India - Punjab Agricultural Credit Project

RESTRICTED FILE COPY Report No. P-826 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 The report moy not be published nor may it be quoted as representing their views.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 CREDIT TO INDIA FOR THE PUNJAB AGRICULTURAL CREDIT PROJECT May 26, 1970  REPORT AND RECOMENiDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE PUNJAB AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US$27.5 million to India. PART I - HISTORICAL 2. Since 1949 the Bank and the Association have made twelve loans and credits totalling some US$180 million to finance agricultural pro- jects in India, including the Gujarat Agricultural Credit Project approved on May 5, 1970, which I expect to be signed prior to consideration of this proposal. 3. The proposed credit would help to finance an investment pro- gram for farm mechanization including tractors, harvesters and farm implements, in the State of Punjab in northwest India. 4. This is the second agricultural credit project resulting from project preparation efforts which began with a reconnaissance mission under the IBRD/FAO Cooperative Program in November and December 1968. An appraisal report is being prepared now for a third such pro- ject in the State of Andhra Pradesh. 5. This project was appraised in November and December 1969 and negotiations for the proposed credit were completed on i9Iay 12, 1970. The Borrower was represented by I9Ir. G. V. Rarnakrishna, Director, Depart- ment of Economic Affairs, Ministry of Finance, and Mr. A. Prakash, Joint Secretary, Department of Agriculture, Ministry of Food and Agriculture. The Agricultural Refinance Corporation (ARC) was repre- sented by its Managing Director, Mr. K. Madhava Das. MIr. Pritmohinder Singh, Development Comnissioner, Government of Punjab, represented the Punjab Agro-Industries Corporation (PAIC) of which he is also Chairman. The Punjab State Co-Operative Land Mortgage Bank (LMB) was represented by Mr. Daljit Singh, its Secretary.  6. Details of undisbursed loans and credits and comments on delays in project execution were given in paragraphs 5 and 6 of my Report on the Sixth Industrial Imports Credit (P-794, April 8, 1970). The following is a state- ment of the totals of Bank and IDA lending as of April 30, 1970: 1/ (US$ million) Bank IDA Undisbursed Loans/Credits active 237.0 249.2 322.6 Loans/Credits fully disbursed 810.7 953.2 Total (less cancellations) 1,047.7 1,202.4 of which has been repaid Bank and others 424.0 Total now outstanding 623.7 Amount sold 110.0 of which has been repaid 106.0 4.0 Total now held by Bank and IDA 619.7 1,202.4 Total undisbursed 128.0 194.6 322.6 7. Since 1957, IFC has made thirteen commitments in India totalling US$42.3 million of which US$34.2 million represent loans and US$8.1 million equity. As of April 30, 1970, US$15.4 million of this total had been dis- bursed and US$6.1 million cancelled. The largest commitment is a total of US$18.0 million to Zuari Agro-Chemicals for a fertilizer plant in Goa. A number of other industrial schemes are currently under consideration. 8. This project is the last recommendation regarding IDA lending to India which I intend to make in this fiscal year, and if approved would brin:g the total of such development credits this year to $227.5 million. A proposed eighth loan to ICICI, which is the only Bank loan in the lending program fox this year, is to be presented for your consideration on June 2, 1970. In addition to the Andhra Pradesh agricultural credit project mentioned in para- graph 4, appraisal reports are being prepared for the Cauvery Delta irri- gation project, the Pochampad irrigation project, an agricultural aviation project, a grain storage project, and a second power transmission project. Several other projects are at various stages of consideration, including further irrigation and agricultural credit projects. 1/ Including Credit 176-IN (Kadana Irrigation) and Credit No.182-IN (Sixth Industrial Imports) which are not yet effective. In addition a $35 million credit for the Gujarat Agricultural Credit Project was approved by the Executive Directors on May 5, 1970.  - 3 - PART II - DESCRIPTION OF THEL PROPOSED CREDIT 9. Borrower: India, acting by its President. Beneficiaries: ARC, LMB, and participating commercial banks, for relending to farmers and other ultimate beneficiaries in Punjab State. Amount: US$27.5 million. Purpose: To help finance a program for farm mechanization including tractors, harvesters and farm implements. Amortization: In 50 years including a ten-year period of grace, through semi-annual installments of one-half of one percent from August 15, 1980 through February 15, 199:, and of 1-1/2 percent from August 15, 1990 through February 15, 2020. Service Charge: 3/4 of 1 percent per annum. Estimated Economic Rate of Return: 14 - 22 percent. Relending Terms: From India to ARC: at 5 percent per annum with 1/4 pci cent rebate for prompt payment of interest and prinri- ar with lump sum repayment 9 years from withdrawal by AhG. India will bear the exchange risk. From ARC to LMB and participating commercial banks: at 6-1/2 percent per annum with repayments set to correspond approximately with expected collections of loans granted to farmers and other ultimate beneficiaries. From LMB and participating commercial banks to ultimate beneficiaries: at 9 percent per annum with maximum maturities of 5 years for loans for self-propelled combine harvesters and 7 years for other farm mechanization loans. PART III - THE PROJECT 10. An appraisal report entitled "Punjab Agricultural Credit Project India" (PA-48a) is attached. 11. The State of Punjab has been among the most successful centers of the heartening increase in agricultural production in India over the last, few years. The willingness of Punjabi farmers to adopt new agricultural practi'es is well known; in the current atmosphere and conditions of Punjab, a degrec  - 4 - of mechanization is not only desirable but inevitable. This project would provide equipment for farm mechanization on the credit terms necessary to make it available for use by a wide range of farmers. 