India - Drought Prone Area Project

FILE COPY, DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1522-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE DROUGHT PRONE AREAS PROJECT November 15, 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 It may not be published, quoted or cited without Bank Group authorization.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 completen^ss of the report.  CURRENCY EQUIVALENTS US$1.00 = Rs. 8.00 Rs. 1.00 = US$0.125 Rs. 1 million = US$125,000 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 were made at US$1 to Rs 8.00, which was the rate at the time of the report's completion. On November 8, 1974, the exchange rate was US$1 - Rs 8.11. 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 DROUGHT PRONE AREAS PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$35 million on standard IDA terms to help finance a project designed to increase and stabilize production from agriculture and related activities under the Drought Prone Areas Program in six districts in the states of Andhra Pradesh, Karnataka, Rajasthan, and Maharashtra. 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 difficuity 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 inevitable 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 never- theless 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 socioeconomic infrastructure (transport, education, health services, etc.) has been spectacular, but has often been achieved at high  -2- cost and has yielded results of variable qualities; many industrial and agri- cultural investment schemes have 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 1970's compared with around 49% twenty years previously. The share of output contributed by the industrial sector has increased only slowly and since the late 1960's has remained approximately constant at a level of 23%. Tnere 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 preponderence of consumer goods production 25 years ago. 7. The economic report contained a review of the immense difficulties confronting the 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 difficulties 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 pervasively agricultural economy, the drought also had the effect of causing a general slowdown 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 policymakers 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; and, finally, to maintain a minimum investment program so as to avoid economic  -3- 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 kharif (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 au 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, nonferrous 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 Iran and Iraq will also provide welcome relief. Nevertheless, these various sources of financing hardly measure up to India's current requirements. India  - 4 - 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 Agricultture Ministry and to regroup power generation and coal mining under an Energy Ministry. 14. In the short term, however. there ars limits to the e.;tent to which India's dependence on oil imports can be reduced and production of domestic sources of energy can be stepped up. Insofar as t:he compression of demand for oil products is concerned, these limits are determined, on Lhe one hand, by the relatively small proportion of oil products used for private con- sumption (possibly one-sixth) and, on the other hand, by the lim1ited 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 cannot 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  - 5 - 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, nonferrous 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 possible a proportion of these requirements should be provided on concessional terms. However, even on very optimistic assumptions regarding India's success 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 worldwide 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 merchan- dise 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 ratio is likely to rise, given the magnitude of India's requirements and the unavoidability of having to finance part of these on nonconcessional terms.  -6- 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$655 million has been repaid and US$1,112 million was still undisbursed as of October 31, 1974. Annex II contains a summary statement of disbursements as of October 31, 1974, and notes on the execution of ongoing projects. 20. Since 1957, IFC has made 13 commitments in India totaling US$42.3 million, of which US$7.6 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$20.8 million, US$13.7 million represents loans and US$7.1 million equity. A summary statement of IFC operations as of October 31, 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 Bank 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 capacity util'ization in these sectors. The Bank Group has 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 the agricultural sector has been further enhanced in the present world 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 irrigation 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 productivity of small farmers and landless laborers, as demonstrated by the project which is the subject of this report. Lending in support of infrastructure and industrial investments will focus on energy- related projects. Repeater credits for power and railways have high priority in this context, and discussions are under way with the Government in an effort to identify and prepare projects specifically designed to facilitate coal production and coal transport. Lending for fertilizer projects, which  -7- has been an important feature in recent years, is expected to continue to occupy a prominent place in the future program; the use of coal-based tech- nology will receive particular attention. 