India - Sone Irrigation (State of Bihar) Project

- ~ RESTR!CTED plir irf nDY Report No. P-284 This report was prepared for use within the Association. It may not be published nor may it be quoted as representing the Association's views.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 THE SONE IRRIGATION PROJECT IN THE STATE OF BIHAR June Z1, 1962  INTERNIT IOMAL DEVELOPMIENT ASSOCIATION REPORT AND RECOPIENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPTENT CREDIT TO THE GOVERiN;ENT OF INDIA FOR THE SONE ITRIGATION PROJECT IN THE STATE OF BIHAR 1. I submit herewith the following report and recommendations on a proposed development credit to the Government of India in an amount in various currencies equivalent to $15 million to assist in financing a pro- ject to improve and extend irrigation services in the Sone irrigation scheme in the State of Bihar. PART I - HISTORICAL BACKGROUND 2. A substantial increase in agricultural productivity is one of the basic objectives of India's economic development. During the decade of the First and Second Five-Year Plans, agricultural production rose by about 35 per cent, The Third Plan, which seeks to achieve self-sufficiency in food- grains and a substantial increase in output of commercial crops, aims at a rate of increase almost twice as large. Since not much new land can be opened up to cultivation, emphasis must be placed on irrigation and other means of intensifying production and increasing crop yields. In view of the importance of agriculture to the economic development of India, the Association has already made credits to assist in the financing of four agri- cultural projects in the country. Two more were appraised by a mission which visited India early this year, one of them the Sone Irrigation Project in the State of Bihar. Negotiations with the representatives of the Government of India and of the State of Bihar commenced June 11 and were concluded June 15, 1962. 3. The proposed credit would be the Association's seventh credit to India, bringing the total to $122 million. Credits previously made have been as follows: Credit No. Purpose Amount ($ million) 3 IN Development of National Highways 60.0 8 IN Tubewell Irrigation 6.0 13 IN Shetrunji Irrigation 4.5 14 IN Salandi Irrigation 8.0 15 IN Punjab Drainage and Flood Protection 10.0 19 IN Fourth DVC Project 18.5 107.0  - 2 - The Bank has now ma.de 30 loans for projects in India. Their status as of May 31, 1962, is as follows: ($ million) Total loans, net of cancellationo 817.5 of which has been repaid 92.2 Total now outstanding 725.3 Amount sold 66.0 of which has been repaid 45.l 209 Net Amount held by the Bank 704.4 1/ Including $19.5 million not yet effective and $175.0 million not yet disbursed: PART II DESCRIPTION OF THE PROPOSED CREDIT 4, The main features of the proposed credit are: Purpose: To finance about one half of the total cost, to be incurred during the Third Plan, of a project for the completion of works to improve and expand irrigation services in the Sone irrigation scheme in the State of Bihar. Borrower: India, acting by its President. Amount: The equivalent in various currencies of $15 million. Term and Amortization: The term of the credit would be 50 years, with a grace period of 10 years, From Jaruary 1, 1973, one half of one per cent of the principal amount would be repayable semi-annually for ten years, and one and one half per cent would be repayable semi- annually commencing January 1, 1983, and ending July 1, 2012e Payment Dates: January 1 and July 1. Project Agreement: The Association would enter into a Project Agreement with the State of Bihar which will construct and operate the project.  - 3 - PART III - LEGAL INSTRUI;ENTS 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 Bihar and the Association (No. 2)o These draft agreements are substantially in the form used for the Associationts previous credits for irrigation pzo- jects in India. 6. Section 204 of the Project Agreement requires Bihar to take all such action as shall be necessary to improve and expand agricultural services in the Project area. -ith reference to this Section, Bihar would advise the Association in a letter (No. 3) that it would expand the scope of an inten- sified agricultural program so as to encompass the whole Project area and to continue these services as required, In Section 2.03(a) of the Project Agreement, Bihar would undertake to recover, on reasonable terms and condi- tions, the investment in the Project with reasonable interest thereon by water charges and, as far as practicable, by imposing other charges on land benefiting from the Project. W;ater rates, pursuant to Section 2.03(b) of this Agreement, would also have to cover all operation and maintenance costs of the Project. 7. The recommendation of the Committee provided for in Article V, Secti.on l(d) of the Articles of Agreement of the Association is attached (No.4)0 PART rI - APPRAISAL OF THE PROPOSED CREDIT The Project 8n A detailed appraisal of the project (TO-323 b) is attached (No. 5). The Sone irrigation scheme has been operating for over 80 years but the exist- ing diversion weir, impounding the waters of the Sone River, can no longer be economically maintained and needs to be replaced, The project to be financed therefore provides for a new diversion dam acrGss the Sone River which together witln the modernization and expansion of the existing canal system would improve and extend irrigation services so as to make possible the irrigation of about one million crop acres. The total cost of the project is estimated at the equivalent of about $30 million. 