India - Agriculture Machinery Project

Copy No. INT ERNATIONAL BANK FOR RECONSTRUCTION AND EELOPMET REPORT AND RECOIMENDA TI ONS OF THE PRESIDENT TO THE BOARD OF EXECUTIVE DIRECTORS ON THE AGRICULTURAL .:ACHINL-RY PMJECT LOAN APPLICATION OF THE DOINION OF INDIA September 26, 1949 CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOIEfNT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING ROPCED LOAN TO.INDIA 1. I submit the following report and recommendations with regard to an application from the Dominon of India for a medium term loan of $10,000,000 for an agricultural machinery project. ART I - Historical 2. The report of the Bank's Mission to India and the statement by the President to the Executive Directors made on Play 1Q, 1949, concerning the basis on which the loan negotiations with India would be conducted, were distributed to the Board on 1,y 10, 1949, (Document RBr,226). 3. In August, 1949, the B&nk informed the Indian representatives that it was prepared to consider, in the immediate future, the granting of loans for approved projects in the approximate amount af $75OOOOOO0 On August 18, 1949, the Bank granted a loan to the Dominion cf India for the Railway Project in the amount of $34,000,000. 4. Negotiations for the Agricultural Machinery Loan were opened on August 22, 1949. 5. The formal application was submitted. in a letter dated September 22, 1949, from the Ambassador for India to the United States of America. 6. The authoriged negotiator pn behalf of India is Mr. Keith C. Roy, Deputy Secretary to the Government of India, Ministry of Finance. PART II - Description of Pro)osed Loan Borrower 7. The Borrower will be the DominIon of India, a member of the Bank. -2 Amount 8. The loan will be in the amount of $10,000,000. Purpose 9. (a) The proceeds of the loan are to be applied to the financing of the acquisition of agricultural machinery to be used by the Central Tractor Organization, a subordinate organization of the Ministry of Agriculture of the GovernT4ent of India, in the specific project of reclalming about 3 million acres of lands infested with kans grass and of clearing about 100,000 acres of scrub jungle lands. (b) The specific goods ad services which will be purchased with the proceeds of the loan are as follows: (i) Tractors, equipment and spare parts, including freight, for the recl4ma- tion of %ans grass infested lands - $8,750,000 (ii) Tractors, equipment and, spare parts, including freight,for the clearance Qf scrub jungle lands - $1,250,000 $10,000,000. Amortization Arranements 10. The loan will be amortized by semi-annual principal payments of $1,000,000 beginning June 1, 1952. These payments will retire the entire loan by December 1, 1956. Interest, Commission and Commitment Chares 11. The loan will bear interest (incluiding 1% commissign) at the rate of 31fo per annum. A commitment charge has been prpvided foi7 in accordance with the present policy of the Bapk, -3 Legal Instruments and Legal Authority 12. (a) Appendix I contains a draft of a Loan Agreement between the Dominion of India and the Bank1. The form of Loan Agreement follows in general the form used in other loans made directly to governments. (b) Before the Loan Agreement becomes effective, the Indian Govern- ment will submit evidence, including legal opinions, pursuant to Article XI of the Loan Agreement, showing that the executive,power has, under existing law, authority to enter into the proposed Loan Agreement without further leg- islative authorization and without the necessity of ratification. The Staff has examined the legal questions involved and has no doubt as to the authority of the executive power in that respect. The Indian Government also proposes to obtain the passage of a Resolution of the Indian L,gislature which would affirmatively show its approval of their entering into the Loan Agreement, although such legislative action is not required for the validity of the transaction. (c) The form of Loan Agreement also provides that before it becomes effective the United Provinces, the Central Provinces, Bhopal and the Madhya- Bharat Union, in which the project is located, will make arrangements satis- factory to the Bank to cooperate with the Government of India in the carrying out of the project. PART. III, Ap raisal of :-oqsed Ln'an 13. A report on the Recent Economic Developments in India was distributed to the Board on August 12, 1949, (Document R-242). 14. An appraisal of the Agricultural Machinery Project was distributed to the Board on September 23, 1949, (Document R-251). 15. Annex A hereto contains the report of the Committee provided for in Article III, Section 4, paragraph (iii) of the Articles of Agreement. The Need for a Loan 16. Food shortages have been and still remain one of the basic problems of India. A low level of nutrition and recurring famines engender political unrest, diminish the physical fitness of the population and hinder economic development. The growth of population in India at a rate of over 3,000,000 yearly aggravates the problem. Imports of substantial volumes of grain needed for the maintenance of the low standards of nutrition have serious effects on the financial position of India. 17, Attaching the greatest importance to the food problem, the Government of India has recently evolved a three-fold program aVming at the attainment of selfuoufficiency in grain. The Government is already carrying out with its own resources the phase of the program which involves increasing the present low yields on lands now under cultivation through the application of better methods of cultiva- tion, the wider use of fertilizers and the provision of better equipment. 19. The execution of other phases of the program consisting of the installation of extensive irrigation systems, the reclamation of lands, the clearance qf scrub jungle lands, and multi-purpose schemes including irriga- tion and flood control requires foreign exchange investments beyond India's present capacity. Accordingly, the Government of India has submitted for the Banl's examination some of the projects for agriqultura development. 