23. The 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. The need for readily usable foreign exchange assistance is especially pressing at a time when output and investment have to be adjusted to a radically different price situation. Consequently, Bank Group lending for critical industrial raw materials and components continues to be an essential element within the overall program of assistance. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. 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 an appropriate contribution to the financing of projects in these and other 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 signif'cantly. In 1969/70, the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements, as compared with an estimated 35%, 27% and 37%, respectively, in 1973/74, and the contribution of the Bank Group 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 25%. Because Bank Group assistance to India is pre- dominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1973/74, about 12% of India's total debt service payments were to the Bank Group. PART III - THE DROUGHT PRONE AREAS PROGRAM Background 25. Agriculture remains the most important sector of the Indian economy; it engages 72% of the labor force, contributes presently about 43% of GNP, and accounts for a major share of exports. The overall growth rate of agricultural production, averaging about 3% per annum, obscures considerable variations over shorter periods of time, between crops, and between regions. Thus, the introduction of high-yielding varieties of wheat led to increases in production of about 11% p.a. between 1967 and 1971. Other foodgrain crops, notably rice, have not enjoyed the same success, as the introduction of high-yielding varieties has encountered difficulties arising from local climatic and ecological conditions.  - 8 - 26. India's agricultural output remains heavily dependent upon adequate rainfall. In the period 1969-71, nonirrigated areas averaged about 127 million hectares or 77% of gross cropped areas in India. In addition to efforts at expanding irrigation and making more effective use of existing investment in irrigation facilities, improved dryland farming technology is vital to any significant and sustained growth of agricul- tural production. 27. The need for gains in agricultural productivity in the vast areas heavily dependent on rainfall coincides with the Government's desire for improved employment, income distribution and the uplift generally of the weaker sections of society, particularly in rural areas. The Government therefore initiated a number of programs, in 1970/71 and 1971/72, as essen- tial components in its strategy for meeting the problems of agrarian un- employment, low productivity and rural poverty. The most important among these programs are the Small Farmers Development, and Marginal Farmers and Agricultural Laborers Agencies Programs, and the Drought Prone Areas Pro- gram. 28. These programs have been operating with varying degrees of success. Performance has been uneven from area to area and between projects in the.same area. Rigidities, imperfections, problems in design, definition, guidelines, organization and execution became evident as the programs got under way. Most of these problems had been attributable to the experimental nature of the programs. Nevertheless, the programs were formulated on the basis of considerable earlier experience, and thorough evaluations since have confirmed that they are conceptually realistic. Bearing in mind their relatively recent start and slow initial pace, they have already reached respectable rates of expenditure, activity, and accoDlplish- ment. 29. The programs represent a promising start in tackling the complex and interrelated problems of rural development. A general short- coming has been that they were conceived in isolation and that their operations were locationally dispersed. It will be necessary not only to accelerate the pace of their implementation and to bring about operational improvemnents, but to ensure their close coordination with the general development programs for particular areas. Only a well-integrated, comprehensive effort promises to bring about lasting improvements in the economic conditions of small and marginal farmers and agricultural laborers. These considerations, which emerge from tihe Government's follow-up and evaluation of program performance, are especially relevant to the Drought Prone Areas Program. Drought Prone Areas Program 30. The Drought Prone Areas Program (DPAP), initiated as the Rural Works Program in 1970/71, now covers 72 districts in 13 states. The districts selected for inclusion in the program were chosen on the basis of low average annual rainfall, the frequency and severity of droughts, and relatively low  proportions of irrigated land to the total cultivated area. Program districts are located throughout the country with a concentration in central and western India. They cover about 590,000 sq. km. with a population of about 66 million and an average per capita income significantly below the national average. The objective of the program is to mitigate the effects of periodic droughts in these areas by providing permanent employment, on-farm development, and improving public sector services. Accordingly, the principal elements of the program are irrigation, soil and moisture conservation, and the diver- sification of agricultural production. More than half of the expenditures under the program, so far, has been for medium and minor irrigation. The main thrust will be on development and management of irrigation resources, soil and moisture conservation, changes of cropping patterns, pasture devel- opment, better agronomic practices, livestock development, and the technolo- gical changes these activities require. 