India - Bihar Agricultural Credit Project

kCIRCULATING COP DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No.}1327-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE BIHAR AGRICULTURAL CREDIT PROJECT October 10,, 1973 | This ieport was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURREiCY EQUIVALENTS US$ 1.00 R Ps 7.5 Rs 1.00 = US$ 0.13 Rs 1 million = US$ 133,000 The Rupee is officially valued at a fixed Pound Sterling rate. As the Pound is now floating relative to the US Dollar, the US Dollar/Rupee exchange rate is subject to change. Coiaversions in the appraisal report and in this report have been retained at US$ 1 = 'is 7.5 which was the rate prevailing at the time of appraisal; or Sepcen,ber 2L, 1273, the exchange rate was US$ 1 = Rs. 7.82. FISCAL YEAR April 1 - Miarch 31  INTERNATIONAL DEVELO P1ENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE BIHAR AGRICUITURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an ainoutt equivalent to US$32 million for the Bihar Agricultural Credit Project. The credit would support a three-year lending program in the State, for investment in minor irrigation tubewells and pump- sets. About 50,000 farmers would benefit from investment loans under the project; the selling of excess irrigation water produced from these invest- ments would help approximately 50,000 additional small farmers. PART I - THE ECONOMY 2. An economic report, riEconomic Situation and Prospects of India'" (156-IN dated MEay 8, 1973) was distributed to the Executive Directors on May 2h, 1973 (R73-113). A country data sheet is attached as Annex I. 3. Tne performance of the Indian economy since the inception of economic development planning in 1950/51 can best be described as mixed. Progress has been impressive on many fronts but disappointing on others: the growth of the socio-economic infrastructure (transport, education, health services, etc.) has been spectacular, but has often been achieved at high cost and has yielded results of variable quality; many industrial and agri- cultural irrigation investment schemes have been highly successPal, but others have taken excessively long to be completed and have operated well below full capacity; in some parts of the country there have been periods of rapid growth and change, but in others there has been stagnation and possibly even dec ine. 4. The average rate of gowth of national income has on]y been about 3 percent per annum and with population growing at an average rate of about 2.2 percent per annum, gains in per capita income have averaged somewlhat less than 1 percent per annum. Although the distribution of income in India is relatively even by comparison with many other countries, such a low rate of economic growth has meant there has been little, if any, increase in the living standards of the vast masses of the urban and rural popyulation. The Government has become increasingly concerned about the plight of the lower income strata which, conservatively measured, consist of some 200 million people with income less than US$60 rcr head per y-ear, ane J _ ,__ proposals for the Fifth Five-Year Pnan <1927275-1,?7/79) is arhiinb to intensifIy its efforts to alleviate their poverty.  5. The structure of the economy has also been slow to change. Agriculture remains the dorminant sector, accounting for soTLe 40 percent of national product in the early 1970s compared with around 49 percent twenty years earlier. Despite the emphasis accorded to the industrial sector, particularly in the period commencing in the mid-1950s, the share of output contributed by the sector has increased only marginally over the period, and since the late 1960s has remained approximately constant at a level of 23 percent. The principal change has been the increased contribution of the tertiary sector from some 27 percent In 1951 to 31 percent in 1971. 6. Undoubtedly, India's nost irp-essiLve .achievement has been the doubling of the average growth rate of prod1uctivit` in food=ra- n production. But it is proving difficult to maintain the momentum of this performance, as evidenced by the drought-induced decline in production in 1972. Much remains to be done to consolidate the production growth in the wheat belt and to extend it both to other areas and to other foodgrain crops, most particularly rice. Other crops have, in most cases, shown a slow but fairly constant rate of in- crease in production. Irrigation has played a major part in agricultural growth in recent years and, by reducing dependence on the monsoon, has reducel- variabillty in Derformance. At present only about half the potentially irri- gable area has been developed. Fuller utilization of the existing irrigation system and the extension of the irrigated area are, therefore, matters of the highest priority in order to meet India's rising food needs and to protect the economy against the vagaries of the weather. Al.so of importance is the need to ra: .se outtptl from non-irrigated land whicrh acco-unts. .'or about 50 percent of the cultivable area, through higher yielding technology and investment in dry land farming from which substantial benefits reirain to be realised. The widespread drought in 1972/73 and 1he neavry cost Lll i4ui.ian al. if:!an(:lia terms nas again served to emphasise the precariousness of hndia'- .Lsodgrainsupply situation. 7. Perfornance of the industrial sector has been variable and, given the emphasis placed in the past on industrialization, disappointing. Industrial growth averaged about 7 percent a year in the 1 950s, rose to 9 percent in the first half of the 1960s, and then declined to around 3 percent through the early 1970s. The stagnation of recent years is especially worrying. To a largn extent it was precipitated by the severe drought of 1966 and 1967 and the accompanying general recession. But it has also been the result of mrany other factors: the relatively limited opportunities for further import substitution 7hich had from the outset been at the centre of the industrialization strateQy; the recurring bottlenecks in the production of a numnber of key intermediate goods such as steel and cement; shortages of imported raw materials; and cumber- some administrative procedures. The improvement in output whlich occurred in 1972, combined with recent measures to simplifyT administrative controls, shoul'd lead to better realization, of India's industrial capacity and a higher rate of reinvestment.  - 3 - 8. Domestic savings have fluctuated in the region of 8-10 percent of net domestic product for the past decade. This has been far short of India's resource needs and, even with substantial flows of external assist- ance, has not permitted the investment rate to rise above 13 percent except in a few years. More recently, as a result of the recession and a decline in foreign assistance, the investment rate has been only about 9-11 percent. In particular there has been a deterioration in the savings performance of the public sector, largely due to a sharp fall in the Central Government's current account savings despite a near doubling of tax revenues in the 1960s. A disturbing feature of the budgetary situation has been the expansion of the States' expenditures far in excess of the growth of their owr. revenues. The Central Government has had to meet the resulting deficits through budget transfers. This, combined with several other factors (the military events and refugee relief of 1971 and 1972, and a sharp drop in net foreign aid in 1972), has forced a massive rise in total deficit financing. The inflationary consequences of this and those arising from the food and otSher comrmodity shortages have been serious, with wholesale prices currently rising at an annual rate of nearly 20 percent. The budget for 1 73/74 inltroduced measures to help curb inflation, while the Reserve Banrk of India has also been inter- vening to control the expansion of money supply. 9. Ever since the balance of payments crisis of 1956/7 7 a shortage of foreign exchange has constituted one of the most crit:ical constraints to the development of the economy. This has manifested itself in various ways. The authorities have acted with caution in their foreign exchange management and have been left with little flexibility or margin to accommodate special and emergency needs. Exchange control and also, in large part, the import and industrial licensing procedures have been the result of the acute foreig exchange situation. Even though the external sector is small in relation to the national economy, the continuing shortage of foreign exchange together aritii these controls have retarded and distorted investment and the rate of utiliza- tion of existing capacity. This is most clearly seen in the stagnation of non-food imports: for instance, despite expansion of the economy at some 3 percent per annum, even at current prices the present level of non-food imports is approximately the same as that of the early 1960s, and there has been a continuing shortage of imported raw materials, spares, and components. While exports have expanded reasonably steadily, they have never achieved a sastained growth sufficient to have an appreciable effect on the foreign exchange problem. Traditional items such as jute, tea, cashew, and textiles, which are all bDeset with supply difficulties at home and high competitive or shrinking markets abroa,K still constitute the most important component of exports. And despite a rapid expansion in the 1960s, non-traditional items such as engineering goods and chemicals still form only a small share of total exports. It i :i;n -his area ' non-traditional items that there is a need for more aggressi-ve e-:Port poiacia of which the Central Government has been increasingly aware.  10. Extenlal assistance has played an important role in supplenenting India's domestic resources for development, especially from the late 1950s to the end of the 1960s. But, with rising debt service payments and more recently a decline in gross aid, the inportance of net aid has diminished, both as a supplement to domestic investment and as a means of financing imports. Nevertheless, because of a generally low growth rate of exports and because of a dearth of overall resources relative to even basic develop- ment needs, aid remains important. 11. As a result of substantial past borrowings, India's external public debt stood at US$8.5 billion on March 31, 1972. Annual debt serv-;ce payments are currently running at a level of around US$725 million. This compares with a level of about US$200 million in the mid-1960s. In order to mitigate the negative effects on growtlh of such a high burden of ex-ternal debt and to forestall any danger of a foreign exchange crisis, the India ConsortiuT from 1968/69 onwards has extended debt relief to India. In addi- tion, starting in the .idd-1 060s there has been somre sof tening in the financial. terms of official assistance offered by several major creditors, and also an increase in the proportion of pryogram vs. project aid. These changes are welcome in helping India to meet her more urgent import requirements, but they are still modest in relation to the country's basic needs. 12. The Govereunment is at present preparingr th-te detailed sectoral pro-rams to be implementecd in the Fifth Plan. It is also re-examining t.ne overall internal and external resources position as well as devisi_ncg the appropriate policies to achieve the Plan objectives. A first draft of the complete Plan is expected to be completed later this year, with the finral dociunent. being publisheed in M1arch 197'. PATT II - PP. G ;TUCl.; II. IIA credits to e 1 ~9, LanTrk d('roni -hp made !1 .)Ioq is asn be cle-i.velopent c s to India totaliln JS$1 O, . . nill, on -J ' - iillon . th t of c 1ane lat ion), resrecti fc'lv. Cf' thiese ar-iUnti r-'$' z ili on as a a R C)dc31nd ITS$1 103 T-:-ii.o - .3ti 111 s Am,I TI contair Is a S'I7.iary statenient ci d sbuirer,ents ar C