India - Andhra Pradesh Agricultural Credit Project

RETURN TO REPORTS DES L cn RES T RI CTED WITHIN 11E COPY Report No. PA-59a ONE WEEK This report was prepared for use within the Bank and its affiliated orgonizations. 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 The report may not be published nor may it be quoted as representing their views. INITRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ANDHRA PRADESH AGRICULTURAL CREDIT PROJECT INDIA December 1, 1970 Agriculture Projects Department  t:;i1''''-',wj' .1-il sPO;3RTS D<E-SK ROOr: A-124 I3Y:, ,2-o 7- ' CURCY. EQUIVATS US$1 = RB 7.50 Rs 1 US$0.13 Rs 1,000 = US$133.33 Rs 1.,000,000 - US$133,333 WEIHTS AND MEASURES Metric System ABBREVIATIONS APSAIC - Andhra Pradesh Agro-Industries Corporation APSEB - Andhra Pradesh State Electricity Board ARC - Agricultural Refinance Corporation G0I - Goverzinent of India IMB - Andhra Pradesh Cooperative Central Land Mortgage Bank RBI - Reserve Bank of India SGD - Andhra Pradesh State Groundwater Directorate  INDIA ANDHRA PRADESH AGRICULTURAL CREDIT PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS ..... ................. i-ii I. INTRODUCTION ....... .......................... 1 II. BACKGROUND OF AGRICULTURE .................... 1 A. India .......... ......................... 1 B. The State of Andhra Pradesh .... ......... 2 Area and Population ..... ........... 2 Ecology ....... ..................... 2 Agricultural Structure .... ......... 2 Agricultural Production .... ........ 3 Agricultural Development Priorities 3 Introduction ..... ............. 3 Minor Irrigation .... .......... 3 Land Levelling .... ............ 4 Farm Mechanization .... ........ 4 Agricultural Inputs and Services ... 4 Credit Services ............... 5 III. AGRICULTURAL CREDIT INSTITUTIONS INVOLVED IN TIIE PROJECT ............................. 6 A. Introduction .......................... 6 B. Agricultural Refinance Corporation .... 6 Organization and Management ........ 6 Lending Policies and Operations .... 7 Operational Results .... ............ 7 C. Andlira Pradesh Cooperative Central Land Mortgage Bank ..... .................... 8 Organization and Management ........ 8 Lending Policies and Operations .... 8 Operational Results .... ............ 9 Reserves Policy and Accounts ....... 10 D. Commercial Banks ..... ................... 10 This appraisal report is based on the findings of a mission which visited India in April 1970 and was composed of Messrs. C.H. WIalton and K.W. Berg (IDA) and I.T. Burer, B.P. Pothecary and R.F. Stoner (Consultants) who all contributed to the report.  -2- Table of Contents (Cont'd) Page No. IV. THE PROJECT ....... ........................... 10 A. Brief Description .......... .. ........... 10 B. Detailed Features ..... .................. 11 Minor Irrigation ...............11 Land Levelling ...... ............... 11 Farm Mechanization ..... .............. 12 Consultant Services ..... ........... 12 C. Cost Estimates and Financing . ......... 13 D. Procurement .............................. 15 E. Disbursements ...... ..................... 16 V. ORGANIZATION AND MANAGEMENT ...........17 Introduction ....... ................ 17 Agricultural Refinance Corporation 17 Andhra Pradesh Cooperative Central Land Mortgage Bank ..... .......... 17 Andhra Pradesh State Agro-Industries Corporation ....... ............... 18 Lending Policies and Terms .... ..... 18 VI. PRODUCTION, MARKETS, PRICES AND FARMERS' BENEFITS ................................... 20 Production ........... .. ............ 20 Markets ............................ 20 Prices ....., 20 Farmers Benefits .................... . 21 VII. BENEFITS AND JUSTIFICATION .......... ......... 21 VIII. REC0MMENDATIONS .............................. 22  -3- ANNEXES 1. Minor Irrigation Appendix 1-1 List of Taluks Designated for Tubewell and Dugwell Investments Appendix 1-2 W4ell Drilling Rates Appendix 1-3 Terms of Reference and Qualification of Technical Assistance to the Andhra Pradesh Groundwater Directorate 2. Land Levelling Appendix 2-1 Custom Rate Charged by Andhra Pradesh State Agro-Industries Corporation for Land Levelling Appendix 2-2 Maximum Scheduled Lending Scales of Andhra Pradesh Cooperative Central Land Mortgage Bank Appendix 2-3 Estimates of Land Levelling Costs on the Nagarjunasagar and Pochampad Schemes 3. Farm Mechanization Appendix 3-1 Tractor Production and Imports Appendix 3-2 Tractor Dealer Network 4. Andhra Pradesh State Agro-Industries Corporation Ltd. Appendix 4-1 Inventory of Earth Moving Equipment Appendix 4-2 Condensed Balance Sheet 5. Agricultural Refinance Corporation Appendix 5-1 Condensed Statements of Net Income Appendix 5-2 Projected Statements of Net Income Appendix 5-3 Condensed Balance Sheets Appendix 5-4 Projected Balance Sheets 6. Andhra Pradesh Cooperative Central Land Mortgage Bank Appendix 6-1 Terms of Reference of Proposed Management Consultancy Appendix 6-2 Primary Land Mortgage Banks Combined Operations Appendix 6-3 Condensed