12. The project would provide medium and long-term finance to farmers, groups of farmers, cooperative farming societies, and persons or enterprises carrying out farm custom work in the State of Punjab, for the purchase of tractors, tractor implements and harvesters. 13. With the very minor exception noted in paragraph 17 below, the pIo- posed credit would provide finance entirely for the foreign exchange cost of imported equipment, which represents about 69 percent of the estimated total cost of the project of US$40.0 million. The ultimate beneficiaries, and ARC, LMB and the participating commercial banks, also will finance portions of the Project. (Paragraphs 4.08 through 4.10 of the Appraisal Report). 14. Benefits from the project would arise from increased agricultural production. Through increased double cropping and improved farm practices, the investments in farm mechanization would expand the cropped area in Punjab by an estimated 62,000 hectares. Foodgrain production would increase by an estimated 200,000 tons annually which would provide additional marketable surpluses for grain-short areas and cities. The economic rate of return of the project is estimated to be between 14 and 22 percent. The increased agricultural production also should result in savings of foreign exchange. (Paragraphs 6.01 and 7.01 through 7.04 of the Appraisal Report). 15. The Government of India and the other institutions which would participate in the project share my concern for the necessity to make the benefits of farm mechanization available to small and medium-sized farmers as well as to large land owners. At the same time the agreements reached during negotiations reflect the view shared by all of the parties to this proposed credit that steps should be taken to ensure an acceptable economic use of the equipment to be financed out of the proceeds of the credit. The appraisal report reflects these concerns and account is taken of them in the draft legal documents. There is no minimum acreage requirement for eligibility to purchase a tractor under the project, but purchasers would have to indicate their plans to assure that the tractor would be used to crop 40 hectares per year or for 1,000 hours of productive work in agriculture. Because of the present land ownership patterns, I expect that this would require some tractor buyers to engage in farm custom work; tractors might be purchased primarily for use in providing farm custom services. 16. Lending operations would be carried under the supervision of ARC. While LMB would account for most of the loans, commercial banks also would be able to participate. ARC would determine the extent of participation of any commercial banks willing to accept the same obligations required of LMB under the project. 17. PAIC would organize the procurement of equipment to be financed out of the proceeds of this credit. Imported tractors, which with initial complements of spare parts account for an estimated foreign exchange cost of US$25.0 million (including contingencies), would be procured under arrange-  - 5 - ments similar to those agreed in the Gujarat Agricultural Credit Project (see paragraph 15 of my Report P-798, April 22, 1970). Briefly, farmers would be allowed their choice of tractors from those for which quotations were offered by suppliers in Bank member countries which have manufacturing facilities in India or which have received the Government's approval to establish such facilities. Tractor implements would also be procured by arrangements similar to those under the Gujarat project; discs and plough bottoms would be imported under the project and financed by IDA after international competitive bidding. These implements, to be procured by PAIC for distribution to local manufacturers, have an estimated foreign exchange cost of US$1.3 million (including contingencies). Self-propelled harvesters, which are manufactured in India, and tractor-drawn harvesters, which are not, will be procured through international competitive bidding with a level of preference for domestic suppliers of 15 percent or the prevailing customs d;Ity, whichever is lower. The current customs duty on such items is 15 percent. The cost of harvesters and initial spare parts is estimated at US$1.2 million.. It is possible that the contract for the supply of some harvesters may be won by local suppliers after international competitive bidding; in this event rJho financing of local currency expenditures of up to $500,000 could be involved3 I consider this justified on country grounds. (Paragraphs 411 through 4.17 of the Appraisal Report). PART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and ARC, LAB and PAIC, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of a Resolution approving the proposed Credit are being distributed to the Executive Directors separately. 19. The agreements contain covenants usual for agricultural credit projects and similar to those negotiated for the Gujarat Agricultural Credit Project. The relending terms to ARC, LMB and participating commercial banks are set forth in Schedule 4 to the Development Credit Agreement, and the terms of agricultural loans in Schedule 1 to the Project Agreement. PART V - THE ECONOMY 20. An economic report entitled "Economic Situation and Prospects of India" (SA-13a) was distributed on April 24, 1970. As indicated in paragraphs 380 to 391, the balance of payments prospect and debt service position continiue to call for the provision of development assistance to India primarily on concessionary terms.  - 6 - PART VI - CO0PLIAW,TC. IWITH ARTICLES OF AGREEMT 21. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 22. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachment May 26, 1970