India - Uttar Pradesh Agricultural Credit Project

CUI-36:JLA IA iG QUPY TO BE RETURNED TO REPORTS DESK Pr, F,.-) DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-125 7-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE UTTAR PRADESH AGRICULTURAL CREDIT PROJECT May 8, 1973 This report 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 It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY EQUIVALENTS (April 27, 1973) Currency Unit = Rupee (Rs.) US$1.00 = Rs 7.50* Rs 1.00 5 US$0.13 Rs 1 lakh (102 = US$13,333 Rs 1 crore (100) = US$1.3 million * India has not declared a new par value following the devaluation of the US dollar. The rupee is officially valued at a fixed pound sterling rate and, as the pound sterling is now floating relative to the US dollar, the US dollar/Rupee exchange rate is subject to change. Conversions have been made at the rate of Rs 7.5 to US$1 in this and the appraisal reports. However, by the end of the week April 27, 1973 the rate was about Rs 7.55 to US$1. FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE UTTAR PRADESH AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an amount equivalent to US$38 million for the Uttar Pradesh Agricultural Credit project. The project is designed to provide medium to long-term credit to farmers for on-farm investment in minor irrigation as a means of increasing agricultural production and furthering the adoption of new production techniques. PART I - THE ECONOMY 2. The most recent economic report, "Economic Situation and Prospects of India" (SA-32a, dated May 10, 1972), was distributed to the Executive Directors on June 2, 1972. A new report commenting on recent developments is to be circulated shortly. 3. In the Indian fiscal years 1969/70 and 1970/71, the economy grew at an average rate of about 5 percent per annum, largely due to favorable weather conditions and good performance in the agricultural sector. But economic growth fell to somewhat less than 4 percent in 1971/72 and to around 2 percent in 1972/73. A principal factor affecting economic growth particularly in the past year has been the serious failure of the monsoon. Although export performance has been exceptionally good in 1972/73, the foreign exchange position remains tight especially because of the sharp decline in net foreign aid. 4. Until the beginning of 1972, performance in the industrial sector had been especially disappointing, with a downward trend from a growth rate of 7.1 percent in 1969 to 4.5 percent in 1971. However, more recently there has been some improvement and industrial production is expected to have increased by about 7 percent in 1972. But this improvement has to be qualified because much of it was confined to industries which recovered from the effects of severe domestic shortages of raw materials. Performance continues to be affected bv shortage of imported raw materials, labor unrest, and power shortages, as well as bottlenecks in the domestic production of a number of key industrial commodities such as steel and cement. Cumbersome administrative procedures in applying industrial policy have also aggravated the situation. These factors have been present in varying degrees almost continuously over the past decade, with the result that India's industrial potential has yet to be fully realized. The Government of India (GOI) recognizes that fresh initiatives must be taken through industrial policy measures. Revisions of the industrial licensing policy have been announced recently but it is as yet too early to evaluate their effects.  - 2 - 5. Foodgrain production reached the record level of 108 million tons in 1970/71. In 1971/72 foodgrain production was affected by poor monsoons with the result that only an estimated 106 million tons were produced. Weather conditions in 1972 were disastrous with a failure of the monsoon in both the west and east sides of the country, an unusual occurrence. Precise estimates have still to be made but clearly production of sumner foodgrains in 1972 was substantially below the 1971 level., with the result that India is enduring very serious food shortages over large parts of the country. The Government had hoped that large foodgrain stocks built up between 1968 and 1970 would be adequate to meet requirem.ents in bad years. But the combined effect of supplying foodgrain to Bangladesh and the severity of the drought this year has led to the reduction of foodgrain stocks by about half, to 3-4 million tons at the end of 1972. The GDvernnent decided. to import about two nillion tons of foodgrains and furthier imports may be required although there are indications that the winter crop will turn out reasonably well and make up for part of the shortfall of the kharif crop. Other crops have also been affected by last year's drought. Jute and, to a lesser extent, cotton production are expected to be lower, while the shortage of oilseeds could be quite severe with a resulting need for higher imports. 6. In the present situation, the gener.aliv favorable trend in agricul- tural. production over the past several years should not be overlooked. Even if this year's foodgrain crop should be as expecte.d, close to 100 million tons, it would still be much above that obtained in the last serious drought year, 1965/66, when production reached only 72 million tons. This indicates that the considerable investrments in irrigation facilities, fertilizer, and other agricultural inputs have had the effect of reducing the impact of droughts. If yields this year remain high on irrigated land in spite of adverse weather conditions, and reports of good crops in the Punjab and Haryana are favorable indications, this will confirm the success of the new technology and highlight the need to expand its use to other crops and to other areas. 