India - Sindri Fertilizer Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1520-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE SINDRI FERTILIZER PROJECT November 12, 1974 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 It may not be published, quoted or cited without Bank Group authorization.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 = Rs 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. Conversions in the appraisal report and in this report have been made at US$1 = Rs 7.50 which was the rate prevailing at the time of appraisal. On October 26, 1974, the exchange rate was US$1 = Rs 8.13. 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 SINDRI FERTILIZER PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an amount equivalent to US$91.0 million on standard IDA terms to help finance the Sindri Fertilizer Project. Funds equivalent to the proceeds of the credit would be onlent to the Fertilizers Corporation of India (FCI) for 15 years, including five years' grace, at an interest rate of 10-1/4% per annum. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (402-IN, dated May 7, 1974) was distributed to the Executive Directors on May 20, 1974. A country data sheet is attached as Annex I. 3. India is exceptional among the Bank Group's member countries for its size, diversity, and the extreme difficulty of its economic conditions. India's economic policies and performance have their shortcomings, many of which are attributable to the open political system, where the reconciliation of conflicting political views tends to favor less than optimal economic solutions; others are due to the sheer magnitude of the task facing the Govern- ment. Governing a country divided into more than 20 states with a population of some 580 million and over 60 languages is an extraordinary responsibility. The country's poverty and poor natural resource endowment, supplemented by a net transfer of external resources averaging in recent years well below US$1 per head per annum, have imposed sharp limitations on the rate of growth. Any judgment of India's economic performance must take these underlying cir- cumstances into account. So, also, must account be taken of the uncertainties imposed by the uncertain availability of water. A bad monsoon, which is in- evitable from time to time, has a pervasive influence over the entire economy and wipes out the results of years of effort. 4. In the past 25 years, national income has grown at nearly 4% per annum, which compares very favorably with the average annual growth rate of less than 1% during the preceding 50 years. Population has also grown faster in the past two decades than previously, but per capita income has neverthe- less risen from a more or less stagnant level in the first half of this century to achieve an average growth of roughly 1% a year since independence. 5. Progress has been impressive on many fronts but disappointing on others and has all too often fallen short of India's massive needs. The growth of the socio-economic infrastructure (transport, education, health services, etc.) has been spectacular, but has often been achieved at high  - 2 - cost and has yielded results of variable quality. Many industrial and agri- cultural investment schemes hlave been highly successful, but others have taken excessively long to be completed and have operated well below full capacity. In some regions of the country growth and structural change have been rapid and compare favorably with developments in many other parts of the world, but in other regions there has been stagnation and possibly even decline. Despite these improvements and although the distribution of income in India is relatively even by comparison with many other countries, there has been little impact upon the living standards of the vast masses of the urban and rural population. The Government has become increasingly concerned about the plight of the lower income strata which, conservatively measured, consist of some 200 million people with incomes of less than US$60 per head per year, and has initiated in recent years a variety of programs specifically designed to alleviate poverty. 6. In broad terms, the structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 43% of national product in the early 1970s compared with around 49% twenty years previously. The share of output contributed by the industrial sector has increased only slowly and since the late 1960s has remained approximately constant at a level of 23%. There has, however, been a shift in the com- position of industrial production, with consumer, intermediate, and capital goods now contributing about one-third each compared with an overwhelming preponderance of consumer goods production 25 years ago. 7. The economic report contained a review of the immense difficulties confronting thie Indian economy as the Fourth Plan period drew to a close. The final year of the Plan, 1973/74, witnessed a severe deterioration in India's terms of trade which was led by, but by no means restricted to, the dramatic increase in oil prices. The resulting balance of payments difficul- ties were compounded by the need for food imports following the drought of 1972/73, in order to sustain the public distribution system on which the poorest section of society is particularly dependent. Given India's perva- sively agricultural economy, the drought also had the effect of causing a general slow-down in economic activity which was further aggravated by infrastructure constraints, particularly widespread power shortages and labor problems of Indian Railways. Food shortages and other scarcities touched off an unprecedented inflationary spiral fueled by large budgetary deficits which were at least partly attributable to mounting expenditures for drought relief. The inflation in turn contributed to labor unrest while efforts to cope with it through budgetary cuts affected, among other things, the level of real expenditures for development programs. 