31. Funding of the program is shared equally by the Central Govern- ment and the state governments involved. The GOI budgeted a total of Rs 1 billion (US$121 million) for the four years, 1970/71 to 1973/74; almost the entire amount has now been disbursed. The budget has been increased to Rs 1.7 billion (US$206 million) in the Fifth Plan period. The funds avail- able under the program are allocated specifically for the benefit of the selected districts; they are additional to t1ie regular development assist- ance received by the states from the Center and the institutional credit allocations by Central institutions. However, financing by the Center under the program is made contingent upon the provision, district by district, of equivalent funds by the states. At the Center, the program is administered by the Department of Cooperatives and Community Development within the Min- istry of Agriculture. The state level organization varies among states, but the general pattern includes a small staff within the ministry respon- sible for rural development. At the district level, the program has been administered through the office of the Collector, the senior civil servant in the district, and by the district officers of executing state government departments. Execution of all public sector works is the responsibility of existing departments and agencies of the state governments. 32. The urgent need for relief in the selected districts during the past three years, especially in the wake of the 1972 monsoon failure, tended to lead state governments to place emphasis on employment generation in the design of program components and to ignore developmental exigencies. Exces- sive priority was given in many areas to road construction, even though at the present stage of development their contribution to drought mitigation in the concerned areas could not be considered significant. Moreover, super- vision of design and implementation of the various schemes was often inadequate, which resulted in deviations from the norms and standards imposed at the time of their formulation. 33. On the institutional side, greater emphasis is now being given to tne role ot the district administration, both in planning and coordinating program implementation. The drought problem can be tackled only on a long-term basis and the specific long-term programs needed for different districts cannot  - 10 - emerge out of overall state plans but have to be conceived to meet the needs of individual districts. At the same time, the quality of the agro- nomic and technical design of the individual schemes would have to be improved to make better use of the available land and water resources. The execution of the individual schemes will be the responsibility of appropriately staffed and equipped specialist departments in the state governments, assisted by the administration of the program at the Center, while the coordination of these various activities and the supervision of implementation schedules must be a function of the district administration. Apart from the administrative and financial arrangements, the key to the success of the program is very largely a question of introducing improved technological practices. The work under way at the newly established International Crop Research Institute for the Semi-Arid Tropics is aimed to this end, as is that of some of the 23 research centers in dryland farming all over India. Research, which has proved effective within the narrow and controlled confines of the experiment station, is only just beginning to spread. This does not mean that investments to improve the productivity of arid or semiarid areas must wait for a fully developed technology. The investment will be, in itself, a means of helping advance the critical breakthrough. These considerations have been significant in shaping the proposed project and the specific conditions associated with it. PART IV - THE PROJECT Background 34. An IDA reconnaissance mission visited India, in February 1973, to examine the possibilities of a project in the context of the Drought Prone Areas Program. Following further discussions with the GOI and the state governments concerned, a project was prepared by GOI and selected states with the assistance of the Bank's resident missionl. The project was appraised in October/November 1973; a follow-up mission completed the appraisal in 'larch 1974. A report entitled, "Appraisal of Drought Prone Areas Project," Report No. 533a-IN dated November 14, 1974, is being circulated separately to the Executive Directors. Negotiations were held in Washington, from October 18 to October 24, 1974. The Borrower was represented by Messrs. V. N. Rajagopalan, Director, Department of Economic Affairs, Mlinistry of Finance; M. A. Quraishi, Secretary to the Government of India, I!inistry of Agriculture; D. Aurora, Director (DPAP), Ministry of Agriculture; and C. H. Krishnamoorthy, Assistant Director General-cum-Project Director, Indian Council of Agricultural Research. Andhra Pradesh was represented by Mr. B. C. Gangopadhyay, Secretary, Forests and Rural Development Department; Karnataka by Mr. S. K. Hlajra, Deputy Commissioner, Bijapur District; Maharashtra by ilr. V. Subramanian, Secretary, Planning Department and Additional Development Commissioner; and Rajasthan by Mr. P. Chopra, Deputy Secretary, Agriculture (Special Schemes). A credit and project summary is given in Annex III.  