India - Tarai Seeds Project

y ~ ~RESTRICTED -0 FLE COPY TRIC Report No. P708 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE TARAI SEEDS PROJECT May 28, 1969  REPORT AND RECOY4MENDATIOi'! OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE TARAI SEEDS PROJECT 1. I submit the followfing report and recommendation on a proposed loan in an amount in various currencies equivalent to US$13.0 million to India. PART I - HISTORICAL 2. The Bank and the Association have contributed to the financing of nine projects in the agricultural sector in India (including two multi- purpose projects) with loans and credits totalling some US$97 million, net of cancellations. Apart from two early loans by the Bank, one in 1949 for land clearance and the other in 1953 for irrigation, the main lending for agriculture was a group of six credits totalling about uS$55 million (net of cancellations) made by the Association in 1961 and 1962 as part of the Bank Group's contribution towiards financing of the Third Plan. 3. The loan I am now proposing would be the first financing any- where by the Bank Group in the field of seed production. The development of a seeds industry is of vital importance to India's new agricultural strategy. The Government has been aware of the importance of improved seeds for some time and there are a number of good seed research and development centers in India. Nevertheless seeds of high-yielding food- grain varieties have become available only in very recent years. A National Seeds Corporation has been active since 1962 and a Seeds Act regulating the industry was passed in 1966. 4. The possibilities of the Tarai region of Uttar Pradesh State as a center for a seed production project were first brought to the attention of the Bank Group through the efforts of the Uttar Pradesh Agricultural University and its Vice-Chancellor. The project in its present form devel- oped as a result of two missions in 1966 and 1967 under the FAO/IBRD Cooperative Program. The project was appraised by a mission in April and May 1968. The continued uncertainty regarding IDA replenishment has made it necessary to consider the project for Bank financing, so that it will not be delayed further. 5. Negotiations took place in Washington in 'November and December 1968. Representing the Borrower were rlessrs. G. V. Ramakrishna (Deputy Secretary, Ministry of Finance), D. P. Singh (Vice-Chancellor, Uttar Pradesh Agricultural University), S. M. H. Burney (Joint Secretary, Depart- ment of Agriculture) and J. S. Varshneya (State Bank of India).  -2- 6. Since negotiations,. some steps toward project implementation have taken place. The Tarai Development Corporation (see paragraph 16 below) has beeni incorporated, and after consultation with the Bank a Managing Director has been appointed. Subscription of initial share capital has begun. 7. The Bank has made 36 loans in India, including 30 which are fully disbursed. The .-ssociation has made 22 credits to India, including 17 which are fully disbursed. The status of Bank loans and IDA credits in India as of April 30, 1969, is summarized as folloiTs: Active Amount (US $ Million) Loans/Credits (Less cancellations) Nurnber Year Borrower Purpose Bank IDA Undisbursed 14 1961 India Salandi Irrigation 7.5 .2 307 1961 IISCo Coal Mining 19.5 6.4 19 1962 India Durgapur Pow,Yer 16.8 .7 24 1962 India Koyna Power II 17.5 4.1 27 1962 India Bombay Port 16.2 3.1 414 1965 ICICI Industry VI 50.0 25.9 416 1965 India Power Transmission 58.0 28.0 417 1965 India Kothagudem Power II 14.0 2.3 89 1966 India Beas Equipment 23.0 12.9 456 1966 IISCO Balancing Scheme 30.0 28.8 515 1967 ICICI Industry VII 25.0 25.0 Loans/Credits fully disbursed 810.7 929.1 Total 1,007.2 1,010.1 of wlhich has been repaid to Bank and others 382.7 Total now outstanding 624.5 Amount sold 109.7 of which has been repaid 103.8 5.9 Total now held by Bank and IDA 618.6 1,010.1 Total undisbursed 116.4 21.0 137.4 8. There have been delays in disbursement on several Bank and IDA financed projects in India. Under the Power Transmission Project (Loan No. 416-ii), the Bank has received satisfactory revised financial under- takings fron all State Electricity Boards and, as agreed by the Executive Directors (R69-48, March 10, 1969), the Closing Date !wTill be postponed until December 31, 1970. We continue to give very close attention to the  - 3 - situation of the Indian Iron and Steel Company (Loans Nos. 307-IN and 456-IN), wjhere various difficulties have considerably delayed both projects. In the case of the Bombay Port Project (Credit No. 27-IN), an end-use mission in February 1969 reported that although work was slightly behind the revised schedule, disbursements should be completed by the revised Closing Date of July 31, 1970. The industrial recession resulted in a slower rate of disbursement by ICICI than expected (Loans Nos. 414-IN and 515-IN), but in recent months commitments have risen noticeably. 9. IFC has made ten commitments in India totalling $33.5 million, of wqhich $2h.6 million represent loans and $8.9 million equity. As of April 30, 1969, $13.6 million had been disbursed. The largest commitment, not yet effective, is a total of $15.9 million to Zuari Agrochemicals for a fertilizer plant in Goa. A number of other industrial schemes are currently under consideration, with particular emphasis on new fertilizer projects. 