India - Mysore Agricultural Wholesale Markets Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use lF I Ls E OM P Y Report No. P-1200-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE MYSORE AGRICULTURAL WHOLESALE MARKETS PROJECT March 15, 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 It may not be published, quoted or cited without Bank Group authorization.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 US$1.00 Rupees (Rs) 8.0 * Rs 1.00 US$00125 Rs 1 million US$125,000 *As of the date of writing, India. has not declared a new par value followring the devaluation of the dollar; the Rupee is officially valued at a fixed Pound Sterling rate. The Pound i.c now floating relative to the US Dollar and consequently the Rupee - US Dollar exchange rate is subject to change. Fiscal Year April 1 - I,arch 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 MYSORE AGRICULTURAL WHOLESALE MARKETS PROJECT 1. I submit the following report and recammendation on a proposed credit to India in an amount equivalent to US$8.0 million on standard IDA terms to help finance the Mysore agricultural wholesale markets project in India. 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. This report estimated that for the Indian Fiscal Year ending on March 31, 1972, the economy grew at less than 4 percent. For the current year, growth is expected to be even lower and, indeed, there is the prospect that there may not be any growth at all. The principal factor has been the serious failure of the monsoon. In comparing the rate of economic growth achieved over the past two years with the average of 5 percent per annum experienced during the preceding two years account should be taken of the fact that the Indian economy underwent two years of bad weather in a period of sharply falling foreign aid and provided substantial economic assistance to Bangladesh. 3. 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 4e5 percent in 1971. However, the figure for 1971 obscures some improvement which began to take place during the last quarter and which was sustained during the first quarter of 1972. Over these six months industrial production increased by 7.2 percent compared with the same period the year before. But this improve- ment has to be qualified,first,because much of it was confined to the textile industry which recovered from the effects of a severe shortage of raw cotton and, secondly,because recent data indicate that no further increase in industrial output occurred during the latter part of 1972. The factors which have brought about this situation include lack of demand for certain capital goods, shortage of imported raw materials, labor unrest, power shortages, as well as managerial difficulties, especially in the steel industry. 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. What marks out the last 3 years is the severity of the deceleration in industrial activity notwithstanding the modest reprieve gained in the early part of 1972. The Government of India (GOI)  -2- recognizes that fresh initiatives must be taken through industrial policy measures. Revisions of the industrial licensing policy have been acnounced recently; it is as yet too early to evaluate the effects of these rev-isions on investment and output. 4.s Agricultural production registered. an increase of over five percent irn each of the first two years of the Fourth Plan, with foodgrain production reaching 108 million tans in 1970/71. In 1971/72 foodgrain productioyn was affected by rather indifferent weather with the result that only qn estim.ated 106 million tons were produced. This year weather co.nditions have been disastrous wmith a complete failure of the monsoon in both t.he west and east sides of the country, an unusual occurrence. Meanaingful estimates have still to be made but clearly production of suirmier foodgrains will be substantially below last year's 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 stoclks built up between 1 968 and 1 970 would be adequate to meet require- meY,t,s in bad years. But the combined effect of supplying foodgrain to 13B:r.flaadesh and the severity of the drought this year has led to foodgrain st.ocks being reduced by aibout half, to 3-4 million tons at the end of 1972. These s-tocks are now being depleted at a rate of one millioln tons a month0 The Government has decided to import about two mil'ion tons of foodgraiIns and more may be required if the winter crop fails to exceed or falls short of last year's level of output. Other crops have also been affected. Jute and, to a lesser extent, cotton production are expected to lhe lower, while the shortage of oilseeds could be quite severe with the resulting need for hiigher imports. in the present situation, the generallyr favorable trend in agri,cultural production over the past several years should not be over- 'Eooked v Ezven if this yearIs foodgrain crop should be between 95 and 100 mil-lion tons it would stiLl be significantly above that obtained in the last serious drought year, 1965/66, wihen production reached only 72 million tons0 This would indicat.e that the considerable investments in irrigation facilities, fertilizer, ancl other agriculltural inputs have had the ef.tect of reduLcing thze impact of droughts. If yields this year remain h-igh on irrigated land in spite of adverse -weather conditions, and reports of good crops in the Punjab and Haryana are favorable indications, this wllM confi.rm the success of the new technology and highlight the need to broaden its use within India. 