8. Thus, at the commencement of the Fifth Plan period (1974/75-1978/79) the most urgent tasks facing policy makers were: to get agricultural pro- duction moving again; to bring inflation under control; to reduce India's dependence on oil imports by compressing energy consumption and by formulating and implementing programs to develop domestic energy sources; to boost export earnings and to tap additional sources of aid in order to sustain imports;  -3- and, finally, to maintain a minimum investment program so as to avoid economic standstill in the longer run. Even in the best of times, it would have been extremely difficult to pursue simultaneously such a variety of potentially inconsistent objectives. 9. Events since the preparation of the last economic report provide little encouragement. For the second time in the last three years, the weather has let down India's farmers with the result that the khariff (fall) crop recently harvested is believed to be considerably below last year's (about 60 million tons as compared with 67 million tons). The outlook for the next rabi (spring) crop is uncertain in view of continuing shortages of power for irrigation pumps and possible fertilizer shortages. The reduced avail- ability of foodgrains, the depletion of official food stocks, India's balance of payments difficulties, the inflationary setting and frequent changes in the Government's food procurement policy have led to hoarding for both speculative and insurance purposes. Procurement for public distribution has become extremely difficult. The public kitchens established in some of the worst-affected areas (Bihar, Bengal, Orissa) bear evidence of the serious- ness of the situation as well as of the Government's determination to prevent extreme hardship. 10. The spectre of massive food import requirements hangs over an already very difficult balance of payments situation in the current year. The need for six to seven million tons of foodgrains imports appears evident, and considerably more than half this amount either has been delivered already or has been purchased. There is little evidence of a major break in the prices of other commodities imported in substantial quantities by India (e.g. oil, fertilizers, steel, non-ferrous metals, rock phosphate). 11. One of the few bright spots in the balance of payments picture has been the growth of export earnings. In 1973/74 export earnings recorded an unprecedented increase of about 30% and there are indications of a similar increase in the current year. While these increases - particularly that in 1973/74 - are primarily attributable to unit value increases caused by worldwide inflation, there is greater willingness to take advantage of export opportunities, as illustrated most dramatically by the recent diversion of sugar from domestic consumption to exports. 12. Nevertheless, despite the increase in export earnings, India is expected to run a massive trade deficit this year - probably of the order of US$1,600 million as compared with US$795 million in 1973/74 and a negli- gible one the previous year. Moreover, despite the magnitude of the current deficit, it is unlikely that India's imports, excluding foodgrains, will be as large in volume as in 1972/73. In addition to financing a trade deficit of this order, India will have to meet debt service payments of about US$730 million. These financing requirements will be partly offset through Consortium assistance and USSR aid, which are together expected to reach disbursement levels of about US$1,550 million in 1974/75 compared with about US$1,270 million in 1973/74. The deferred payment arrangements for part of her oil requirements that India is understood to have reached with  - 4 - Iran and Iraq will also provide welcome relief. Nevertheless, these various sources of financing hardly measure up to India's current requirements. India will have to draw on her foreign exchange reserves, which, at about US$1,300 million, are currently equivalent to less than three months of imports. India has also drawn US$375 million on the IMF in the current year. The Government also intends to make use of the IMF oil facility, and a drawing on this facility of about US$240 million has been recently approved for use in calendar year 1974. 13. On the domestic front, the Government's present efforts are con- centrated primarily on maximizing production in key sectors through a system of priorities in the allocation of scarce resources and through careful monitoring of developments and performance. In agriculture this entails provision of power on a priority basis for minor irrigation and fertilizer production and allocation of adequate foreign exchange for as much fertilizer as can be imported from the limited world supplies. Similarly, efforts are made to identify production bottlenecks in such sectors as fertilizer pro- duction, coal mining and power generation; and special arrangements exist for meeting expeditiously the foreign exchange requirements of these sectors for such items as captive power units where appropriate, spares and replace- ment parts. The railways are also tied into this system and accord priority to the movement of goods required by these sectors. In the fertilizer, coal and power sectors, senior officials are provided on a continuing basis with detailed production figures along with explanations for production shortfalls. Attempts are also being made to rationalize the administrative machinery of the Government in these sectors, as evidenced by the October 1974 decision to bring irrigation under the wing of the Food and Agriculture Ministry and to regroup power generation and coal mining under an Energy Ministry. 