10. Bank Group lending in the agricultural sector is expected to increase during the next few years. An agricultural credit reconnaissance mission visited India in NTovember and December 1968, and an irrigation reconnaissance mission visited India in January and February 1969 to identify projects suitable for Bank Group financing. The reports of these missions have been reviewed, and were discussed, along with a wide range of policy issues, at a series of meetings between Bank staff and representatives of the Government of India, in New Delhi in April. An irrigation project on the Kadana River in Gujarat State was appraised in May, and several other projects are scheduled for appraisal over the next fewT months. A third telecommunications project for $55 million also will be presented to the Executive Directors in June, and a tenth railway project for about $35 million has been appraised and should be ready for consideration by about August. Several other projects are in various stages of preparation. PART II - DESCRIPTION OF THE PROPOSED LOAN 11. Borrower: India, acting by its President. Beneficiaries: Project area farmers. Purpose: On-farm improvements, installation of seed processing plants and other developments necessary for production of certified seeds of high-yielding varieties of foodgrains. Amount: US$13.0 million.  - 4 - Amortization: In 30 years including a 10 year period of grace, through semi-annual installments beginning June 15, 1979 and ending June 15, 1999. Interest Rate: 6-1/2I Commitment Charge: 3/h of l,d per annum on the undisbursed amount of the loan. Relending Terms: $9.0 million of loan proceeds wjould be relent through Agricultural Refinance Corporation and State Bank of India to farmers and others for periods of five to ten years w-ith interest at 8-1/2 to 9%'. PART III - TI-E PROJECT 12. An appraisal report on the proposed project, entitled "Tarai Seeds Project" (TO-689a) is attaclhed. 13. In recent years there has been a major change in the Government of India's development priorities. In particular, since 1965/66 there has been newT emphasis on agriculture, prompted by two bad harvests, the result- ing balance of payments drain to pay for food imports, and a desire to achieve self-sufficiency in food production. The new strategy of develop- ment is centered around provision of modern inputs. There is heavy stress on stepped-up availability of fertilizer and high-yielding seed, accompa- nied by efforts to improve water availability and water use; all of which facilitates multiple cropping. There is also emphasis on strengthening credit institutions. 1h. I attach considerable importance to the support by the Bank Group of this new agricultural strategy. There can be no doubt that some pro- gressive farmers have taken up the new technology eagerly and made impres- sive progress; nevertheless, a significant lag exists between the high yields already achieved by a few farmers, and the increases yet to be achieved by others. Recent achievements need to be consolidated, and there are still formidable obstacles to be overcome. India's development prospects will depend on continued progress in the agricultural sector and, in the first instance, on the speed /.ith which self-sufficiency in staple food is reached. Clearly, improvements in the agricultural sector will have a favorable impact on India's balance of payments.  15. The Tarai Seeds Project would contribute to increased agricultural production through the supply of certified seeds of high-yielding foodgrain varieties. The project would develop about h6,o00 acres of land in the Tarai belt of Uttar Pradesh State, which at project completion should produce each year enough certified seeds of high-yielding foodgrain varieties to sow over two million acres each of rice and wheat and over three million acres of other foodgrains. 16. Implementation of the project would rest largely with the Tarai Development Corporation (TDC), established for the purpose, in association with the State Bank of India (SBI) and the Uttar Pradesh Agricultural University (UPAU). TDC is a private corporation, which includes among its shareholders project area farmers, the UPAU, and the National Seeds Corpora- tion. TDC would organize production of raw seed by farmers, provide seed processing facilities, and market clean seed. UPAU would provide extension services including preparation of the farm development plans to be used as bases for loan agreements between farmers and SBI. 17. SBI would make credit available to TDC, farmers, contractors, and the State Electricity Board, using for this purpose its own funds and the major portion of the proposed Bank loan, which wiould be relent by GOI to SBI through the Agricultural Refinance Corporation (ARC). 18. Total investment costs for the project are estimated at US$18.4 million equivalent (including contingencies), of which the Bank would finance US$9.0 million equivalent (49 percent). In addition, it is proposed as an exceptional measure that the Bank finance the estimated US$4 million equivalent cost (including contingencies) of imported fertilizers required for project purposes over five years. Adequate fertilizer dressings are essential for the seed crops, and India is currently short of fertilizer, importing about twice as much as it produces. It is expected that by project completion indigenous production will be more adequate to the country's needs, but during this transitional period some special assistance to meet fertilizer requirements on individual high-priority projects seems justified. Total costs of the project would therefore be US$22.4 million equivalent, of wihich the Bank would finance US$13.0 million (58 percent). 19. The remaining investment costs would be financed by the SBI, by TDC investors, by farmers other than as TDC investors, and by authorized dealers in farm machinery. 20. The principal benefit arising from the project is the provision of sufficient certified seed to the Indian economy to service about seven million acres annually - a benefit difficult to quantify under diverse conditions of planting; howrever, even on the conservative assumption that the economic value of the seed produced is equal only to the price at which it wa.ould be sold, the return to the economy of the proposed investment is estimated at about 17 percent per annum.  - 6 - 21. Procurement would be in accordance with international competi- tive bidding procedures with a domestic preference of 15 percent or the prevailing level of customs duty whichever is lower, for the following goods: (a) agricultural machinery (other than tractors) purchased in bulk by TDC for seed growers; (b) the supply and installation of seed processing equipment; and (c) land levelling machinery for contractors. International competitive bidding procedures with no local procurement would be followed for bulk purchase of fertilizers. With a few minor exceptions, the applicable level of customs duties for items to be pro- cured under international competitive bidding is currently 15 percent. 22. Other items are not suitable for international competitive bidding procedures, and would be procured as explained in paragraph 4.21 of the Appraisal Report. In particular, farm tractors would be procured by TDC which would negotiate the best possible prices for makes and models preferred by farmers and for which satisfactory servicing and spare parts facilities are or can be made available. Farm trailers would be procured directly by farmers from among the several suitable locally manufactured models. 23. The US$h4.o million to finance fertilizer imports would be dis- bursed against import documentation. Of the US$9.0 million to finance investment items, about US$7.6 million (for consultant services, and land levelling, farm and seed processing machinery) would be disbursed against import documentation for imported items or against other appropriate docu- mentation in the case of local procurement. The remaining US$1.4 million would be disbursed as a percentage of the loans made by SBI, to be set initially at 11 percent. 24. The outcome of procurement procedures will determine the exact foreign exchange cost of the project. If all equipment open to inter- national procurement procedures is purchased externally, the total foreign exchange costs would be about US$12.1h million equivalent, leaving US$0.6 million equivalent from the Bank loan to finance local currency expenditure. The amount of local currency financing wiould be increased to the extent that local firms are able to supply agricultural equipment at competitive prices. 25. The needs of the Indian economy for external capital will continue to be large even with the effort India is making to increase savings. Agri- culture is of key importance, and by financing agriculture the Bank Group can play an important part in India's development. The direct imports needed by most agricultural projects are low, and in these circumstances an effective contribution by the Bank Group to Indian agriculture may involve considerable local expenditure financing. I believe therefore that the Bank should be prepared to undertake such financing on high-priority agricultural projects such as the one presently proposed.  PART IV - LEGAL INSTRUNENTS AND AUTHORITY 26. The draft Loan Agreement between India and the Bank, the draft Project Agreement between the Bank and the Tarai Development Corporation, the draft Project Agreement between the Bank and the State Bank of India, the report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. 27. The following provisions of the draft Loan Agreement are of special interest: (a) Section 5.o2 contains commitments by India with regard to the granting of import licenses, provision of foreign exchange and allocation of locally produced materials required for the project. (b) Paragraphs (c) and (d) of Section 7.01 specify as con- ditions of effectiveness the submission of undertakings from the Uttar Pradesh State Electricity Board and the Uttar Pradesh Agricultural University setting forth their obligations with respect to the project. (c) Schedule 4 sets forth the procedures for the procurement of goods to be financed out of the proceeds of the loan and includes the methods of comparing bids for contracts for the supply of certain types of equipment in order to effectuate the preference in favor of domestic suppliers (paragraphs 3 and 4). 28. The draft Project Agreement with Tarai Development Corporation sets forth that company's obligations with respect to the project and contains other provisions usual for agreements with private business enterprises. 29. The Schedule to the draft Project Agreement with State Bank of India sets forth the procedures and policies to be followed by State Bank of India in making various types of loans for purposes of the project. PART V - THE ECONOMY 30. A report on the economic situation in India was distributed to the Executive Directors on April 28, 1969 (R69-75). 31. The proposed loan would be the first by the Bank to India since September 1967. India's debt servicing position remains difficult, and it is expected that a net inflow of new funds on concessionary terms will be necessary for some years. However, given the current rate of repayment of existing Bank loans and the expected phasing of disbursements, the  - 8 - proposed loan would not increase beyond prudent limits the level of the Bank's net investment in India. The amriount of loans to India held by the Bank on April 30, 1969, net of repayments, was $619 million, of which about 1,116 million was still to be disbursed. In addition the Bank held on that date a special deposit of $P15 million, which is expected to be liquidated by March 1970. PART VI - COMPLIANCE IITH ARTICLES OF AGREE4ENT 32. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOM1iENDATION 33. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachmen-ts May 28, 1969