 billion of the increase will be repayable only over a long period of time, amortization and interest are calculated to reach a peak of $370 million a year by 1968/69 - 1970/71 or about 17-18 per cent of India's estimated foreign exchange earnings on current account in thess years. It was iath these considerations in mind that I indicated, during the recent Consortium Meeting, that I was prepared to recommend to the Executive Directors that the Association should contribute over the next two years about $200 million for projects in India's Third Five-Year Plan. PART V - COMPLIANCE WITH ARTICLES OF AGREENENT 21. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECCMMENDATIONS 22. I recommend that the Association make available a Development Credit to India in an amount in various currencies equivalent to $6 million for a total term of 50 years with service charge of 3/4 of 1 per cent per annum and on such other terms as are specified in the draft Development Credit Agreement and draft Project Agreement, and that the Executive Direc- tors adopt a resolution to that effect in the form attached (No.5). W.A.B. Iliff Vice President Washington, D.C. August 29, 1961 for Eugene R. Black President