6. The -wholesale price index has increased at a rate of 6.5 percent bet-wefen July 1 972 and December 1972. An important factor has been the rapid increase of food prices, which went up at the same rate over this periLod reflecting expected foodgrain shortages0 In an effort to control inflation, the Government has limited the overdraft facilities available to State gorernments, previously a source of defici-t spending, and is considering measures to control more effectively the level of foodgrain prices, but such steps are likely to be offset by the relief programs necessitated by the droaug,ht.  -3- 7. India's net reserves position at the end of September was US$1 ,188 million or the equivalent of 39 percent of annual imports, plus debt service payments. Reserves have fallen by nearly US$100 million since March 1972. Further pressure on the country's declining reserves from foodgrain imports is inevitable. On the export side, recent estimates indicate a 23 percent increase in exports between April and November this year, as compared with the corresponding period last year. But overall, the rate of growth of ex.ports has been slow in the recent past and uncertainty surrounds future levels of net aid. In the circum- stances, India should clearly continue to receive substantial aid from IDA. 8e A document setting out the approach to the Fifth Plan for the period 1974/75 to 1978/79 hIs recently been published by the Government. Economic self-reliance and the elimination of poverty are held to be the major tasks of the Fifth Plan. In the light of the experience of the Fourth Plan, considerable effort will be required to achieve the 5.5 percent annual grawth which is the target for the Fifth Plan period. 9. A country data sheet is attached as Annex I. PART II - BANK GROUP OPERATIONS IN INDIA 10. Since 1949 the Bank has made 40 loans and 48 development credits to India totalling US$1,110 million and US$2,014 million (both net of cancellation), respectively. Of these amounts, US$564 million has been repaid and US$770 million is still undisbursed. Annex II contains a summary statement of disbursements as of January 31, 1973, and notes on the status of currently active loans and credits. 11. Since 1957 IFC has made 13 cammitments in India totalling US$42.3 million of which US$4.3 million has been repaid, US$7J6 million sold and US$6.0 million cancelled. Of the balance of US$24.4 million, US$16.9 million represents loans and US$7.5 million equity. A summary statement of IFC operations as of January 31, 1973, is also included in Annex II (page 2). 12. 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. In addition to the Agricultural Universities project, which was signed on November 10, 1972 and the Nangal Fertilizer project, signed on February 9, 1973, two agricultural credi1% one agro- industry (apple processing) and an additional markets project are expected to be ready for consideration by the Executive Directors this fiscal year. 13. Lending to industry will also be a prominent feature of the program for this fiscal year. Assistance to the industrial sector will concentrate an the support of development finance institutions through the credit to the Industrial Development Bank of India, which was signed on February 9, 1973 and a tenth loan to the Industrial Credit and Investment  Corporation of India. Industry will also benefit from an Industrial Imports credit. In addition, assistance to infrastructure development is provided for in this year's program through a credit for power transmission, and a credit in support of the Government's tele- communications investment program which has been appraised. India's large cities, particularly Bombay and Calcutta, require major investment in public services to keep up with the growth of their populations; accordingly, a Bombay Water Supply and Sewerage project and an Urban Development project in Calcutta are also included in this year's program. 1h4 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 the discussions within the India Consortium. We recognize that emphasis on lending for such critical sectors as agri- cuture or urban development is inevitably leading to a relatively slow transfer of IDA's resources. In order to balance our program we have in the past included lending for more rapidly disbursing projects, such as power transmission, telecommunications and industrial imports. We plan to continue to provide assistance for such projects in the curn mt fiscal year. Because of the capacity of the capital goods sector of the Indian economy, India imports relatively few capital goods. As in the case of the credit now proposed, 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. FPART III - THE PROJECT 15. This credit, if approved, will be the Bank Groivp's second lending operation in India in support of an agricultural markets project. The project pursues objectives similar to those of the Bihar Agricultural Markets project, which is progressing satisfactorily. The Mysore project was appraised in May and June 1972. Negotiations were held in January 1973. The Borrower's delegation was headed by Messrs. M. K. Mukherjee, Joint Secretary, Mtnistnr of Food and Agriculture and G. V. K. Rao, Development Commissioner, State of Mysore and included Messrs. A. N. Choksi, V. N. Rajagopalan, S. Varadhan and J. Alexander. A project summary is attached as Annex III. 16. The Government of India considers development of regulated wholesale markets aimed at increasing trade efficiency and reducing produce losses to be one of the key elements in its strategy to induce increased agricultural production. Traditional marketing systems are characterized by scattered marketing opportunities, location in congested areas, inadequate storage and auction facilities, inefficient produce grading and a dearth of other facilities. There is also a marked lack of market intelligence. These circumstances which fail to assure fair prices leave the farmer little incentive to improve the quantity or quality of his production. In order to rectify this situation, the Government of India has encouraged State governments to establish modern regulated markets under appropriate legislation.  