The Project 35. Representing a five year "time slice" of the ongoing DPAP program, the proposed project is designed to increase and stabilize production in six districts selected from among those especially affected by the 1972 drought. These districts are: Anantapur in Andhra Pradesh; Bijapur in Karnataka; Jodhpur and Nagaur in Rajasthan; and Ahmednagar and Sholapur in Maharashtra. The range of conditions in these districts is such that there would be considerable scope for replication of successful project components elsewhere in the arid and semiarid regions of India. 36. Project activities would vary, reflecting particular district needs and resources. They would consist of public works and on-farm development and cover minor irrigation schemes, command area development, watershed management, dry farming, and sheep and dairy development. In addition, the project would include cooperative investments in calf raising, the conversion of sugarcane residues to fodder, the storage of cattle fodder for emergencies, and diversification schemes in fisheries, sericulture (raw silk production) and horticulture. Applied research and training programs included in the project would strengthen the technical support available to farmers. There would also be measures to improve the flow of agricultural credit in project districts. Finally, outsiJe the scope of IDA financing, the project would include unallocated funds to finance additional surveys, research and training during the project period (core funds), and small schemes unidentified at the time of appraisal but falling within objectives and norms of DPAP. These schemes, which will be planned at the district level in cooperation with state development departments, would provide flexibility to the project in an environment of unstable and changing conditions. 37. Since agricultural production in the project districts is seriously hampered by scarcity of water, exploitation and optimal use of what limited water sources are available is a key element of the project. In the six project districts, a total of about 1,735 wells of different types would be built, and about 2,000 pumpsets installed. Together with about 30 tanks for surface irrigation, these investments would secure agricultural production on a total of about 20,000 hectares of which about 12,000 hectares would be improved through land-leveling and construction of lined channels for water. The groundwater resources of project districts have been adequately surveyed in Rajasthan. Surveys are under way in Karnataka, and Maharashtra and Andhra Pradesh have agreed to conduct similar surveys in the project areas. Maha- rashtra, Karnataka, and Andhra Pradesh will prepare a master plan for inte- grated tank construction and command area development. 38. Watershed management would comprise soil conservation, afforestation and pasture development appropriate to each land class within a watershed. The upper reaches of most watersheds have been degraded through over-exploit- ation of forest and pasture land. Such areas would be stabilized and gradually restored through contour furrowing and pasture establishment on about 80,000 hectares of public and 10,000 hectares of private land. About 16,000 hectares  - 12 - of public land would be afforested and about 2,000 hectares of public village woodlots would be established to augment fuel supplies thus reducing the present exploitation of the existing tree and bush cover. Trees would also be established on about 12,000 hectares of woodside and boundary windbreaks providing a secondary fuel source. About 230,000 hectares of private arable lands, presently eroded because of inadequate conservation and husbandry practices, would be protected through the construction of bunds, grass-lined waterways and farm ponds. Old bunds would be repaired over a further 140,000 hectares. An advisor with experience in dryland pasture development would assist in implementing the pasture program. 39. Dry farming development under the project would be undertaken on a pilot scale, embracing about 7,500 smallholdings in each of five of the project districts. The objective would be to apply preliminary findings of the Government's All-India Coordinated Research Project for Dryland Agricul- ture, putting recommended technological and institutional adjustments to the test under actual field conditions. Innovative dryland farming practices would be introduced selectively, depending on each area's main crops and productive potential. Critical to the success of this component would be close cooperation envisaged between extension services and farmers, and the active role to be played by progressive farmers as agents of change. 