9. The land in the project area is very well suited for irrigated agri- culture; In conjunction with the Ford Foundation, Bihar is already carrying out an intensive program of agricultural services in parts of the project area. These include extension services, experimentation with different crop varieties, the extensive use of fertilizer, and agricultural credit,, This program is to be expanded so as to make possible full and effective utilization of the irri- gation water about five years after the project's construction has been completed 10. The project should bring much higher crop yields and, when the water is fully utilized, the gross value of production is expected to be nearly double the present level. This will bring about an improvement of the living  standards of the farmers irn the area, main-ly through a substantial increase in the production of rice, the principal crop and staple food in the area. llo, Financing for projects like Sone is provided 60 per cent by the Government of India and 40 per cent by the State Government, The Central Government's contribution is made available in the form of annual advances at an interest rate determined annually and being recovered over a period varying between 7 and 15 years, The proposed credit would be used to finance part of the Central Government's contribution, When the project has been completed, the revenues collected from water charges, and to the extent practi- cable from other charges imposed on land benefiting from the project, would meet all the project's operation and maintenance costs and recover the entire investment with reasonable interest thereon in a period considerably shorter than the useful life of the project. 127 The project is to be constructed by the River Valley Projects Department and to be operated by the Irrigation Departmenv of the State of Bihar. Most of the works will be carried out by local contractors selected on the basis of competitive biddinga The goods to be imported by Bihar will be paochased on the basis of international competitive bidding. The ..noljr' Sit.ation 13. An econcmic mission from the Bank and the Association has recently returned ffom India and is now in the process of preparing its report. Following a record expansion during the last year of the Second Plan, the rate of gr ow~th of the Indian economlry has slowed down substantially during 1961/62 from about 7 per cent to perhaps around 2 per cent. This set-back is mainly attributable to agricultural output which was not favored by good weather concldtions and was only slightly above the record level attained last yearn The mere fact that Indian agriculture has been able to maintain such a high level of production under unfavorable climavic conditions, however, is to be considered a sign of progress. 15. The jute and cotton textile industries suffered from last year's poor harvest and were largely responsible for the slowing down of the industrial growth rate from 12 per cent in 1960 to 6F per cent in 1961. However, output of industries other than textiles increased by well over 10 per cent despite the increasing shortages of raw materials, power, and maintenance imports. 16. The uneven development of the economy is shown by the fact that the standard of living of the population is steadily improving in the urban areas, but has hardly shown any change in the countryside. 17. The Planning Commission's preliminary estimates indicate that Third Plan developmaent outlays of the Government were rather modest in 1961/62. However, there is no sign that interest in private industrial investment is  slackening; in fact, licenses have been issued for most of the private sector projects included in the Third Plan, On the whole, investment during the last year was naintained at a fairly high level and most of the Second Plan projects which spilled over into the Third Plan are now about to be completed. A start has been made with most of the public sector projects included in the Third Plan. However, power, coal and transport are still major bottlenecks in the economy, preventing the attainment of a higher growth rate, 18. The price level, which rose steadily during the Second Plan period remained fairly stable in 1961/62. The wholesale price index dropped by 3 per cent from May 1961 to May 1962 and the consumer price index grew only 3 per cent, reflecting mainly the increase in the level of indirect taxation. On the whole, fiscal and monetary policies have been sensible and have helped to keep the price level under control. 19. Export earnings rose by more than 4 per cent in 1961/62 above the previous yearts level. However, this increase was largely fortuitious and no definite upward trend in export earnings can yet be observed. 1iain- tenance imports have been kept well bel-ow the level needed to take full advantage of the expansion of industrial capacity0 India's mounting obligations for debtL repaymernt have also added to the strain on the balance of payments3 Despite the assistance received during 1961/62 from the IMF, foreign exchange reserves dropped slightly during the year, The level on Juine 8, 1962, is equivalent to $b60 million, $247 million of gold and $213 million of foreign exchange. In view of the tight balance of payments position, the Government is currently considering further restrictions on foreign exchange expenditures, 20. A meetiing of countries and institutions interested in assisting India's economic growth - the sixth of the series - was held in the Bank on May 28 for the purpose of raising additional assistance for the second year of the Plan, over and above the $2,250 million of commitments indicated in June 1961 toward the financing of the first two years. Somle new commit- ments were offered by various members but in view of the fact that some of thae countries were not ready to make any definite announcement, and since there are indications that other countries might join the consortium in the near future, it was decided to adjourn the meeting to allow the interested parties sufficient time to reach their decisions. PART V - COJIPLIANCE WITH ARTICLES OF AGREEMENT 21. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  -6- PART VI - RECQI ENDATI0NS 22. i recoir=end that the Association make available a Development Credit to India in an amount in various currencies equivalent to $15 million for a total term of 50 years with service charge of 3/h 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 Excecutive Directors adopt a resolu- tion to that effect in the form attached (No. 6). Eugene Ro Black Presideiont Washington, D,C. June 21, 1962