20. In connection with a project for the reclamation of lands infested with kans grass and the clearing of jungle lands, India has requested Ghe Bank at this time to assist in the financing of the purchase of heavy tractors and ancillary equipment obtainable only in the United States. All other equipment and services necessary for the project, including imported fuel and lubricants, will be financed out of India's own resources. 21. The objective of the project is to increase domestic food grain production and is in line with the Government's program to increase the domestic food supply as rapidly as possible to a point where imports of food grains may be discontinued. The Effects of the Project 22. The recla'ation of kans-infested lands will bring back into full cultivation 460,000 acres of land yearly, or a total of 3 million acres during the seven-year period. This will raise materially the present very low standard of living of the farmers in the reclaimed area. After payment of reclamation and other incidental costs, the proceeds from the sales of surplus grain will leave the farmers a profit and the increased productivity of the lands will enhance their value. 23. The surplus grain will augment the volume of domestic supply available for consumption by the non-farming population and ease the pressures on the Indian balance of payments. 24. The pressing need for new land can be partially satisfied by the clearance of jungle lands. The pilot project will enable the Government to gauge the practicability of large-scale clearance of jungle lands with modern equipment and even on the small scale envisaged it will contribute to the dmestic food supply. -6- 25. Thus the carrying out of the project before the Bank will be of significant importance in the economic development of India. 26. For these reasons and because of India's present unfavorable balance of payments position, and in particular because of the shortF.ge of hard currency, the financing on a loan basis of a part of the dollar requirements of this important project is justified. 27. I am satisfied that in prevailing market conditions India would be unable otherwise to obtain the loan for this project under conditions reasonable to her. I consider that the schedule for the repayment of :principal and the rate of interest and other charges in connection with the proposed loan are appropriate for the project. Prospects of Fulfillment of Qbligations 28, The proposed method of reclamation of kans-infested lands has been tested by an organization of the Indian Government and its practicability has been demonstrated. This method is feasible on a large scale and can be done economically because the lands to be reclaimed under the project are in large tracts. The organization which will carry out the project has suffi- cient trained personnel for the planned operations. Furthermore, the Govern- ments of the Provinces and States in which the project is located are taking legislative and other steps required in connection with their participation in the execution of the project. 29. The additional charge which India will have to bear as a result of the proposed loan of 0'10,000,000 is small in comparison with the benefits to be derived from the project. Annual service during the period of amortiza- tion will average 2.2 million and added to the service of the Railway Pro- ject Loan wi2 amount to a maximum charge in 152 of '0.4 million. This 7 amount is considered to be within India's capacity to service dollar obliga- tions. 30. I am satisfied that due regard has been paid to the prospects that India will be in a position to meet her obligations under the proposed loan and I am satisfied that, in making this loan, the Bank will be acting pru- dently in the interests both of Tndia and of the members of the Bank as a whole. PART IV - Compliance with Articles of Agreement 31. I am satisfied that the proposed loan complies with the require- ments of the Articles of Agreement of the Bank. PART V - Recommendations 32. 1 recommend that the Bank at this time grant to the Dominion of India a loan of bl10,000,000 for a term of 7 years, with interest (including commission) and commitment charge at such rates, and on such other terms as are specified in the form of Loan Agreement attached as Appendix I. /s/ Eugene R. Black Rashington, D. C. September 26, 1949, Annex A STATuTORY LOAN COMMITTE REPORT To: The President, International Bank for Reconstruction and DeveloDment Report of Loat Committee under Article III, Section 4 (iii), of the Articles of Agreement on the proposed Loan to Dominion of India. The undersigned Committee, constituted under Article V, Section 7, of the Articles of Agreement of International Bank for Reconstruction and Development (hereinafter called the Bank) hereby submits its report pursuant to Article III, Section 4 (iii), of said Articles in respect of the proposal that the Bank grant to Dominion of India a loon in the principal amount of $Q5000,000. The purpose of said loan is to provide foreign exchange for the acquisition of agricultural machinery to be used by the Central Tractor Organization, a subordinate organization of the Ministry of Agriculture of the Government of India, in the reclamation of lands infested with kans grass and in the clearance of scrub jungle lands. 1. The Committee has carefully studied the merits of the proposal to grant such a loan and the purposes to which the proceeds of the Zoan are to be applied. 2. The Committee is of the opinion that the project toward the financing of which the proceeds of such loan are to be applied comes within the purposes of the Bank as set forth in Article I of said Articles of Agreement and that the said project is designed to promote the development of thp prod-active faco1lities and resources of the Dominion of India and is in the interests 6r the Dominion of India and of the members of the Bank as a whole. 3. Accordingly, the Committee finds that the said project merits the financial assistance of the Bank and hereby recommends the said project for such assistance. COMMITTEM R. L. Garner Keith C. Roy W. A. B. Iliff D. Sommers Crena de Iongh L. B. Rist Dated At Washington, D. C. September 23, 1949.