14. In the short term, however, there are limits to the extent to which India's dependence on oil imports can be reduced and production of domestic sources of energy can be stepped up. Insofar as the compression of demand for oil products is concerned, these limits are determined, on the one hand, bv the relatively small proportion of oil products used for private con- sumption (possibly one-sixth) and, on the other hand, by the limited avail- ability of domestic substitutes (i.e. coal and power). The 13 million tons of crude oil plus 3 million tons of product imports planned for the current year probably represent the lower limit beyond which these imports can be curbed without serious repercussions on domestic production. Had consumption been allowed to grow in line with recent trends, the present level of crude and product imports taken together would probably be of the order of at least 18 million tons. 15. A major effort is being made to use existing capacity as fully as possible throughout the economy. To this end, despite the serious balance of payments problem described above, the Government is pursuing a relatively  liberal policy toward imports of raw materials required by industry. Never- theless, it is hard to get away from the current infrastructure constraints and particularly the shortage and unreliability of power supplies which, though somewhat eased, continue to affect production. Fiscal and monetary policies, including the cutback in budgetary expenditures and limitations on bank credit, are also restraining industrial output; and there is some evidence that, due to rapidly rising food prices and the consequent erosion of real purchasing power, the demand for some consumer items and industrial projects is being affected. Given the various constraints, there is likely to be little or no industrial growth in the current year which, in combination with the current agricultural situation, makes it unlikely that there will be any GNP growth either. In regard to inflation, the Government has made impressive efforts to curb budgetary expenditures and to tap additional sources of revenue. However, not surprisingly, in view of continuing food shortages and other scarcities, inflation has not abated. The wholesale price index, which in 1973/74 had recorded an increase of 29% over the pre- vious year, has risen by a further 14% during the first five months of this fiscal year. 16. In present circumstances the Draft Fifth Plan, published in late 1973, has not been finalized. In real terms investment in the current Annual Plan is about 30% below the annual level implicit in the Draft Fifth Plan, and even this is unlikely to be reached. To adjust to reduced resource availability a number of investments are being postponed. Expenditures on some of the social sectors such as education and family planning are un- fortunately also affected. The focus once again is primarily on investments in key sectors such as fertilizer, coal, power, and steel, and quite rightly within these sectors the emphasis is on completing ongoing investments before committing resources to new schemes. 17. In the long run, given her groundwater, coal, hydroelectric, iron ore, non-ferrous metals and human resources, India undoubtedly has the capability to overcome her present difficulties. It is, however, clear that to overcome them and to resume the interrupted process of economic development, India will require substantially larger capital inflows than foreseen by the authors of the Draft Fifth Plan. It is equally clear that as large as pos- sible a proportion of these requirements should be provided on concessional terms. However, even on very optimistic assumptions regarding India's suc- cess in narrowing her resource gap and the response of both Consortium and other donors, a gap will remain between external financing requirements and the availability of concessional aid. 18. India's external public debt outstanding on March 31, 1973, stood at US$9.9 billion. As a consequence of world-wide inflation and its effects on India's export earnings, service payments of about US$730 million due on this debt in 1974/75 are expected to be equivalent to about 17% of mer- chandise exports as compared with about 26% in 1972/73. However, substantial additional debt will have to be incurred as a result of increases in the prices of India's imports. In the future, therefore, the debt service  - 6 - ratio is likely to rise, given the magnitude of India's requirements and the unavoidability of having to finance part of these on non-concessional terms. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 42 loans and 63 development credits to India totaling US$1,229 million and US$2,880 million (both net of cancellation), respectively. Of these amounts, US$649 million has been repaid and US$1,169 million was still undisbursed as of September 30, 1974. Annex II contains a summary statement of disbursements as of September 30, 1974, and notes on the execution of ongoing projects. 20. Since 1957, IFC lGas made 13 commitments in India totaling US$42.3 million, of which US$7.3 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$21.1 million, US$14.0 million represents loans and US$7.1 million equity. A summary statement of IFC operations as of September 30, 1974 is also included in Annex II (page 2). 21. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit operations. Major irrigation, marketing, and seed development are other agricultural activities supported by the Bank Group. In recognition of the importance of adequate fertilizer supplies for agricultural output, the lhank Group has been active in financing the expansion of fertilizer production. Apart from investments in fertilizer plants, the Bank Group has lent support to the industrial sector through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small-scale enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capacitv utilization in these sectors. The Bank Group hias also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and related urban investments have also received Bank Group support in recent years. 22. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, and transport remains highly relevant. The priority of tlhe agricultural sector has been further enhanced in the present wzorld commodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irriga- tion schemes, fertilizer and seeds form an important aspect of the Bank Group's program for the next few years. Special emphasis will be given to projects designed to increase the productiv ity of small farmers and landless laborers.  -7- Lending in support of infrastructure and industrial Investments will focus on energy-related projects. Repeater credits for power and railways have high prioritv in this context, and discussions are under way with the Govern- me:lt in an effort to identify and prepare projects specifically designed to facilitate coal production and coal transport. Lending for fertilizer projects, which has been an important feature in recent years, is expected to continue to occupy a prominent olace in the future program. 23. Tie need for a substantial net transfer of external resources in support of Tndia's economy has been a recurrent theme of Bank economic reports and of the discussions withlin the India Consortium. The need for readily viable foreign exchange assistance is especially pressing at a time when outnut and investment have to be adjusted to a radically different price situ:ation. Consequently, Bank Group lending for critical industrial raw materials and components continues to be an essential element within the overall progran of assistance. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expendittures. India imports relatively few capital goods because of the capacity of the domestic capital goods industrv. The import component of projects tends to be especially low in such high-priority areas as agricul- ture, education, and family planning. For the Bank Group to be able to make ain appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures. 24. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70 the Bank Grotto accounted for 34,, of total commitments, 13% of gross disbursements, and 12X' of net disbursements, as compared with an estimated 35%', 27% and 37%, respectively, in 1973/74, and the contribution of the Bank Croup is expected to continue growing. Whereas on March 31, 1973, the Bank Group share of India's outstanding external public debt was 21%, by 1979 it is projected to account for about 257. Because Bank Group assistance to Incdia is nre- domi nantly in the form of IDA credits, debt service to the Bank Croup will rise slowly. In 1973/74 about 12% of India's total debt service payments were to the Bank Group. PART III - THE FERTILIZER SECTOR 25. Increased fertilizer production is an essential element in Tndia's orogram to increase agricultural production. Approximatelv 24% of total development expenditure by the public sector has been devoted to agriculture in recent years, with priority being, given to accelerating the spread of modern technology through increasing the availability of inputs such as improved seeds, irrigation, credit and fertilizers. The output of foodgrains, particularly the high-yielding varieties of wheat and rice, is largely a function of the fertilizer application rate. It is estimated that, under present average conditions in India, the application of one nutrient ton of fertilizer yields an incremental production of five to seven tons of grain. Thus, shortfalls in the supply of fertilizer, whether imported or produced  - 8 - lomestically, have consequences of the utmost gravity for essential food supplie s . 26. Consumption of fertilizers in India has been increasing at an average annual rate of about 17% since 1953/54, when it was at a level of 113,000 nutrient tons, but it still remains very low relative to usage in other countries. In 1973/74 it reached a level of 2.8 million tons, of wqhich 66' was nitrogen, 22% phosphate, and 12% potash. More than 40% of this total was importe(d. The level of imports, and therefore the increase in consumption, would have been higher were it not for the scarcity of fertilizer on the world market and the extremely high prices prevailing. Currently, India has an installed capacity of about 2.5 million niutrient tons of nitrogenous and phosphatic fertilizers, which is inadequate Lo Fleet even the depressed level of consumption. The gap between domestic nroduction and consumption is about one million tons wider because of limited utilization of capacity in the fertilizer industry. Domestic production of 'rrilizer has drown at an average annual rate of 16% over the past two .1ecades, reaching 1.45 million tons in 1973/74, or slightly more than half c,f consumption. Projections through the end of the decade show a continuing deficit, even assuming optimistic start-up schedules for new projects and relatively high capacity utilization for all plants. ". Only about 67Z of India's installed nitrogenous fertilizer capacitv ",,'IS used in 1973/74, largely for reasons outside the control of the industry Ltself. hle largest single cause of low capacity uitilization was power .-horta es and fluctuations. It is estimated that power problems and shortage ,f raw materials resulted in the loss of about 112,000 tons of nitrogen .1r-oriuction in 1973./74. This is about 81% of installed capacity and is worth about U1S$60 million at present import prices. In addition, design deficiencies _nu aging enuiphent result in the fact that the effective capacity in several -l.nts i- less than the rated capacity. Projects under construction suffer l od..lela-s in co;mnissioning, particularlv because of procurement and start- : ff i-ulties. shortages of cement and steel, and delays in the supply of ,quipment. The Government has undertaken i concerted effort to overcome these problems and bottlenecks. I'S$17 million *as allocated for a Plant Operations ;l2provement Progranm in Credit 481-IN of June 19, 1974; these funds are being used to meet the foreign exchange costs of equipment, materials, and consulting s.rvices for individual plant optimization programs. :J) The present intention is to create an -installed capacity of about 4.9 million tons of nitrogen and 1.2 million tons of phosplhate by 1978/79. Ile;e tLarpets are reasonable, although they are probably the maximum which can he accomplished, given the constraints imposed by financial resources and implementation capability. There are 28 projects under construction or at sn advanced stage of planning with a total capacity of 3.6 million tons. ..lhen these are completed, about 60%' of installed capacity will be in the :ublic sector and the balance in the private and cooperative sectors.  -9- 30. With the exception of three new projects which are coal-based, all of Tndia's existing and planned fertilizer plants are based on petrolewT Droducts, including naphtha and fuel oil, or domestic natural gas. In the long run, coal may well become the preferred feedstock for production of nitrogenous fertilizers in India, given her sizeable coal deposits and the impact that recent increases in petroleum prices has had on the economics of fertilizer production. Expansion of fertilizer capacity in the near future, however, is expected to be based on heavy fuel oil, because of constraints on coal Droduction, more immediate economic utilization of additional coal output as a substitute for petroleum products in power g,ene- ration and other industrial uses, and the desirability of taking advantage of anticipated orogress in the technology of coal-based ammonia synthesis. At current prices, about US$30-35 is needed to pay for the fuel oil for each ton of urea, which currently costs about IIS$250-350 to import and is expected to cost about US$175 in 1978. Thus, for the next two or three years India shotl-d pursue the rapid implementation of projects based on petroleum feed- stocks which are already at an advanced stage of preparation. 31. The Bank Group has been actively supporting the fertilizer industry in India for some time. IDA has made four credits, for the Fertil- iser and Chemicals, Travancore Ltd. (FACT) plant in Cochin and for the Gorakhpur, Nangal and Trombay Units of FCI. These projects have all aimed at a balanced expansion of capacity while at the same time removing bottle- necks to the efficient utilization nf existing capacity. Work on the three FCI plants is proceeding satisfactorily. The Cochin II project, which was approved in July 1971, was envisaged as a follow-up to Cochin I, a maior ammonia/urea complex financed by a bilateral credit, which was expected to commence operations in mid-1971. However, labor and procurement difficulties and problems in the implementation of Cochin I have led to delavs in Cochin II, which is now almost two years behind schedule. Procurement for Cochin II has, however, now been virtuallv completed and substantial disbursments made. IFC has Participated in two private sector fertilizer projects: Indian Explosive Ltd. and Zuari Agro-Chemicals Ltd., both of which are now in neration. A 'oan for the construction of a noi IFFCO (Indian warmers Fertil- iser Cooperative Ltd.) plant at Phulpur, in Uttar Pradesh, has been negotiated and will be presented to the Executive Directors in the near future. PART IV - THIE PROJECT 32. The proposed Project was appraised in Mav/June 1974. The apprais- nl report: (Nlo. 569 dated November 11, 1974) is being distributed separately to the Executive Directors. Negotiations were held in Washington in October 1974. The Government of India was represented by Messrs. K. Balachandran and S. Venkataraman of the Ministry of Petroleum and Chemicals, and by Mr. V.N. Rajagopalan of the Department of Economic Affairs, Ministry of Finance; FCI was represented by lfessrs. R.S. Gupta, Director (Finance), K.S. Sarma, Officer on Special Duty (Projects) nnd Mr. P.L. Ardhanari, Deputv Chief Engineer. Attached as Annex ITI is a credit and project summarv.  - 10 - 33. The credit would help finance the modernization and expansion of the Sindri plant of FCI in the State of Bihar by adding a 900 metric tons oer day (TPD) ammonia plant and a 1,000 TPD urea plant to the existing facilities, which will bring about a net increase in output of some 136,000 metric tons per vear (TPY) of nitrogen, after some small, uneconomic and now obsolete uinits presentlv producing ammonia, uren and double-salt are shut down. 34. The existing Sindri plant was commissioned in 1952. After several expansions, it now m:anufactures ammonium sulphate, double-salt, urea, ammoniuLm -,itrate, ammonia and nitric acid. Facilities for the production of triple superphosphate (TSP) are presentlv under construction. Due to the age of mlost of the manufacturing units, Sindri is able to piroduce only about 50% of its rated design capacity. Bv 1978, when the project is completed and the uineconomic and obsolete units have been retired, the Sindri unit will he a modern, large-scale producer of urea, ammonium sulphate and TSP. The rotal production capacity will amount to 235,000 TPY of nitrogen (compared with the current attainable capacity of about 99,000 TPY). Concurrently with the implementation of the project, FCI will carry out a Renovation Program to repair and restore the facilities which will continue in operation after conpletion of the nroject; FCI has agreed to complete the Renovation Program by June 30, 1977 (Section 2.08(a) of Project Agreement). 35. Two units are involved in the proposed project - a single train 297,nn0 TPY ammnonia plant and a single-train 330,000 TPY urea plant - and all, necessary ancillary facilities not already available in the existing .:orks. The ammonia in excess of that required for urea production will be niilized mainly for the production of ammonium sulphate and ammonium nitrate. ihc project in most respects would be a duplicate of the Tangal ammonia/urea project, for which an IDA credit of US$58 million was approved on January 30, 1973, and will use the same designs where possible. These are based on modern, commercially proven technology to ensure efficient plant operation. 