40. In drought prone areas, where foodcrop production barely meets subsistence requirements, animal husbandry traditionally becomes the major source of cash income. Farmers, using public grazing lands, therefore tend to expand the stock beyond the carrying capacity of the available land, which leads to declining animal health and yields and to serious degradation of the nonarable land. The livestock component of the project would aim at increasing the productivity of selected livestock as a first step toward a reduction in total animal numbers, creating a better balance between avail- able land resources and animals. Programs for improving grasslands, cross- breeding rams, veterinary services, and improved mutton and wool marketing facilities would increase yields and earnings from sheep husbandry. It is expected that at full development about 370 societies would have been estab- lished, each of which would maintain a flock of about 400 mature sheep on about 100 hectares of enclosed common land. Dairy development would be based on village milk producer societies, in accordance with the pattern adopted for dairy development throughout India. In the six project districts, a total of about 90,000 farmers is expected to form at least 480 cooperatives, motivated and assisted by special teams trained by the National Dairy Devel- opment Board. Cooperatives involved would benefit from organized milk collection, improved veterinary services, and distribution of cattlefeed concentrates. The formation of sheep growers' and milk producers' coopera- tive societies would be essential to ensure farmer access to health and marketing services. Under an experimental scheme for crossbred dairying, farmers would sell crossbred calves to calf-rearing centers, or establish their own herds of crossbred cows. The services of an advisor would be provided to assist in the planning and setting up of nine calf-rearing centers, and would also assist in training of project staff.  - 13 - 41. In order for farmers to take full advantage of the public invest- ment provided by the project, they require credit for on-farm investments in land shaping and water supply. Short and medium-term agricultural credit would be provided principally by primary cooperative societies. Long-term credit would be provided mainly by land development banks; commercial banks have only recently ventured into agricultural lending and have yet to play a major role. The various institutional, legal and social constraints that in general impede agricultural lending in India also prevail in the project districts. Thus, the project includes measures to facilitate the expansion of agricultural credit in project districts. Programs to be started in Andhra Pradesh and Rajasthan to update land records would enable farmers to show title or rights in support of their credit applications. Farmers' Service Societies would be established and would extend credit primarily to smallholders. Liaison between district officials and credit institutions would be improved by strengthening local credit coordination committees. A survey of short-term agricultural credit requirements in project districts would be undertaken to point out problems and propose remedies. The Agricul- tural Refinance Corporation would prepare district banking plans to facilitate an expanded flow of medium and long-term credit, and would undertake the appraisal and sanctioning of proposals received from the four States for institutional financing under the project. Agricultural credit projects financed by IDA would complement the proposed project in Andhra Pradesh, Karnataka and MSaharashtra. 42. A team of agricultural economists would examine farm systems, monitor the impact of development programs and, with the knowledge thus gained, would help synthesize viable packages of technology for extension to farmers. A team of pasture agronomists would investigate methods of dryland pasture improvement and management. In addition, the Indian Council of Agriculture Research would undertake a research program in agrometeorology to establish soil moisture probabilities and relate them to crop water demand to determine the probabilities of success of different cropping patterns. Consultants in pasture agronomy and agrometeorology would be employed by GOI to assist with these programs. Project Implementation 43. In the past, DPAP schemes have often suffered from insufficient planning and too rigid adherence to common standards and criteria. Also, lack of coordination among executing development departments, which have traditionally carried out works along sectoral lines, has frustrated DPAP performance. The GOI and the states have now decided to modify and strengthen organization of the program, particularly in the districts, with a view to ensuring effective execution and coordination of program activities. 