7. The wholesale price index has increased at an annual rate of 6.5 percent between July 1972 and December 1972. An important factor has been the rapid increase of food prices, which went up at the same rate over thiis period reflecting expected foodgrain shortages. In an effort to control inflation, the Government has limited the overdraft facilities available to State governments, previouslv a source of deficit spending, and is considering measures to control more effectively the level of foodgrain prices. 8. India's net reserves position at the end of March 1973 was US$1,231 million or the equivalent of 39 percent of anrnual imports, plus debt service payments. Reserves have fallen about US$33 mi.llion since March 1972, and there will undoubtedly be continuing pressure on the country's reserves from maintenance and capital goods imports needed to sustain the development program and perhaps also from further foodgrain imports. On the export side, current estimates indicate a 10 percent increase in exports in 1972/73, after excluding exports to Bangladesh which have been financed mostly  -3- through Indian assistance. But overall, the rate of growth. of exports in the past has been considerably slower than this, while uncertainty surrounds future levels of net aid. In the circumstances, Indian should clearly continue to receive substantial aid from IDA. 9. In a paper entitled "Approach to the Fifth Five' Year Plan" published in January 1973, GOI set out in broad ternms the objectives and preliminary estimates of the financial and physical magnitudes (but not yet the policy implications) for the Plan period 1974/75 to 1978/79. Removal of poverty and attainment of self-reliance were stated as two major objectives. The target for overall economic growth is put at 5.5 percent per annum. It is planned that per capita consumption of the lowest 30 percent of the urban and rural population should increase over the plan period by 50 and 60 percent respectivelv. Conversely a decline in per capita consumption of about 5 percent is projected for the wealthier 30 percent of population. 10. So far as self-reliance is concerned, the Approach paper suggests that on the basis of preliminary estimates it should be possible to achieve the objective of a zero net transfer of concessional foreign assistance by 1978/79, provided (a) exports grow at 7 percent per annum, (b) satisfactory progress is made in the program of import substitution, and (c) there is a redistribution of consumption as indicated above, with its postulated favor- able impact on the balance of payments. 11. The Government is at present in the process of preparing the detailed sectoral programs to be implemented in the Plan. It is also re- examining the overall internal and external resource position as preliminarily estimated in the Approach paper, as well as devising 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 final document being published in March 1974. 12. A country data sheet is attached as Annex I. PART II - BANK GROUP OPERATIONS IN INDIA 13. Since 1949, the Bank Group has made 40 loans and 51 development credits to India totalling US$1,110 million and US2,162 million (both net of cancellation), respectively. Of these amounts US$569 million has been repaid and US$821 million is still undisbursed. Annex II contains a summary state- ment of disbursements as of March 31, 1973, and notes on the status of currently active loans and credits. 14. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million, of which US$5.1 million has been repaid, US$7.2 million sold and US$6.3 million cancelled. Of the balance of US$23.7 million, US$16.3  - 4 - million represents loans and US$7.4 nillion equity. A summary statement of IFC operations as of March 31, 1973 is also included in Annex II (page 2). 15. The emphasis of Bank Group assistance to India in recent years has been on agriculture and agriculture-related projects. This reflects the importance of agriculture, which contributes about 50 percent of India's GNP, and the corresponding investment priorities of the Government. Agricul- tural projects will continue to form an important part of the Bank Group's program of assistance to India. Projects designed to foster aaricultural production through the provision of essential inputs, such as credit for on-farm investment, irrigation or domestic fertilizer production, form an important aspect of the program for this and the next fiscal year. In addition, there are projects reflecting the needs of technologically advanced and diversified agricultural production, such as support of agricultural education and marketing. Lending for investments in processing facilities for special crops and for livestock development would contribute to diversi- fication of agricultural production. Special emphasis is being given to projects benefiting India's small farmer-s; examples are the specia"l provisions for small farmers in IDA-supported agricultural credit schemes and a project being developed in support of the Government's drought-prone areas program. 