30. The project provides for adequate equipment to control pollution and FCI has agreed to comply with environmental quality standards satisfactory zo the Association (Section 2.11 of Project Agreement). Liquid effluent will be treated before discharge to the Damodar River to conform with lIndian regulations and the plant will be designed to control atmospheric erissions to be compatible with European and US standards. Since many of the xistinsg obsolete units which now cause considerable pollution will be retired, the project will have positive ecological effects. Furthermore, iCi has agreed to engage consultants for an environmental study of the existing works to reduce presently prevailing, pollution, and to consult with the Association with a view to implementing the main recommendations arising fromi this study (Section 2.08 (c) of Project Agreement). 37. The principal raw material would be heavy fuel oil (240,000 TPY) to he supplied hy the Indian Oil Corporation from its Barauni refinery, -'hich has a heav-Y-fuel-oil production capacity of 400,000 TPY. The project  will also consume up to 275,000 TPY of coal in addition to the 430,000 TPY presently being supplied by the Coal Mines Authority from the nearby Raniganj coal field. W4ater will be drawn from the Damodar River adjacent to the plant site. Phosphate rock needed for the production of TSP, although not directly used by the project, is essential to utilize the excess product- ion of ammonia for the production of ammonium sulphate. Because the supply conditions for all of these raw materials are becoming increasingly tight, FCI has agreed to make long-term supply arrangements for them all prior to December 31, 1975 (Section 2.08 (b) of Project Agreement). GOI has agreed to make available foreign exchange for the importation of phosphate rock, and to ensure thiat adequate railway wagons are made available to FCI for operations of the Sindri Unit (Section 4.02 of Development Credit Agreement). Pover will be supplied by the existing captive 80 MW thermal plant, which will lhave no difficulty in meeting the plant's continuous full load require- ments of 54 MIN. 38. The project would be implemented by FCI, a public sector corporation which was established in 1961 and which is India's largest fertilizer oroducer, accounting for about 25% of nitrogen and 10% of phosphate capacity in the country. During 1974, FCI produced 279,000 tons of nitrogen and 32,000 tons of phosphate, operating at about 75% of capacity. In addition to the five operating units, all of which are being or soon will be expanded, PCI has seven plants at new sites under construction or in an advanced stage of Planning. Bv 1979, when all these projects are to be completed, FCI is expected to have a capacity of about 2.5 million TPY of nitrogen and 0.7 million TPY of phosphate. The management and technical staff are well-trained, experienced and capable. Because these managerial and technical resources are taxed by FCI's large Pepansion program, the Corporation relies on outside engineering companies to supplement its own staff in project execution. 39. FCI, using its Planning and Development Division (P&D) will act as prime contractor with overall responsibility for project execution. Because the project is essentially a duplicate of the Nangal ammonia/urea project, in which P&D is Dlaying a major role in the detailed engineering, procurement and construction, FCI is judged to be capable of assuming this responsibility. It will be assisted by the same foreign engineering firms who are participating in the Nangal project, Friedrich Ulde GmbH (Germany), who will provide the basic engineering for the ammonia plant, and Tecnimont (Italy), who will provide the basic engineering for the urea plant. These firms will assume responsibility for process performance and will provide qualified advisors during construction and start-up to the extent required. Suiitable contracts with both these firmsi for the re-use of the Nangal designs lhave been executed; this will allow procurement to proceed more expeditiously than usual and redtuce construction time, with a commensurate reduction in cost and earlier flow of benefits. ,0. FCI has a satisfactory debt/equity ratio of 27/73, and its expansion program will be financed on a sound basis with a debt/equity ratio not exceeding 40/60. Commissioning of new plants over the next four years is also forecast to improve the current ratio from an estimated 1.2:1  - 12 - in 1975 to 2.5:1 in 1984. The financial agreements which have been reached with GOI and FCI are in conformity with previous arrangements under IDA- financed projects. FCI has agreed to maintain for itself and the Sindri Unit a current ratio of at least 1.2:1 and a debt/equity ratio of no more than 50/50, and not to prepay any debt or make any other cash distribution if, after such payments, FCI's current ratio were to be less than 1.5:1 (Section 4.04 of Project Agreement). GOI has agreed to provide funds to FCI to complete its ongoing projects (Section 4.03 of Development Credit Acreeement). 41. Total financing required for the project is estimated at US$188.8 million including US$77.7 million in foreign exchange. A breakdown of the estimated capital cost is included in Annex III. In addition to the US$91 million IDA contribution, covering 52% of total project costs, GOI will Drovide an equity contribution of US$88.2 million, and short-term commercial funds of US$9.6 million for working capital would provide the balance. The capital cost estimate is based on recent estimates for the Nangal project, uipdated according to actual prices for equipment now being procured, and adjusted to October 1974 price levels. Physical contingencies provided are approximately 7.7% and 4.8% of local and foreign exchange costs, respectively. Price escalation rates beyond May 1974, have been taken at 14% for 1974; 11% for 1975 and 7-1/2% thereafter for equipment and foreign costs and 12%, 10%/ and 8%, respectively, for all local costs. 