44. At the Center, the DPAP unit within the Ministry of Agriculture provides overall direction for the DPAP. It would, in particular. monitor the financial and physical performance of the project, review investment categories and norms, assist in preparation of more complex or innovative  - 14 - schemes to be financed out of unallocated core funds, and address problems related to credit constraints in all DPAP districts. Further, this unit would be responsible for training activities, coordination of the research component, and project evaluation. Recognizing the importance of these functions, the GOI is strengthening the DPAP unit with a core of senior experts in the fields of dry farming and soil conservation, irrigation, and economics. Filling of these posts with qualified candidates satisfactory to the Association would be a condition of effectiveness for the proposed credit (see Section 6.01 of the draft Development Credit Agreement). In addition, the GOI has agreed to establish an Interdepartmental Coordination Committee, under the chairmanship of the Secretary of the department concerned with DPAP. Meeting quarterly, this committee would review performance in the various subsectors of the program and ensure consistency of technical norms with those of other programs. 45. At the state level, DPAP is administered by a special cell in the department responsible for rural development. Headed by a special secretary or deputy secretary, this unit is responsible for planning, budget- ing and technical supervision. It receives, from district officers, regular reports on financial and physical performance, and monitors the execution of program works by the executing state government departments. Interdepart- mental coordination committees would include not only representatives of all state government departments concerned with the program, but representatives of the State Land Development Bank and the Apex Cooperative Bank as well. 46. The GOI and the states have decided to establish District Devel- opment Authorities (DDAs) initially in the project districts and eventually in all other DPAP districts. These DDAs will be responsible for planning, coordination and supervision of project activities, ensuring sound integra- tion of DPAP and other development programs. They will in nicst cases be chaired by the Collector withi a memberslhip consisting of diistrict level officers of development departments and representatives of local governmenc, the state legislature, commercial banks and producer cooperatives. Eacl) DDA will have a small executive staff headed by a Project Manager, wiho will be the second ranking officer of the district. It would be a condition of disbursement in each state that DDAs had been duly constituted in all project districts and that Project Managers with acceptable qualifications had been appointed there- to. (See Schedule 1, paragraph 4(c), (iii), of the draft Development Credit Agreement.) Project Costs and Financing 47. The estimated total cost of the project is US$102.7 million equivalent, including US$5.0 million in foreign exchange. The principal cost components are: minor irrigation and soil moisture conservation (US$23.0 million); forestry and pasture development (US$7.0 million); dry farming (US$1.9 million); sheep and dairy development (US$22.1 million); diversification schemes (US$1.9 million); updating land records and project management (US$1.2 million); district and central core funds (US$4.1 million),  - 15 - and technical assistance and research (US$1.3 million). The proposed project represents a five-year "time slice" of an ongoing government program. Similar to credit projects, cost estimates have been based on investment norms rather than specific locations and numbers of works, and therefore no physical contingency has been included. However, a significant price contingency provision (US$40.2 million) has been made since cost increases over the project period are expected to be such as would otherwise jeopardize realization of project objectives. 48. The GOI and the state governments would share equally the financing of DPAP activities. On-farm development and cooperative activities amounting to 30% of project cost would be financed by the farmers with credits from commercial banks and cooperative credit institutions. Public sector ex- penditures would amount to 70% of the total project cost, of which the proposed credit would cover about 50%, or 34% of the total. It is expected that about 90% of the total institutional credit requirements would be financed by cooperatives and LDBs, sources of funds for which include loans from state governments, the Reserve Bank of India, and ARC. 49. The proceeds of the proposed credit would be used exclusively for public sector investments under the project: civil works (US$9.7 million); equipment, vehicles and livestock (US$2.6 million); operating and staff expenses of project units (US$6.9 millJon); technical assistance and research (US$1.3 million); and contingencies (US$14.5 million). All the staff covered in project costs and against which disbursements would be made would be incremental during the five-year project period. Procurement and Disbursement 50. Civil works (US$10.5 million) would not be suitable for interna- tional competitive bidding because of their diverse nature, small size and scattered locations. At the option of a State, these works, except for tank construction (US$3.5 million), would either be executed by Government depart- ments possessing the necessary staff and competence, or by civil works contractors following competitive bidding advertised locally and in accord- ance with local procedures which are satisfactory to the Bank. Government contracts for the above tank construction, and government contracts for the procurement of machinery, equipment, vehicles, and livestock in excess of US$12,500 equivalent each (US$2.2 million), would also be let after competitive bidding based on local advertising. Individual procurement contracts