16. The industrial sector and investments in infrastructure development have received substantial amounts of Bank Group assistance over time, essentially to cover the substantial foreign exchange expenditures associated with investments in these fields. Apart from IDA credits for a number of fertilizer projects, lending to industry in recent years has been principally through the medium of development finance companies. A credit to the Industrial Development Bank of India was signed earlier this year, and a tenth loan to the Industrial Credit and Investment Corporation of India is expected to be ready for consideration before the end of this fiscal year. In addition, industrial production has been helped through a series of indus- trial imports credits; an agreement for an eighth industrial imports credit is expected to be negotiated shortly. Assistance to infrastructure develop- ment is concenrated in the power, telecomnunications and railways sectors. A credit for a power transmission project was recently approved and a credit in support of the Government's telecommuunications investment program is expected to be ready for consideration before the end of this fiscal year; a fifth railway project is scheduled in the next year program. India's large cities, particularly Bombay and Calcutta, require major investments in public services to keep up with the growth of their populations; in addition to the Bombay Water Supply and Sewerage project, a project in support of Calcutta's urban development program is expected to be ready for consideration shortly. 17. The urgent need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic reports and of discussions within the India Consortium. Emphasis on lending for such zritical sectors as agriculture or urban development results in a relatively slow transfer of IDA's resources. To compensate for this, the Association also lends for more rapidly disbursing  - 5 - projects, such as power transmission, telecommunications and industrial imports. Such a balance is reflected in the program of the current fiscal year. Because of the capacity of the capital goods sector of the Indian economy, India imports relatively few capital goods. The Association should, therefore, be prepared to help finance the local costs of high priority projects in support of India's efforts to secure a transfer of resources adequate to sustain a satisfactory rate of growth. PART III - AGRICULTURAL SECTOR IN INDIA 18. Since 1965, India has shifted the emphasis of its development efforts from industry to agriculture. As a result, priority has been given in recent years to accelerating the spread of modern agricultural technology through increasing the availability of improved inputs such as high-yielding varieties of seeds, fertilizers, agricultural credit and irrigation. The sector plays a dominant, crucial role in the Indian economy, accounting for about 50 percent of India's GNP and employing 70 percent of the total labor force. Growth in real income is essentially dependent on the growth of agricultural production and the rate of expansion in agricultural output required to meet demand for far m products during this decade is estimated at slightly more than 5 percent per annum. Roughly 24 percent of outlay in public sector plans has been devoted to agriculture. 19. Although substantial progress has been achieved in foodgrain production, output of most other commodities has been stagnating, and strenuous efforts are needed to meet agricultural development targets. 20. Last year's severe drought underlines dramatically India's need to exploit as fully and as quickly as possible its irrigation potential, not only as an insurance against future monsoon failures but to achieve the marketable surpluses which only greatly intensified cropping based on the irrigation of farm land can provide. An increased supply of credit for farm investment, and particularly for minor irrigation from groundwater supplies, which this project is designed to supply, is essential to continued growth of production. The project would also contribute to a better regional balance of agricultural growth by spreading the new agricultural technology into the relatively neglected and depressed rural areas of eastern Uttar Pradesh. 21. The Reserve Bank of India has estimated that credit institutions will require US$2,000 million equivalent for long-term agricultural lending during the Fourth Plan (1969/70-1973/74) or an annual average of US$400 million equivalent. Provisional figures show the long-term credit supply for 1970-71 to have been about US$240 million equivalent. There thus remains a substantial agricultural credit gap.  -6 - 22. Since 1970 the Association has supported agricultural credit projects in India by a series of seven lending operations in the States of Gujarat, Punjab, Haryana, Andhra Pradesh, Tamil Nadu, Mysore and Maharashtra. The proposed credit would bring the Association's total lending for agricul- tuiral credit to US$251 million. The credits are fairly similar in structure; they are designed to provide medium- and long-term credit to farmers for on-farm investments and contalin special provisions for lending to small farmers. Because of the wide geographical spread which has been achieved, project components have varied to accommodate differing circumstances and needs from State to State anti have included tractors, harvesters, various types of minor irrigation, land-levelling, project equipment and technical assistance. In all these credits the lending channel and main supervisory agency is the Agricultural Refinance Corporation (ARC). Terms and conditions of on-lending and standards of performance and viability to be achieved by lending institutions are conmmon; the technical criteria to