India - Railway Project

Gopy No. INTERNATIONAL BANK FOR RECONSTRUCTION A-ND DEVELOPMENT REPORT AND RECOMMIDATIONS OF TE PRESIDENT TO TÆE BOARD CF EECUTIVE DIREQTORS ON THE LOAN APPLICATION OF TE DOMINION OF INDIA August 16, 1949 QONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTNI'AD DEVjELOPENT REPORT AND RECOI NDATIONOF THE PREIDENT TO THE EXfCUTIVIE DIRWCTORýS CQNCERNING PROPOED TO INDIA . I submit herewi.th the following report and recommendations with regard to an application from India for a loan of w,34,000,000, for. a raiway project (hereinafter sometimes called Railway PEroject Loan), PART I - Historical 2. During the meeting of the Governors of the Bank in Septenfoer, 1948, the representatives of India informed the Bank of the intention of the Government of India to apply for a loan for the recongtruction and development of the Indian Railways and the development of agri, culture, shipping, radio and civil aviation, 3. At the invitation of the Government of India a Bank MVission visited India from Jarnary 24, 1949 to the end of Mlarch. The Mission included a spe cially engaged railway consultant, 4, The reports of the Mission and the statement by the President to the Dxecutive Directors made on iay 10, 1949, concerning the basis on which the loan negotiations with India would be conduct-d, were distributed to the Board on May 10, 19h9, (Doc-ument R.-226), 5. Negotiations were opened on June 27, 1949,. 6. Thé Government of India, ·through its representatives, gave assùrances that essential measures designed to increase the operati,ng efficiency of the Indian GovernMent Railways have been undertaken and will be continued. -2- 7. As result of negotiations the amount of the proposed loan to finance the balance of orders for certain railway equipment placed by India in the U.S.A. and Canada and orders to be placed was set at )3, 000, 000. 8. During the negotiations, the Indian representative was informed that the Bank: a) was now ready to commence discussions regarding a loan for an Agricultural iiachinery Project, b) would soon be in a position to open discussions regarding the electric power project at Bokaro in the Damodar River Valley; c) was actively investigating the other projects submitted by India for the Bank's consideration which were in an advanced stage of preparation; d) was prepared to consider, in the immediate future, the grant- ing of loans for approved projects, including the Railway Project Loan, in the approximate amount of ,)75,000,000. 9. The final and formal application was embodied in a letter from the Ambassador for India in tho-.bitod States of Almorica datod August 16, 1949. 10. The authorized negotiator on behalf of India is Mr. Keith C. Roy, Deputy Secretary to the Government of India, inistry of Finance. PART II - Description of Proposed Loan Borrower 11. The Borrower willbe the Dominion of India. Amount 12. The loan will be in the amount of 34.,000,000. According to the Indian program of purchases, approximately 17,000,000 will be paid to Canadian suppliers, approximately 11,000,000 to U,,. sjup-liers, leav- ing a balance of ,6,000,000 to finance orders not yet placed and the cost of freight. -3- Purpose 13. (a) The proceeds of the loan are to be applied to financing the acquisition for use by India on railways owned or operated by it, of loco- motives, boilers, and locomotive spare parts, with the primary object of increasing, and improving the utilization of, railway freight haulage capacity. (b) The specific goods and services to be purchased with the proceeds of the loan are as follows; (i) locomotives and boilers 26,350,000, (ii) locomotives spare parts 6,800,000. (iii) freight 80,000t. $5,000,000. Amortization Arrangements The amortization of the loan will be made in semi-annual payments, beginning August 11th, 1950, in the amounts set out in Schedule 1 of the proposed Loan agreement, These payments will retire the entire loan by maturity on August 15th, 1964, i.e., in a period of 15 years. Interest, Commission and Commitment Charges 1*. (a) The Loan will bear interest (including 1; cogmission) at the rate of 4% per annum. I (b) A commitment charge has been provided for in accordance with the present policy of the Bank. Legal Instruments and Legal Authority 16, (a) Appendix I Qontains a draft of a Loan Agreement between the Daiion of India and the BUMM., The fom of Loah Agreemant WWis in jeral -the. form us,ed is Othatk lo0no WD alrOttly e govornments. (b) Before the Loan Agreement becomes effective, the Indian Government 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 prodosed Loan Agreement without further legislative authorization and vithout 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 legislature 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. PART III - Appraisal of Proposed Loan 17. A report "Indian Creditworthiness" was distributed to the Board onl,lay 10, 1949, (Document R,226). A report on the Recent Tconomic Devel- opments in India was distributed to the Board on August 12,1949, (Document R-242). 18. A report by the Railway Consultant on the Indian ailaays was distributed to the Board on 'lay 10, 1949 (Document R-226). An appraisal of the Railway project, submitted for the Bank's financing, was distributed to the Board on August 12, 1949, (Document R-242). The Need for a Loan 19. With the outbreak of the war the development of the resources of India came almost to a standstill. During the war, the Indian economy contributed arms, food, munitions and various services, including rail transportation, to the Allied war effort. After the war, when India attained her independence, plans were laid to make good the lost years and to transform India into an important industrial power in the East. 20. While India possesses vast natural and human resources, and there is no lack of initiative, her economic progress is delayed because of the shortage of capital and technical knowledge. Also, a political climate favorable to economic stability has not yet been fully achieved. In addition to domestic ferment spread by disruptive elements there are raIny unsettled difficulties with Pakcistan. Although working arrangements have been made to deal with urgent problems on a temporary basis, a close economic cooperation between the two countries is still far from having been achieved. 