are not expected to exceed US$20,000, bulking for international competitive bidding would not be practicable, and the local representation of international equipment suppliers is adequate for providing reasonable competition. Govern- ment contracts for machinery, equipment, vehicles and livestock worth less than US$12,500 each would be subject to the normal state government procure- ment procedures which are satisfactory to the Bank. Well-drilling rigs (US$0.3 million) would be procured on the basis of ICB in accordance with the Association's guidelines, with domestic suppliers accorded the usual prefer- ence of 15% or the rate of customs duties, whichever is the lower. Bids for imported bulls (US$0.1 million) would be solicited from at least three  - 16 - countries free from foot-and-moutlh disease. All contracts for on-farm and cooperative investments, financed by credit institutions, would be subject to the same rules for local procurement as the above public sector investments. 51. Although the cost of public investments would be shared equally by IDA and the central/state governments, pro rata disbursement item by item would not be feasible nor practicable. The proceeds of the credit would be disbursed against the c.i.f. cost of imported goods, and at the rate of 80% for goods procured locally. Disbursements for civil works would be made on the basis of 95% of total expenditures against the usual documentation sub- mitted by state governments. For irrigation tank construction, however, only 47.5% against total expenditures on each tank would be authorized by the Association for disbursement until certification by the DDA Project Manager, in the district concerned, that command area development related to that tank had started in accordance with approved plans. Thereafter full disbursement would be made. (See Schedule 1, paragraph 4(b) of the draft Development Credit Agreement). Against technical assistance and research expenditures, the Association would disburse 100% of total cost. Finally, the Association would disburse 60%/ against operating costs of DDAs and Project Implementation Units, and '100% against technical assistance and research. Benefits, Justification, and Risks 52. It is estimated that the proposed project would improve permanently the income of some 225,000 rural households, most of whom would belong to the poorest segments of the population. Taking the average household as five persons, then over 1 million people, or more thian 10% of the population of the six districts, would permaaently benefit from the project. Average annual income gains resulting from direct on-farm development would range from Rs 1,000 to 1,100 for the bunding program to over Rs 4,000 (Rs 1,000 to 55300) for tank irrigation. For dairy development, which would affect the greatest number of people, it would be median at Rs 700 (Rs 1,050 to 1,750). 53. Annual crop production would increase by about 58,000 tons, principally foodgrains and oilseeds, and substantial increases would also be realized in saleable fodder as well as milk, wool and mutton. About 85,000 man-years of short-term employment would be generated over the project period,and, in addition, about 20,000 man-years of permanent employment would be created. Measures to improve credit flow, research and training would have permanent benef-Lts as would changes in district- level planning and supervisory capacity through the establishment of district development authorities. 54. By its nature and objectives, this is not a project from which to expect significant direct recoveries of public sector outlay. However, by mitigating the impact of the future droughts, the project would reduce the need for Government-supported famine relief and thereby result in a saving of public funds. Only rough estimates of these possible savings can be made  - 17 - since the incidence and effects of drought cannot be accurately predicted. Under conservative assumptions, the saving in public expenditure would be in excess of US$5 million equivalent during the project period. 55. Furthermore, a proportion of costs would be recovered under two major components. Fifty percent of the cost of bund construction on private land would be recovered from farmers (about US$3.5 million equivalent). About 2,500 farmers benefiting from irrigation tank construction would also repay operation and maintenance costs and part of the capital cost. Because of the diversity of systems and rates of payments (water rates, betterment levy and crop cesses) it has not been possible to estimate the precise extent of capital cost recovery. However, with current practices, it is unlikely to exceed 20% and even this reflects a recent significant increase of rates. These are now kept under constant review in recognition of the need to improve the capital recovery position. Because the project's irrigation component is but one of many and represents only a small part of the irri- gation program of participating states, it has not been considered appro- priate to seek assurances that recovery rates would be further increased. 56. Economic rates of return have been calculated for the individual project components and sensitivity analyses have been carried out to appraise the possible impact of the key uncertainties bearing on these investments. The rates so calculated range from 12% for pasture development to 37% for dairy development. 