be applied to groundwater exploitation have varied depending on thie availability of supply at proposed levels of utilization. Disbursements under the on-going projects have been slower than anticipated, largely because of unresolved problems connected with the procuremernt of tractors (see Annex II). There have also been initial institutional difficulties, but these have now been over- come as ARC and the Cooperative Land Development Banks in the States have gained more experience following fairly intensive stupervision efforts; and implementation is now progressing satisfactorily. PAR' TV - THE' PROJECT 2.J. The proposed credit will finance minor irrigation (dugwells and tubewells) in Uttar Pradesh. The project was appraised in October-November 1972; the appraisal report (number ,07a-IN) is being distributed separately. Negotiations were held in April 1973. The Borrower was represented by Mr. M. A. Qurairhi, Secretary of Corporation, Ministry of Agriculture and Mr. Venkataraman, Deputy Secretary, Department of Economic Affairs, Ministry of Finance, ARC was represented by its Managing Director, Mr. Chidambram, and the State of Uttar Pradesh by Mr. B. D. Sanwal, Agricultural Production Commissioner. The Uttar Pradesh State Cooperative Land Development Bank Ltd. (LDB) was represented by its Chairman, Mr. R. K. Gupta and the State Groundwater Directorate (SGD) by its Director, Mr. Kumar. A project summary is attached as Annex JIT. 24. Uttar Pradesh has the largest population (estimated at 90 million) of any State in India and the greatest population pressure. An inevitable result is a predominance of small farms and poor farmers. Compared with other major States Uttar Pradesh is relatively backward and heavily dependent on the agricultural sector for the income and employment of its population. To accelerate the pace of agricultural development, principally by expanding foodgrain production and providing employment for a growing labor force, the Government of Uttar Pradesh is giving high priority to the introduction of high-yielding varieties and fertilizers and, because extensive areas continue to depend on uncertain rainfall and are subject to periodic drought, to the  - 7 - installation of wells. The deep alluvial soils of the Gangetic plain contain substantial groundwater resources which have yet to be fully developed; only about 36 percent of the annual recharge is utilized at present. 25. The project would support a three-year lending program of the LDB and qualified commercial banks. Investments to be financed would be the construction of about 10,000 masonry or dugwells equipped with Persian wheels (a traditional lift device), 20,000 shallow tubewells and 20,000 medium depth tubewells energized by electric or diesel pumpsets. Shortages and unreliability of electricity supplies make it necessary to finance diesel as well as electric operated pumpsets. 26. The total project cost is US$72.5 million, of which the Association would finance US$38 million. The Association's credit would cover the foreign exchange component, approximately 5 percent of project costs, and 50 percent of local currency costs. Of the total project costs, IDA would finance about 52 percent, farmers 15 percent, and LDB, participating commer- cial banks, and ARC 33 percent. 27. The proceeds of the credit would be relent by GOI to ARC which would repay about 50 percent at the end of nine years at an interest rate of 5-1/4 percent and the balance at the end of 15 years at an interest rate of 5-3/4 percent per annum. ARC would supervise and refinance at 6-1/2 percent per annum the loan operations of LDB and participating commercial banks. Loans to individual borrowers would bear interest at a minimum of 9 percent per annum and would be repayable over periods of up to nine years, but extending to 15 years in the case of loans to small farmers. Farmers' con- tributions would range from 20 percent to 10 percent of the cost of individual investments. In the case of loans made by LDB, the farmers' contribution would include their obligatory share capital contribution of 5 percent of the loan amount. 28. ARC is a subsidiary of the Reserve Bank of India and a familiar lending channel for IDA lending to the agricultural sector in India. It is a sound financial institution with experienced, qualified staff and has demonstrated its capabilities in supervising schemes which it has refinanced. 29. Like other States in India, Uttar Pradesh has an established banking network which includes for long-term investments LDB and the commercial banks. LDB would be the main channel for project funds from ARC to the beneficiaries in the project area. While the commercial banks are increasingly active in the field of agricultural credit, this activity is still new for them, and it is unlikely that they would be able to undertake a significant proportion of project lending. In order to increase the lending capacity of LDB a phased program of staff recruitment and training which would accord priority to the project area was agreed during negotiations. Although in comparison with many similar institutions LDB is in a relatively healthy financial condition, a number of its branches in the project area have excessive overdues. To improve the financial viability of LDB as a whole and, in particular of its branches in the project area, a phased  - 8 - program of financial rehabilitation, to be initiated before the Effective Date was also agreed. With these improvements, the banking system in the project area would be adequate to achieve full project implementation within the three-year period envisaged. 