21. Tho financing required for development programs on the scale originally contemplated by the Government and private enterprise was out of proportion to the level of income aid savings in India. To provide a part of the funds for financing development, the Government has relied on the use of the sterling balances, accumulated during the war.. Due to many factors, some of which were beyond the control of the Government, the allocation of the released balances for development expenditures was not as large as it had been expected. The extent to which the balances will be available in the future and allocated for productive purposes will depend on economic developments in the United Kingdom and India. 22. Since the end of the war, the change in the economic position of the United Kingdom, has, at least temporarily, reduced to a trickle the flow of new investments from this traditional source, and to supplement her own resources, India must now seek assistance elsewhere. 23. There is a constructive and important role to be played by the Bank in India: directly by providing capital for sound, well-prepared projects, and indirectly, by helping to create confidence in the capital exporting countries for this new state and thus encouraging the participation of private capital in the development of India. I believe that by undertaking to give financial assistance now for sound projects and by continuing to cooperate with India in the expansion of her economic resources the Bank will be taking important steps in the achievement of its purposes. Moreover, it can be expected, that the investment in India by the Bank will help to restore the willing- ness of local Indian capital to participate actively in the development of Indian resources. 24. Recently, the Government adjusted its economic policies with the result that the available resources will be dir3cted to the execution of those projects which will yield the greatest immediate returns or develop basic industries. High priority projects are the expansion and improvement of agricultural production --the largest industry of the country -wthe development of electric power and the expansion of pro- duction of essential industrial materials such as steel., 25. High on the priority list is the rehabilitation of the Indian Railways, which, as a result of the war, suffered from a serious backlog of replacements, particularly of motive power, 26. Since the return of the Bank's Mission in March 1949, the Bank has been actively engaged in the study of a number of projects submitted by India. Some of these projects ave not yet ready for examination and several months may pass before the Bank could contemplate financing them. However, in addition to the Railway Project, the financing of which I now recommend, there are two other projects, in an advanced stage of investigation. These projects are the reclamation for -7- cultivation of about three million acres of weed-infested land and the construction of an electric power plant in the industrial section of the Damodar River Valley. I hope that in the near future I shall be able to submit my recommendations with regard to the financing of these two projects. 27. To demonstrate the Bank's interest in the development of India, I propose to announce in the press that, if the final investigations of projects now under way confirm the results of preliminary studies, the amount of loans in the immediate future, including the proposed railway loan, will total approximately $75 million. I do not, however. regard this as the limit of the Bank's interest in sound development projects in India. The Effects of the Project 28. The Railway Project is designed to contribute to the rehabili- tation of the railways, which are the main means of internal transport in India. The new locomotives will help to improve the distribution of goods within the country and the movement of export products; the latter will increase foreign exchange earnings. The rehabilitation of the railway system will not only facilitate the expansion of production and trade, but will also increase the earning power of the Indian Railways, thereby strengthening the finances of the Indian Treasury. 29. The Indian Railways have recently undertaken operational and administrative reforms with a view to improving the utilization of engines, freight cars, repair shops and other facilities. The completion of the project will help in carrying out these ;neasures. Repayment Prosrects 30. Complex political, economic and social situations in this overpopulated country present a series of difficult problems to any Government in power. The Congress Party Government, backed by a great majority of the Indian people, has demonstrated, during its relatively short period of office, administrative ability and political wisdom. It is resolving complicated internal questions connected with the unification of the country and has shown a spirit of cooperation in the search for t)ae peaceful solution of international problems. I believe that so long as the government of India continues to be guided by principles laid down by great Indian leaders, It will be assured of the lasting support of the population. 31. In assessing the economic factors, it is to be noted that India has not only repaid to the United Kingdom, during the war, all of her bonded debt but has also accumulated large sterling balances which help her to finance deficits in the post-war transition period. Her present sole dollar obligation of nearly $100 million arises out of the recent drawings on the International Monetary Fund. During the last war, 226 million ounces of silver were obtained from the United States under the Lend-Lease Act. Steps have been taken by the Government of India to make this amount available for return. India has never defaulted on any of her debt, external or internal4 32. In the prewar perio. India normally had a favorable balance of payments on current account. Since the end of the war there have been sizable deficits to the pent-up demand for con'LMer goods and sitale d eficin, partly ueto the low an a the need for replacement of capital eqTuipment and partly to the low level -9- of exports. The restoration of export trade has been hindered by internal strife, by the disorganization of the transportation system and by the dislocation of markets and the sources of supply of raw materials. To the extent that India proceeds with an orderly development and utilization of her vast resources and as she expands food production, thus minimizing the effects of bad crops on her financial position, the equilibrium of her balance of payments should be gradually restored. 