Statements of Net Income Appendix 6-4 Projected Statements of Net Income Appendix 6-5 Condensed Balance Sheets Appendix 6-6 Projected Balance Sheets Appendix 6-7 Repayment Records of Primary Banks 7. Commercial Banks Operating in Andhra Pradesh 8. Project Cost Appendix 8-1 Details of Estimated Project Cost Appendix 8-2 Breakdown of Tractor and Tractor Implement Cost Appendix 8-3 Estimated Schedule of IDA Disbursements 9. Tractor Procurement 10. Present and Proposed Interest Rates 11. Farm Incomes and Financial Rates of Return on Investments Appendix 11-1 Yield, Price and Cost Assumptions Appendix 11-2 Farm Models Appendix 11-3 Financial Rates of Return to the Enterprise Appendix 11-4 Estimated Increases in Cropped Areas and Production 12. Economic Rate of Return MAP   INDIA ANDHRA PRADESH AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. The report appraises a Project to help finance an agricultural credit program for investments in minor irrigation, land levelling and farm mechanization in the State of Andhra Pradesh for which an IDA Cred- it of US$24.4 million is proposed. ii. In common with other Indian states, Andhra Pradesh has given priority to its agricultural development and it is a surplus producer of rice and other food crops. Compared with its potential however, its pro- gress has been held back by relatively limited irrigation facilities (supplying water to only 19% of agricultural land), and the State is con- sequently largely dependent on uncertain rainfall. In areas where irri- gation water is available, the insufficiency of draft power has prevented the expansion of cropped land and in such circumstances farm mechanization is an important means to intensive cultivation and improved farming tech- nology. iii. To help overcome these problems, the State Government has ini- tiated and substantially financed a number of large surface irrigation schemes. Two of these schemes are now being developed and farmers in their command areas require long-term loans to level their land and thus make effective use of the irrigation water. The Government has also sup- ported lending programs for the expansion of on-farm well development and for farm mechanization but lack of credit and, in the latter case insuffi- cient tractor supplies, have limited progress. iv. The Project consists of a two and a half year program to finance on-farm investments and consultant services estimated to cost US$45.0 mil- lion equivalent: US$26.6 million for minor irrigation, US$9.8 million for land levelling, US$8.2 million for farm mechanization (tractors, tractor implements and spares) and US$0.4 million for technical assistance. The foreign exchange component is estimated at US$7.1 million equivalent or about 16% of the total Project cost. IDA would finance US$24.4 million equivalent, being the foreign exchange component and about one-half of the local currency costs. Farmers' contributions would normally amount to 20% of the cost of individual investments (25% in the case of tractors) but for special categories of small farmers this would be reduced to 10% for certain investments. The remaining finance would be provided by the Andhra Pradesh Cooperative Central Land Mortgage Bank (LMB) and participating commercial banks and the Agricultural Refinance Corporation (ARC) which would also be the channel for IDA finance. ARC is already acting in this capacity for two other IDA supported agricultural credit projects in Gujarat and Punjab. v. The IDA credit to the Government of India (GOI) would be made available to ARC, and, of ARC's borrowings about 70% would be repayable to GOI after 9 years at an interest rate of 4-3/4% and the balance after 15 years at 5-1/4% per annum. GOI would carry the exchange risk. ARC would  - ii - supervise, and refinance at 6-1/2% per annum, the lending operations of LMB and such commercial banks as would meet the criteria laid down by ARC. Loans to individual borrowers would bear interest at 9% per annum and would be repayable normally over periods of up to 10 years, but extending to 15 years for small farmers. vi. The implementation of the minor irrigation and land levelling schemes would be by local contractors or hired labor using local materials. About 31,000 individual on-farm investments would be made and international competitive bidding would, therefore be inappropriate. Tractors to be procured under the Project would be imported and sold to farmers thlrough existing commercial channels and orders would be based on individual farmers' preferences and bulked in order to obtain quantity discounts. At present five foreign tractors suppliers from Bank member countries are eligible for supply and seven others are under consideration. Hard steel components for tractor implements would be procured through international competitive bidding and licenses would be issued for the import of an initial stock of tractor spare parts procured under the Project. vii. ARC and LMB have competent management and art in sound financial condition. Financial returns to farmers are estimated to range from 16 to 22% on minor irrigation schemes and to be 37% on land levelling and 18% on farm mechanization schemes. The rate of returh to the economy would be at least 24%. Appropriate assurances have been obtained during negotiations and the Project is suitable for an tDA credit of US$24.4 million.  