17. Mysore is primarily an agricultural state; 62 percent of its total area, predominantly dry land, is cultivated, and agriculture accounts for about 61 percent of the State's gross product. The prin- cipal crops are foodgrains (almost 6 million tons in 1970-71), sugarcane (8 million tons), oilseeds (0.7 million tons), and cotton (483,000 bales). Mysore is also India's largest producer of coffee and raises a wide variety of spices, nuts, fruits and vegetables. About 50 percent of foodgrains and oilseeds production constitutes marketable surplus and about half of this amount passes at present through regulated markets. 18. The State government is giving great emphasis to increasing agricultural production through investments in irrigation and through a variety of programs aimed at spreading high yielding varieties and more intensive cultivation practices. Considerable increases in agricultural production have occurred in recent years and further increases are likely and woald boost principally the *olume of marketable surpluses. In the circumstances, improvements in agricultural marketing deserve high priority. Agricultural marketing is regulated by a comprehensive Agri- cultural Produce Marketing (Regulation) Act which was passed in 1966. Ninety-nine Regulated Market Committees have been established under the Act and regulate the trade in designated market areas. Each Market Committee includes representatives of farmers, the State government and the trading community. The Committees license middlemen, specify charges that may be levied and supervise the conduct of trade by auction or tender. The State government supervises the election and activity of the Market Committees through the State Marketing Department. 19. Modern marketing facilities are required if the purposes of the Marketing Act are to be accomplished and the Market Committees to operate effectively. The proposed project is designed to provide these facili- ties. It covers the development of new markets or improvements to existing markets operated by Market Committees throughout the State. The facilities to be provided, depending on the needs of the particular location and the commodities handled by a particular market, would include access roads, auction platforms, fencing, shops and go-downs for market intermediaries, internal roadways and parking areas, utilities, equipment, such as grain dryers, scales, testing and comnunications equipment, and buildings for the Market Committee. The project also provides for training of staff of the State Marketing Department and Marketing Committees and for an economic evaluation of the results of the investment by a qualified research institution under contract with the State Marketing Department. 20. The State Marketing Department would be the principal agency directing project implementation. The Department is well staffed to exercise detailed supervision and give assistance to the Market Committees participating in the project. It requires some strengthening in technical and economic matters and the State govermment will make available, as a condition of effectiveness of the proposed credit, an experienced and qualified civil engineer, an architect with experience in designing market layouts and structures and an economic adviser. The Public Works and Town Planning Department of the State government would assist  -6- Market Committees at the direction of the State Marketing Department in the preparation of designs and specifications, tender documents and loan requests, in calling for tenders, analyzing bids and supervising construction by contractors. 21. The Market Cormitteeswould be responsible for the construction and improvement of market facilities and for their operation. It is expected that most Market Committees participating in the project would have been operating for some time, although more recently established Market Committees would not be excluded. Markets to be developed under the project would be selected by the State Marketing Department according to projected grawth in arrivals, location relative to adjacent markets and road network, extent of existing congestion and financial ability to support the investment, including the resulting debt service. Although 99 committees operate in the State, many of these are very small markets and operate only one or two days per week with little need for additional investment at this stage. The Market Committees would provide all land required. for project development and would own all common facilities. Shops< and go-downs for use by market intermediaries (traders, cooperatives arid other corporate or statutory bodies) would be built by Market Committees for rental or by the intermediaries themselves on land leased.