India - Third Industrial Imports Project

RESTRICTED Report No. P - 50 3 FLE .coPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR THE THIRD INDUSTRIAL IMPORTS PROJECT August 10, 1966  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMINDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS 0H A PROPOSED DEVELOPENT CREDIT TO DIDIA FOR A THIRD INDUSTRIAL I1PORTS PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an amount in various currencies equivalent to U.S. $150 million. PART I - HISTORICAL 2. The proposed credit would assist selected industries manufacturing capital goods and agricultural chemicals by providing foreign exchange to pay for a portion of the imports of components, materials, spare parts and balancing equipment which they require to maintain and expand production. In June 1964 and in August 1965 I recommended, and you approved, similar credits to India. It is now clear that those credits have been successful in achieving their primary objective, which was to support and expand production of certain types of capital equipment. It is also evident that a substantial further increase in production can be obtained from existing industrial facilities if additional imports are made available, and that some more general approach is necessary than was possible with the limited resources available from previous industrial imports credits. 3. In recent months the Government of India has announced a number of rnieasures designed to make more efficient use of India's vast productive potential. These measures include a substantial reorientation of agricultural policy, a stepped-up campaign to restrain the growth of population and, in June of this year, devaluation of the rupee along with the first steps toward removal of administrative controls over essential imports. 4. In support of these new directions of policy I have recommended to the Indian consortium that a total of $900 million be provided to India during the current fiscal year (April 1, 1966 to March 31, 1967). On the basis of what consortium members have already reported to me, I am confident that the full $900 million will be made available to India in appropriate form; indeed, much of this has already been announced and, subject to parliamentary and administrative approvals, the balance will be announced during the next month or two. As I already indicated to you at our meeting on June 28, it is my intention over the next several months to recommend credits totaling $215 million as the Association's contribution to this consortium effort. The present proposal represents the first such recommendation. 5. The Association has made 19 credits to India, totaling about $676 million and including 4 which are fully disbursed. The Bank has made 35 loans,including 21 which are fully disbursed. The status of Bank loans and IDA credits to India,  -2- as of July 31, 1966, is sl.%.marized below: Amounts ($ million) Bank IDA Total (less cancellations) 1,001.9 675.5 Of which has been repaid 269.3 - Total now outstanding 732.6 675.5 Amount sold 105.0 Of which has been repaid 89.3 15.7 Total now held by Bank and IDA 716.9 675.5 Of which still undisbursed 189.3 1/ 215.8 2/ 1/ including $30 million for the Fourth IISCO Loan, wjhich is not yet effective. 2/ Including $68 million for the Ninth Railway Project, which Credit became effective August 3, 1966, and $23 million for the Beas Equipment Credit, not yet effective. 6. The following loans made before July 1, 1960, are not yet fully disbursed: Amount ($ million) Loan Undisbursed Date Number Borrower Purpose Loan on 7/31 1966 11/19 1954 106 Tata Power Trombay I 16.2 0.04 5/29 1957 16h Tata Power Trombay II 9.8 0.09 6/25 1958 199 Madras Port Equipment 1h.0 0.53 7/15 1959 232 ICICI Industry II 10.0 0.01  -3- 7. The following loans and credits were approved since July 1, 1960: Loan or credit Borrower Purpose Amount ($ million) Undisbursed Date Niumber Bank IDA on 7/31 1966 7/29 1960 262 India Railways V 70.0 - 10/28 1960 269 ICICI Industry III 20.0 1.02 6/21 1961 3 India Roads 60.o 4.55 8/9 1961 292 India Private Coal Mining 35.0 0.78 8/17 1961 294 Calcutta Equipment II 21.0 8.44 Port 9/6 1961 8 India Tubewell Irrigation 6.0 - 10/13 1961 298 India Railways VI 50.0 - 11/22 1961 13 India Shetrunji Irrigation 4.5 1.11 11/22 1961 14 India Salandi Irrigation 8.0 6.42 11/22 1961 15 India Punjab Flood Protection 10.0 0.55 12/22 1961 307 IISCO Coal Mining 19.5 13.35 2/14 1962 19 India Durgapur Power 18.5 5.22 2/28 1962 312 ICICI Industry IV 20.0 2.h4 6/29 1962 21 India Sone Irrigation 15.0 3.27 7/18 1962 23 India Purna Irrigation 13.0 3.32 8/8 1962 24 India Koyna Power II 17.5 8.26 9/14 1962 27 India Bombay Port 18.0 11.82 9/14 1962 28 India Telecommunications I 42.0 5.37 3/22 1963 36 India Railways VII 67.5 - 5/24 1963 37 India Kothagudem