33. India's payment position with regard to the Western Hemisphere was also favorable before the war. The earnings from exports to the Americas were used to pay for imports from Europe. In the post-war period this situation has changed. The short supply of grains in Asia and indus- trial goods in Europe has necessitated high imports from the .. S. and Canada. The concurrent retarded revival of exports to hard currency areas has widened the gap between dollar receipts and payments. In cooperation with other countries of the sterling area, the Government has recently decided to cut down dollar deficit through the reduction of imports from hard currency areas. This measure, necessitated by circumstance, should have no adverse effects on the economy of the country because of the improving supply position outside of the hard currency area. 34. It can reasonably be expected that, as result of the steps taken by the Government to improve the food production and supplies in the country and to increase imports of foods and manufactured goods from the non-dollar area, the demand for hard currencies for curr'ent imports will be progressively brought down to a level which will be more in line with India's present dollar earnings. The increase of the volume of exports to the dollar area -10- will be aided in so far as close economic cooperation is established with Pakistan. However, India herself must take steps for the more vigorous promotion of her exports. The development needs of the country will require imports of capital goods and technical services, the value of which will exceed India's capacity to pay out of current earnings. But if the political scene remains undisturbed and sound economic policies are pursued, it should be possible to create a favorable climate to attract foreign private equity capital to supplement loans. 35. Studies of the present economic situation indicate that, after a period of 3 to 5 years, necessary for post-war adjustments of the balance of payments, India could, without undue strain, provide annually from 10 to 15 million dollars for the service of 4edium and long-term dollar obligations* The interest payments and amortization of a loan of $34 million will require about 3.1 million dollars annually. This represents only slightly more than 1% of India's 1949 exports to the U.S.A. 36. I believe that it can reasonably be expected that India will be able to meet the service of the proposed loan. PART IV - Compliance with Articles of Agreement A - Compliance with JArticle I of the Articles of Agreement 37. The proposed loan is within the purposes of the Bank as set forth in Article I of its Articles of Agreement. The proceeds of the loan will be used to finance the purchase by India and the importation into India of railway equipment required for the specific project of reconstruction and development of the Indian Railways. The loan comes within the purposes specified in paragraph (i) of Article I. - 11 - B - Compliance with Article III, Section 4, of the Articles of Agrment 38. The proposed loan conforms to the applicable provisins of Section 4 of the Article III of the Articles of Agreement of the Bank. a. Dominion of India, a member of the Bank,is the borrower; b. Inquiries made by the Bank and other available information furnish satisfactory evidence that, under prevailing market conditions, the borrower would be unable otherwise to obtain the loan on conditions reasonable for the borrower. c. There is annexed hereto, and marked Annex A, report of the Committee provided for in paragraph (iii) of that Section recommending the project for which the loan is to be made. d. It appears that the rate of interest and other obarges in connection with the loan are reasonable, and that such rate and charges, and the schedule for repayment of principal are appropriate to the project. e. There is satisfactory evidence that in making the proposed loan the Bank will be acting prudently in the interests both of India and of the members of the Bznk as a whole. Due regard has been paid to the prospDects that the borrover will be in a position to meet its obligations under the proposed loan. f. The proposed loan is for the purpose of a specific project of reconstriuction and development within the meaning of paragraph (vii) of that Section. C - 02Mian.e it Article III. Sectin5b of the Articles 2f Agremant 39. The form of loan agreement contains provisions to ensure that the proceeds of the loan shall be used for purposes for which the loan was granted. - 12 - PART V Recommendations 40. I recommend that the Bank at this time grant to the Dominion of India a loan of $34,000,000 for a term of fifteen 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 presented in Appendix I herewith. Eugene R. Black Annex A STATUTORY LOAN CO1MMITTEE REPORT To: The Presid.ent, International Bank for Reconstruction and Develonment Report of Loan 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 Dominioi of India a loan in the principal amount of $34,000,000. The pur-pose of said loan is to provide foreign exchange for the acquisition of locomotives, boilers and locomotive spare parts to be used on railways owned or operated by Dominion of India. 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 loan 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 come 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 reconstruction and development of the prod-active facilities and resources of the Dominion of India and are in the interests of the Dominion of India and of the members of the Bank as a whole. 3. Acoordinglyv the Committee finds that the said project merits 2 the financial assistance of the Bank and hereby recommends the said project for such assistance. COMMITTEE R. L. Garner Keith C. Roy / s/ V. A. B. Iliff A. F. LuXford Crena de longh L. 3. Rist Dated at Washington, D. C. August 16th, 1949