42. The proceeds of the proposed credit would be disbursed against the cost, including price contingencies, of imported equipment, materials and spare parts (US$54.9 million), the ex-factory cost of equipment and spares expected to be won by Indian suppliers through international competi- tive bidding (US$26.3 million) and the foreign exchange costs of engineering and consultants' services (US$5.8 million). US$4.0 million would remain available to meet physical contingencies on the above items. If the cstimated 27% of equipment contracts are won by Indian bidders, the credit would involve local currency financing of about US$16 million. 43. All equipment and materials to be financed by IDA would be subject to international competitive bidding in accordance with Bank/IDA guidelines. However, in order to expedite the project, well-defined long- delivery items such as tall towers and large compressors (approximately IJS$12 million) would be bid using the Nangal bidders list supplemented by other firms with known appropriate supply capacity. Technically critical items such as the ammonia shift converter and prilling nozzles (approximately US$8 million) would have a restricted bidders list approved by the Associa- tion, and small items costing US$50,000 or less (approximately US$2 million) would be purchased from manufacturers and local representatives of foreign suppliers on the basis of suitability, availability and price con- siderations, following approval by IDA of the list of items involved. The Nangal bidders list, supplemented as above, would be used for bidding on all other items and, should an approved advertisement placed in suitable interna- tional publications bring in responses from additional firms, post-qualification would be applied at the time of bid evaluation. Neither the local costs nor  - 13 - the indirect foreign exchange costs of about US$14 million worth of equipment and spares to be procured locally without international competitive bidding would be financed under the proposed credit. A preference of 15% or the actual customs duty, whichever is lower, would be granted to Indian suppliers for the purpose of evaluating international bids. 44. Urea and other straight nitrogenous fertilizer prices are statutorily controlled by the Government. The retail price of urea, which had been kept within rather narrow bounds since the mid-1960's has almost doubled within the past twelve months. Although an important part of this increase is used to reduce the Government's losses in subsidizing fertilizer imports, the average ex-factory price has increased by about 46%. This has served to offset the increased cost of urea production resulting from the rise in prices of petroleum feedstock and equipment. 45. It is assumed that input costs and ex-factory urea prices will con- tinue to increase, but at the same rate, in the future. The ex-factory price of urea at Sindri has been projected to reach Rs 1,479 per ton by 1978, and would then be approximately in line with anticipated long-range international prices for urea. The retail price to farmers is not expected to increase above its present level, since the element of price equalization between domestic production and subsidized imports would be decreased. Assuming an ex-factory urea price of Rs 1,479 per ton and a fuel oil price of US$78 per ton delivered at factory, the incremental financial rate of return of the project is estimated at 16% before taxes and is unlikely under adverse condi- tions to fall below 11%. The Government has provided assurances that its pricing policies will continue to permit a reasonable return on invested capital (Section 4.04 of Development Credit Agreement). 46. The project's economic rate of return is expected to be 16%, based on the projected 1978 world price of urea. Assuming a 10% cost overrun and a 10% decline in projected fertilizer prices, sensitivity analysis shows the return would drop to 11%. The economic return has also been calculated on a probability basis to reflect the uncertainty of future fertilizer and raw material prices; this analysis indicates that there would be a 10. risk that the return would fail below 10% and a 10% chance that it would exceed 20%. The project shows a net annual foreign exchange saving of about US$68 million, assuming capacity utilization of 90%. The project will not provide additional employment since it will draw personnel, including skilled operators, from those plant sections due for retirement. PART V - LEGAL INSTRUMENTS AND AUTHORITY 47. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the Fertilizer Corporation of India, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement and the text  - 14 - of the Resolution approving the proposed credit are being distributed to the Executive Directors. 48. Features of special interest are referred to in paragraphs 34, 36, 37, 40 and 45 of this Report. Dissolution or disestablishment of FCI or the Sindri Unit have been added as events of suspension and default (paragraphs (b) and (c) of Section 5.01 and paragraph (b) of Section 5.02 of Development Credit Agreement). No special condition of effectiveness is proposed. 49. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 50. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President by J. Burke Knapp Attachments "ovember 12, 1974  ANMEX I CM Alpts - INDIA Page I 3 ho83 !- 5MI7P.7 lie, (aid-1 973) co 350 Par halo! arable loand ODCIAL frIIATORS IndiaP1A !'- !i D2.S.SAIAMJkIL.LATI&AS 21 A . 110 Ia 90 4a 220A~2,600 Cr-ue lr-lth rate (par thouaeond) 3d2 /b 3d /4,c E A..0 L/ - o2 Crods death, rate (Par thousand) 13 7- br. 1(77 iS 12 7c -, 11.9 Infant mortality rota (per thcousand liv births) 139 77 120-140 lt. .. 8 17.%5 Lt Life efl.etanuy at birth (ye.s) hii 7- 50it5! Gross repaotscttst rate1jj .. ~~~~~~~~ ~ ~~2.9 3.2 1.1 1.3 Populatio Irw)'rt 2.3, 2.3 /li 2.0 /b 3.u /b 0.5 I,, eutaosgrowth. rate,- urban 3'L L hZ 5 _1 47W u.7 Age strcture (percent) 0-lb La~~~~~~~~~~i 42 iS n 3 2j.,: is-a4 6 51 53 c 53 613.. 65 and over 32~ 13.', Deciesdocy ratio A . 1.2 /t.lI 1.178 1. 