Power I 20.0 6.34 6/5 1963 340 ICICI Industry V 30.0 8.65 6/9 1964 52 India Industrial Imports I 90.0 - 7/6 1964 58 India Telecommunications II 33.0 9.69 10/26 1964 67 India Railwrays VIII 62.0 - 5/28 1965 414 ICICI Industry VI 50.0 48.53 6/11 1965 416 India Power Transmission 70.0 69.25 6/11 1965 417 India Kothagudem Power II 14.0 6.16 8/11 1965 78 India Industrial Tmports II 100.0 58.86 6/29 1966 88 India Railways IX 68.0 68.oo 6/29 1966 89 India Beas Equipment 23.0 23.00 7/7 1966 456 IISCO Balancing Scheme 30.0 30.00  -4- 8. In my report on the Ninth Railway Project (IDAR66-13), which was circulated on June 20, 1966, I summarized the current status of projects which have experienced delays in disbursement. There have been no significant changes since then, except with respect to the Power Transmission Project (Loan No.416-IN); the first disbursements of Bank funds for this Project were made only recently, but a mission which has just returned from India reports that the rate of disbursement can be expected to quicken in the course of the next few months, partly as a result of improved procedures for clearance of subprojects and procure- ment documents. With respect to the Salandi Irrigation Project (Credit No. 14-IN), my memorandum of August 4, 1966 (IDA/R66-18) summarizes proposed new arrangements for its completion. PART II - DESCRIPTION OF THE PROPOSED CREDIT 9. Borrower: India, acting by its President. Amount: Various currencies equivalent to US $150 million. Purpose: To improve the rate of utilization of existing productive capacity and capital equipment in India by increasing the availability of foreign exchange for the import of materials, components, spare parts and miscellaneous items of manufacturing equipment. Amortization: The term of the credit would be 50 years with a grace period of 10 years. One-half of 1 percent of the principal amount would be repay- able semi-annually for 10 years beginning January 15, 1977, and 1-1/2 percent of such principal amount would be repayable semi-annually beginning January 15, 1987 and ending July 15, 2016. Service Charge: 3/4 of 1 percent annually. PART III - THE PROJECT 10. An appraisal report (AS-115a)is attached. It describes recent measures which the Government of India has taken to relax administrative controls on essential imports and the importance of this program for future economic development in India. The report also provides information on a wide range of industries which are expected to participate directly in the proposed project. 11. The project forms part of a program to maintain and expand industrial production and provides primarily for the import of materials, components and spare parts required by manufacturers of various types of capital equipment and agricultural chemicals.  12. Under the new policy announced in June of 1966, the Government is issuing licenses to manufacturers in priority industries - defined to include a very large percentage of all industrial capacity - largely on the basis of manufacturers' own estimates of their production requiremerits. The Govern- ment has indicated to firms in the priority industries not only that they will receive import licenses to the full extent of their requirements but also that they may return for additional import entitlements whenever necessary to maintain or expand their outnut. The use of such licenses is somewhat restricted, but only to ensure that banned imports are excluded and to enforce restrictions which aid-givers impose on the use of aid funds. Under this new policy, manufacturers are expected to make substantially more efficient use of imported goods, to expand production (for example, by employing additional work shifts and other measures for improving the rate of utilization of existing manufacturing capacity) and to achieve a significantly better relationship between current production on the one hand and inventories of materials on the other. 13. In keeping with the spirit of the Government's new import policy, the proposed third credit would include a much wider range of industries than its predecessors. Nevertheless, withdrawrals from the proposed credit would be limited to payments for imports required by manufacturers of specified types of capital equipment, basic metals and agricultural chemicals, as agreed upon between India and the Association. The inclusion of imports required by manufacturers of chemical fertilizers and pesticides should be specially noted, since it reflects the new emphiasis of Government on scientific agriculture and intensive farming techniques. 