57. This would be the first Bank Group operation in India specifically designed to tackle the difficult problems affecting rural development in her arid and semiarid regions. The project is largely of a pilot nature; investment components and prescriptions for rural development successfully tested in this project would, in due course, be applied elsewhere and en a larger scale. The project includes a wide range of components and involves a variety of institutions at the Center, State and District levels. The nature of the project thus reflects the complexity of rural development in India. The proper implementation and supervision of the project will require considerable effort if the objective, the improvement of agricultural productivity and economic conditions in the six participating districts, is to be realized, and if practical and economic solutions are to be developed which can be used in rural development elsewhere. Technological progress, the adoption of technological innovation, and the effectiveness of institu - tional changes now introduced in the program should have considerable impact on the return on project investments. Uncertainty about these factors and the complexity of the project impose an element of risk greater than in the case of other, more conventional projects. However, these risks should be worth taking in the interest of learning better to deal with the problems of rural backwardness and poverty, and in view of the potential impact of this project extending far beyond the immediate project area.  - 18 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 58. The draft Development Credit Agreement between India and the Association, the draft Project Agreements between the Association and the States of Andhra Pradesh, Karnataka, Maharashtra and Rajasthan, respectively, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association, and the text of a draft resolution approving the proposed Credit are being distributed to the Executive Directors separately. 59. Features of the draft Agreements of special interest are referred to in paragraphs 44, 46 and 51. The due execution and delivery of a State Project Agreement is made a condition for disbursement of proceeds of the Credit allocated to the State which is party to that Agreement, and not a condition for the effectiveness of the entire Credit (see Schedule 1, paragraph 4(c), of the Development Credit Agreement). This would prevent delays in starting the Project in any States which have satisfied this particular condition. 60. I am satisfied that the proposed Credit would comply with the Articles of Agreements of the Association. PART VI - RECOMMENDATION 61. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President by: I.P.M. Cargill Attachments November 15, 1974  ANNEX I - cm A DTA-Page 1 AREA F'P(JLATION DENSITY .772 ko277.0 dIln(mid-1 973)..bl - SOCIAL IiDIWOhlO WI? FMR 0018 MO8 12AM WMsI) f.. 110 / 90 /a 220 At 2,600 /a ratm; (pr 3? 38 .oi - L5 /o. l.2 Cruda utel rat ((P.r,h" aa 1'3 a10 d 12 11 enftt oavtalty rate (par tfaeaas iwl baLthe) 139 7. 130-no . 80 I7.5 Li Life oM*atany at birth (puara) 41 7- 50 i.8 53- !2 GIroas roraoin ae t 2.9 3.2 3.3 1.3 Np.latiae path rate ~~~~ ~~~~~~~ ~~~~~~~2.3, 2.3 /6 2.2 /8 3.0 /8 0.5 lb Papsflatiae paoth rate - urban 3/& 4 7T? 57- .7W o.s Ape struahur (porasat LI h2 4.5s .3 2( 15-62. (6 55 53 53 6 .1. $a,-d 550? 3 3 1 13. DoraScany7 ratio Li 1.0 1.2 /t,1 s1. 4n 1. jL. 0.5 / Urbe pepflatiae as peosat af tatal 18/1 20 /u 12 f I~t 78 Parity plannimng: oof aCeaptore aseoatie tea. 1,0A 7? . 175 109 Se. af usara ( of acrriad acn). .. .a S m orfarc (thoasande) 189,0(0 /0 221,000 [ Lp(.,102 / 13,20-0 ft 25,610 Po'oratape auployod in ogrioultere ;3 7- 7 633 Partantage ac-loyed .. .. a mn beemas r-1ivd by hi$eadt (9 20 fr 22 f .25 /t . 1 facnta natinal incot recoivad by Isl*est 2qi Ii 4?18 Ta It 39', Piloant a! eatianj man0QQ received by 10=st 2(1 86 7W 7W . 54 It 6 ,E Percent at national inseosreeivod by laveot 141 19 77 19 7? v 12 2f 19 2 owneid by :callct2(1at ecrarsf.. .. Q1A*WAm-qprsp g-yi .. ~~~~5,80 fno I 1,SOO 2'.',650 9.100 / 9 20 Py.lA.tice par uae4S~ p-acma 5,1,o 7W~ 5,110 8,01o 5,390 7? 311 In Population par he.sptte bod 2,600 7x- 1,620 Lx 1,720 850 77, 110 zr. For capita nalarte cppy as ofa r*q.irc=tu 689 fa 83/BI8 I 2 Par capita Protein apply, total (vcx par da 1?41 ? 30 53 7? 37 Of Wbih, an-a and pelce 19 7- 16 7?? 14ac 22 7? 57 bocth rat. 1-4. years /7 ..7 .27? 0.7 Is. /9 r har al.a orlbnst ratia 4.2 79 /an "II 112 110 OAdjuswted 7?-= .;iar sceal onraicot ratio 10 23 7i?c 1.2 45 e 72 Tooal of i.Aling previdod, first aid coon lvoal 12 12 12 10 13 Vacattnal earclaat as of so.. ashel osrollout I 6 /Ij 28 10 /ad Ai 5 Adult iter.ay rct. 11 24 /a 36 /t,-M 5.6 22 ir72 97 /f MlP.M II*. of poraa-a jar roa (urban) 2.6 fa . . . 0.? Ltiz Peresi of eeespi.d wtrOt wbthcet pijud cter .. . . /ad' Amatc he eloetrioity, (as af total yopcataati) . . 23 Porest at Rura1 populati-o oce,maated to electricity .. . .6 /a. 2M resytyre Per 1020 pcpalatiaa 5 21 111 (45 I/- 33 Fuoseansr eura per 100 ypoplation o.8 1 2 8 210 Zmatrctate y cornasuzptica (ha, p.o.) L16 III 19 229 1,164 Siosopriat nacacptls P... kg P.r year 0.2 0.3 0.2 1.8 lola 27.7 Note., Figur rotor sutor to theo latest periods or to aeoont of ooatrsoetal tcprt. AsY ealotybe oa the latest yerar. Latact periods rotor in principle to ditftrbtice bW ay cad ama af aatcel apeplati-c the yoe"s 1956-60 er 1966-70; the latest ye-ar in pria- &6 Protein stadards (raqa