30. Individual farm investments would be appraised by LDB and commer- cial bank staff under the general supervision of ARC. SGD, which has responsibility for the investigation of groundwater resources, would super- vise the application of spacing criteria to be applied to well construction in the project area. The Directorate is competent and is being expanded to meet the requirements of the project. It does, however, require some technical assistance, which will be provided by the secondment of two geohydrologists from the Central Groundwater Board of GOI. 31. Local contractors iand government agencies would carry out the minor irrigation schemes; local materials would be used and charges are reasonable. Adequate well-drilling equipment is available within Uttar Pradesh and sufficient for project needs. Piunpsets, including repair and maintenance facilities, are readily available. In all, about 50,000 indivi- dual, small and widely-scattered farm investments would be made, extending over a three year period. international competitive procurement would not, therefore, be feasible. Equipment purchases would be through normal commer- cial channels according to farmers' choice. 32. Disbursements by the Association are expected to extend over 3-1/2 years and would be againist appropriate statements of LDB and commercial bank lending for project purposes refinanced by ARC. These disbursements would average 62 percent of loans disbursed by the lending agencies. 33. The project would have substantial economic and social benefits. It would improve agricultural yields and cropping intensity, as well as increase on-farm employment opportunities in a populous and economically depressed area. The livelihood of about 70,000 farmers (including a majority of small farmers) and their families would be improved significantly. Financial returns to farmers, based on prevailing prices, are estimated to range from 17 percent to 41 percent. The rates of return to the economy, based on projected world market prices, are estimated to range between 16 percent and 35 percent. The value of annual production in the project area at full development, calculated at current domestic prices, would increase by US$46 million equivalent. PART V - LEGAL INSTRUMENTS AND AUTHOR.ITY 34. The draft Development Credit between India and the Association, the draft Project Agreement bietween the Agricultural Refinance Corporation, the Uttar Pradesh State Cooperative Land Development Bank and the Associa- tion, the draft Agreement between the State of Uttar Pradesh and the Asso- ciation, the Recommendation of the Committee provided for in Article V,  -9- Section 1(d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. The draft Development Credit Agreement includes as conditions of effectiveness: the completion of the financial and managerial reorganization of LDB to bring its overdues position in line with those of LDBs in other States in which the Association is financing an agricultural credit project (Section 8.01(d)), the establishment of a Tech- nical Cell in the Head Office of LDB (Section 8.01(f)) and the posting of additional field staff to each LDB branch in the project area (Section 8.01(e)). 35. I am satisfied that the proposed credit will comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 36. I recommend that the Executive Director approve the proposed credit. Robert S. McNamara President By: J. Burke Knapp Attachments May 8, 1973   ANNEX I COUtTEY DATA - INDIA ____ POPUIATION DEN6ITY 3,218,560 2 577 million (mid-1973) 177 per km Bate of grostpo 2.23% (from 1961 to 1971) 550 per ku2of arabl. land POPIlATIOU CRA&CIERISTICS (1i71) HEALTH Cruas biri. Rate (per 1,000) 38 acstI Population per physician (1971) 4,000 (eSt) Crude Death Rate per 1,000, 16 (eat) PopuLation per hospital bed (1968/69) 1026 Infant Nortality (per 1,000 live births) 120-140 (eat) INC0W DJSEMIBUTION (1967/68) DI5TRIBTION OF LIAND OWN1ERSHIP (1954/55) 51 of o..naumptisn, loweat quintila rural 8% 5est) urban 7% (set) % owned by top 7% owners 52% (esat) 5i of conseopticn, highest quintile rural 41%} est) urban 44% (set) % owned by sallest 29% of owners r 1% (eat) ACClES TO PiPE;D WATER (1971) ACCE0S TO E1ZCTRlCITI (1971) ,t oL population - urban 70% east) % of population - urban 100 (eat) 74 of population - rural 5% eat) % of population - rural 25 (eat) N'JTE1TION (1960 - 69) ED3CATIOI nliorne intake as % of requirements 83 (st) Adult literacy rate 93 (197:) 36 -a/ Par capita protein Intake (gr. per day) 55 (eat) Primary school enrollment Ds (1969/70) 79 GNP PO CAPITA IN 1970 a US $ 110 Gli_s NATIONAL PRODUCT I0 1972/73 AiXAL1 RATE OF GROWTH (9. constant prices) US S Bln, % 1961/62-.965/66 1965/66-1969/70 1970/71-lq72/75 GCi at Markst Procee 65.6 100.0 3.3 4.7 2.0 Grose Domestic Investment 9-3 14.6 Croon National Saving a.6 13.5 Current Account Balance 0.7 1.1 Resource Gap 0.5 0.8 OUTPUT. LBOR FORCE AtlD PRODUCTIVITY IN 1371 Value Added (at factor cost) Labor W V.&. P orksr U;3.Ai& -t6 B Qj. J of llicnal Average Agrtculture 19.4 42.6 129.9 72.0 149 47 Industry 13.3 23.3 20.2 11.2 658 208 Services 24.3 54.1 30.2 16.8 805 255 Total/average 57.0 100.0 18G.3 100.0 -6 - GOVERI{31T FINANCE 1/ Gemreal Coveronent Central Government (Re. of CDP ( 1971/f72 % of GDP 1_971/7_2 19-71/772 1968-71i 1-971/T72 1971/72 1968.71 Cuzrrent Receipts 70.30 16.4 14.9 40.28 9.4 8.5 Current Expenditures 73.64 16.7 14.6 41.28 9.6 8.1 Current Surplue/Teficit - 1.34 - 0.3 0.