1h. In the administration of Credits No. 52-IN and 78-IN, IDA missions have had occasion to observe many aspects of Indian industry and have exchanged views with Indian officials regarding Government policies affecting the efficient operation of capital equipment industries and plans for their future development. It is intended to continue these discussions. Since my presentation a year ago, general difficulties colnected with the drought, crop failure and military hostilities delayed progress on some fronts (for example, in connection with the removal of price and distribution controls on the sale of new cormercial vehicles, which has only recently come up again for active consideration). Nevertheless, there have been several favorable developments in recent months - particularly in connection with the relaxation or removal of administrative controls. Industrial licenses are no longer required in certain industries and proposals are under discussion which would increase the number of industries so exempted; the distribution and sa'le of cement and fertilizer are no longer subject to rigid Government control; and, as already noted, administrative restrictions on imports are being relaxed. 15. Government continues to emphasize the desirability of consolidating existing manufacturing facilities before investing in further expansion. However, studies are still urgently needed to provide a more realistic assessment of present manufacturing capabilities and of imports required for optimum production. The Government continues to stress export promotion, but the full benefits are still to be reaped. Finally, as I mentioned a year ago, unless the Government succeeds in developing a more effective program for  -6- the economic exploitation of local minerals, a rapidly growing import bill for materials such as non-ferrous metals seems unavoidable. 16. The industries which would benefit directly from the proposed credit are growing fast, and many of the companies concerned are highly profitable, even after allowing for heavy taxation. By and large, the firms visited by IDA missions follow business practices and policies that resemble those of similar firms in Europe, Japan and the United States, and some would be considered outstanding even in more industrialized countries - well laid out, with highly efficient labor and practicing good production control tech- niques. 17. The credit would be used for imports under licenses giving the recipient wide freedom to purchase in the way which best suits his needs. I. view of the large number of items involved, many of wihich have to fit exist- ing equipment in India, it would be inappropriate to insist on any special procurement procedures. PART IV - LEGAL INSTRUINTS AND AUThIORITY 18. The draft Development Credit Agreement betwreen India and the Association and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement, are being distributed to the Executive Directors separately. 19. The provisions of the riaft Development Credit Agreement follow substantially the pattern of the Agreements for Credits No. 52-INi and 78-IN. Attention is drawl to Section 4.Ol(b) of the draft Development Credit Agreement which contains cormitments of the Borrower with respect to the issuance of licenses, the availability of foreign exchange and the allocation of local materials. These commitments are supplemented by a letter entitled "Foreign Exchange and Ihport Licenses" which is also being distributed separately. PART V - THE ECONONY 20. A report on the economic position and prospects of India was circulated to the Executive Directors on June 20, 1966 (R66-80). As that report indicated, India's development program would justify substantially increased IDA financing. Except for the relaxation of controls on imports, described briefly in paragraph 12 above and more extensively in the Appraisal Report, there have been no significant changes in the economic situation since the economic report was written. In the short run much will dep-nd on the monsoon- so far this year, rainfall seems to have been much better than last year but is still below normal. PART VI - COMPLIANCE WITH ARTICLES OF AGREEPIENT 21. I am satisfied that the proposed development credit would comply' with the Articles of Agreement of the Association.  -7- PART VII - RECOMNDATION 22. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Credit to India (Third Industrial Imports Project) in an amount equivalent to U.S. $150,000,000. RESOLVED: THAT the Association shall grant a development credit to India in an amount in various currencies equivalent to one hundred and fifty million United States dollars (U.S. $150,000,000), to mature on and prior to July 15, 2016, to bear a service charge, at the rate of three-fourths of one percent (3/4 of 1%) per annmu, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Third Industrial Imports Project) between India and the Association which has been presented to this meeting. George D. Wloods President by S. n e Cope W-ashington, D.C. August 10, 1966