0 .q Urban populatiom as percent of total It 20al /i 17 L -7 Psoi; PIa-wing I,9 Saf acceptors cusuaotive (thouas., , 78 .. 's9 ms. of use,rs (% of carried -sane) 2WI5MItor forme (thousands) i~99.C0 I 221,DOO 41,100 IC 13.~00A ?S 25'00 Prce"ntage employ.ed is agriculture 'i .J.ol t3 lt/t Pbs2ceotags uostuployad ,. . Pecet of national lanne recived by tigheet 5% .IC /r 2? /a 25 tin a . Percent of national jocose, r-seivd by higheet 20% .47; 4 J7;. 54 /t t A"-. MiniWnOin P AND 0133MWI %owsedbytopl0~Ofcss.e .,. S -snes by snalleet 166C of o.rer.. ... MPoplain erJ tyiia 5.3~00 L',.,5(00 21,550 9.100 Ia 520 Population Per nuring person IA 0 77 5210o ,0w1 cc77 77 310 / Popula4tion per hospital bed 2,610 77 l,r2o /f.y 1,12, ISo 7,g i t 7 Per capita calrie supply as of requirasete /5' lot. 9 /Alb 93 4 .A ' Per cPita prIotein supply, tonal (gras, per dayT46 5177 ,9 77 1 If137 7c Of ahich, anise! and Palse. I I?7, 14 7.7 Ut , 22 7 51 Death rtot 1-4 yearn /7 .. .. .. r 'fl37Z a8 pr=ay cho 'enollment ratiol '9 /ao el 112 '~~o 14 Ad.,.ited Isoirysho ""olicant ratio 2.0 2'.17I1s 12 45 7c 2 Years of hoioling pro~ddd, first and seound leveal 12 I2 12 1/) Vocational ecrellent, a. % of sec. school enrclloaent 6/g210ld1 Adult literac rate 2i /a 3 L,k 56 LLtL ' ff, H/ AverageoN. af per.eone Per -mo (urban) 2.1. /ai . .. percent of occupid a nile without piped water .. . .6 ad Access to eetriciy (ao S of total Population) .. . .23- percent of ruaral psiulatic, connected to electricity .. . .6AIc EelHE%cMairrs Per low popuation 5 21 i14 45 /ao 133~ P.saange cars per 1000 population 2.8 1 0 0 212 Iloctric poser ounsanption (ikah P.c.) 4i 211 19 229 4.463: Newsprint constotnpton p.c. kg per peas 0.2 0.3 0.2 1.1 lot :1'.9 Oc-t05, Figure refer sitter to the lains period or to accoont of snvlronswaetal teaercore boy mneiht - ad the latent ynnre. Latent perid.i ref- in principle to, distribution by age and S of nationa papulatmneto. th. y-nr 195-6-60 or 1966-70; the leteet y.-.ra cprin, 46. Protei. tanderdo (reqa,rastat) far all ncnr ea as tab siple to 1%o wad are. ltebd by USDA gcauceis Icasn,rob S.-vI.. provids tfr a icieu- /5Th. Per Capita. 05P detieste is at sextet prioeo fsr alovance of 60 graenoru total protein per day, aM 20 grass cf p.5r. utbr tban 1960, calculated by, ibs owns convaerlon etmul ad puloe protein,. of stict 10 (rose hbucd be animal technique an tihs 1972 World lent Aktlas. protein. These standards are sonnudhat lower tita those of 75 /2 Aesrasg custer of daugittre per neona of reproductive grass of total protein and 23 gras of unsea prtoeiu as an age. ava54 far tic. sewIdA, prOpOosd by FAD in ithe Third Wand Foad 'a Fpayttitc grou-th rot..s no.sr tine deeAs e-ding in ' dor.).W 1960 en 1970. lSO stuishv Rsugeted that crude death rates of chiidros 4,Retic of under 15 end 65 and ovs age b"otisi to ageO I thrug 1e _b&usd aso a first oprsflvtLotio i.dec of those in, inbor fence brsctet of age 15 tkutaug' 54, meliuotrittan. 1k AO reference standards represent phyaiological re- 48 Peroentog eannolled of correpending pepelatice of sctool age quirea,cnts far noel actirit " health, talcig an defined fur saah country. /A 1'972, /9 Estimate annual average far 1963.64 bsala on recalls o' itse notional satuple a.vy /c Intl-mt-s 7!T 1965-20: I s totlcted annua averAge fOr 1I5161 bmasd on, exalysin, of decenial ceocuseon It 77969: l5199-eto; 7W 1960-72; I a t eiiino hn as~r~9~6~ho 7,p iSUT ZI xaci- poli.ties, resgTay capiteals athsier plans with urbtan ohrcaitcPasuiUi!iE Fi Pa tie dofini- lieuof oten,see ~~gigjgWppjl p. 156: /I Ratio of populatio te 5a 13 srt .c fOarc in age greap 15-W; m 7AktiWvOfrP.Pulatios undenr a5nd 65 and over t to tale].bici fence; It i9o , In 911, ieal-den all i,uitdciAnsai o partiolpote tnt any type of eoon,ceic activ,ity; & AlD eatsate- f iTbor f-re n age group 15-59. IMOR report gives a figure of i80.4 ofllito. b-anal00 the 1971 pepsletina coccs.. rhe differeoca 8Is ie in changes in the doftitittn Of a worker. Is the, 1971 coccs-, persons weoe classified only it itse basis tf their vol actishtiee. -han Led to the esaluclan Of several nategorties. such an hounenrdvess La 1961; 'r lu-2 !9190a65: /t 1971, /u Ituseholdn; /, 1962. & Personnel in govoronet services only; Lx; 1957: Zoel,ating rurfl lna9.taln; le GOsvrmentChospital easts belueots: l&% 1960-621 /at. 1969-10, la. Neil- oat. which inciudes oveag ntuH'ute; a!j 196; /ean 1969: 7a? mot including Oucational oottroeacc /as Peoa-tatta itt 10 years ant ower basal 0eonO percent Amne oat. of i,9T Iab 15 years and 00cr lat 8.tiso.i baced toanaple, nurey; L 1966, Lak irtrta rasy; Lu. 1965. 21cr cM OPolattos saks lnodeouia a relevant refereoce coantryr. although it in io this Per capita incoen groAP coico inda., Tn..c kited Kiot,%h..Oa been selecedo because of ith important role of atailic eerier ecterprisos .,d ins highl_y da- re! bed cysien, it social uoltare. 6.11. 15~~~~~~~~~~~~~~~~~~5 sepinber lit 1974  ANNEX I Page 2 ECONOMIC DEVELOMNT DATA GNP PER CAPITA IN 1794: US I 110 b/ ,, ATIONA' .in0L"-T IN 1972/73 ANNUAL RATE OF GROWTH (%. constant prices) US $ Bln. % 1961/62-1965/66 1965/66-1969/70 1970/71-1972/73 '.arket ?rices 57.7 100.0 3.3 14.7 2.0 Gru-- ;D-s'tic Investment 9.7 ;6.8 GrosF onal Saving 9.2 15.9 `ur.- en ccount Salance -0.5 -0.9 in.'te.n1rCe ,ap -0.2 -0.3 UT P'-T, LABOR W1DRtCE AIND PRODUCTIVITY IN 1971 dd(at factor cost) Labor Force V.A. Per Worker BUS . US $ of NatiBonal Average A,grtculture 19.14 42.6 129.9 72.0 149 47 ln,'ustrv 13.3 23.3 20.2 11.2 658 208 Sel.-'tces 24.3 34.1 30.2 16.8 805 255 I'otal/average 57.0 100.O 1 3 100.O 31 100 GOVERNM2INT FINANCE 2/ General Government Central Government (Rs. Bln of GNP f i (Ba. Bln) % Of CNP 1972/73 1972/73 1970/71-1972/73 1972/73 1972/73 1970/71_1972/73 ':urrent Receipts 78.71 17.0 '6.1 46.04 10.0 9.3 ,^;r-enr. Excenditures 0.7 17.5 16.2 10.0 9.2 ';urrent S,Lnins/Defin -2.07 - 0.5 - 0.38 - 0 1 ;.xi_ili xpenditurse -' 26.21 5.7 5.5 19.84 4.3 l.0 K-ernal Ass-istanee (net) 3.30 0.7 C.8 3.30 0.7 0.8 'OiE'f