INDIA ANDHRA PRADESH AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 In 1968, an IDA mission, with assistance of the FAO/IBRD Co- operative Program, reviewed agricultural credit institutions and farm investment requirements in selected parts of India and identified high priority agricultural credit projects. Two of these projects, in the States of Gujarat and Punjab, have been approved by IDA and this Project for Andhra Pradesh is the third to be appraised. It would enable farmers, through institutional credit, to make investments in minor irrigation, land levelling and farm mechanization and thereby to obtain increased production and other benefits from the new high-yielding seed varieties, fertilizer use and surface water irrigation facilities. 1.02 Past Bank Group lending for India's agriculture (excluding the US$23 million Beas Equipment Project under the Indus Treaty) totals nearly US$213 million. Hitherto this lending has been concentrated on water de- velopment projects and, in continuation of this, three other irrigation projects, including one at Pochampad in Andhra Pradesh, are under apprais- sal. In response to GOI's new agricultural strategy, the Bank Group is now giving increased emphasis to projects having a more direct impact on farm investment. Appraisal reports are being prepared for similar credit projects in Tamil Nadu and Harayana and other agricultural credit and irrigation projects are under IDA consideration. 1.03 This Project was appraised in April 1970 by C.H. Walton and K.W. Berg (IDA) and M.T. Burer, B.P. Pothecary and R.F. Stoner (consul- tants) and this report is based on the mission's findings. II. BACKGROUND OF AGRICULTURE A. India-/ 2.01 Since 1965 India has chianged the emphasis of its development efforts from industry to the agricultural sector. As a result, priority has been given in recent vears to accelerating the introduction of the new agricultural technology, through increasing the availability of improved inputs and by providing economic incentives to farmers. The new agricultural strategy has already brought encouraging results and the increased use of high yielding seed varieties and fertilizers has partic- ularly contributed to a significant increase in farm production. 1/ A detailed discussion of the present situation and prospects of agri- culture in India is given in "Economic Situation and Prospects of In- dia", Report No. SA-13a, April 24, 1970.  2.02 Although 70% of India's labor force is engaged in agriculture (providing half India's CDP) only a small proportion of farmers have so far benefitted from this agricultural advance and these have been mainly the wealthier farmers with knowledge and canital to adopt the new farm- ing technology. A vastly increased number of farmers could however take advantage of the new techniques if helped with credit and, if the momentum of agricultural growth is to be maintained, it is important that the sup- ply of rural credit for on-farm investment be increased. 2.03 The Reserve Bank of India (RBI) has estimated that credit insti- tutions will require Rs 15,000 million (US$2,000 million) for agricultural investment during the five years of the Fourth Plan. Taking an annual average of Rs 3,000 million, this compares with about Rs 600 million in- vested in 1966/67. Short-term credit demands are expected to amount to Rs 20,000 million (US$2,666 million) in 1973-74, five times the level of current advances, and overall agricultural credit requirements are expec- ted to increase five-fold from the mid-sixties to the end of the Plan pe- riod. If these substantial credit demands are to be met, India will need to mobilize more of its own, particularly rural, savings and increase ex- ternal borrowings. B. The State of Andhra Pradesh Area and Population 2.04 The State of Andhra Pradesh, which came into existence in 1956 is situated in the southeast of the Indian sub-continent (see Map). Its area of 275,000 km2 and estimated population of 42 million each represent about 8% of the all-India totals. Over 75% of the population depends an agriculture which provides 57% of the State's GNP. The State is divided into 20 administrative districts and subdivided administratively into 189 "taluks". Ecology 2.05 The State has two main geographical regions, the deccan plateau and the coastal area. Three main rivers, the Godavari, Krishna and Penner, drain the State flowing into the Bay of Bengal and are the source of many major irrigation schemes. Soils vary considerably in depth and from sandy to clay loams. There are three seasons, the hot summer (March-June) with maximum temperatures of 49