India - Karnataka Dairy Development Project

.., CIRCULATING COPY \ TO BE RETURNED TO REPORTS DESK oNL DEVELOpEN DOCUMENTO l- NTERNATION DVLPE SQ1TO Not For PubUC Use Repo,t No. p-1458UN REpORT AND RE0OgE1DT OF THE pRES IDENT TO THlE EXECUTIVE DItRECTORS ON A pRopOSED CREDIT TO THE GOVERN T OF INDIA FOR TIHE KARNATAlA RY DEvELOPENT PROjCT June 3, 1974  (As at May 25, 1974) U$1.00 Rs. 7.88 Rot 1 .00 US$ 0.127 Rs . 1 mJ1ux US$ 126,904 The Ruxpee 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 hare been retained at US$1= Rs. 8.0 which was the rate prewailing at the timie of appraisal. FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECCMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KARNATAKA_/ DAIRY DEVELOPMENT PROJECT 1. *I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$30 million on standard IDA terms, to help finance a project for providing dairy processing facilities and developing an integrated dairying system in the State of Karnataka. 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 extreme difficulty of its economic conditions. India's economic policies and performance can be criticized on many counts. Some of the shortcomings have their origins in 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 Government. Governing a country divided into more than 20 States with a population of some 580 million and over 60 major languages is an extraordinary responsibility. The country's poverty and poor natural resource endowniment, 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 circumstances into account. So, also, must account be taken of two massive uncertainties which overhang India. The first is the 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. The second uncertainty is the availability of external assistance. The vast majority of bilateral aid is committed annually, usually several months after the start of the fiscal year, and with considerable uncertainties about the level of commitments and disbursements of particular donors. Any delay in IDA replenishment has an enormous impact on aid flows. Together, these considerations severely complicate planning and force a high degree of caution in foreign exchange management. - The name of the State was changed recently from Mysore to Karnataka.  -2- 4. In this perspective, the performance of the economy has been far from bad. Since the inception of economic development planning in 1950/51, national income has grown at nearly 4 percent per annum, which compares very favorably with the average annual growth rate of less than one percent during the preceding 50 years. Population has also grown faster in the past two decades than previously, but per capita income has nevertheless risen from a more or less stagnant level in the first-half of this century to achieve an average growth of roughly one percent 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 cost and has yielded results of variable quality; many industrial and agricultural 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 42 percent of national product in the early 1970s compared with around 49 percent twenty years previously. The share of output contributed by the industrial sector has increased only slowly and, partly due to the generally good performance in agriculture, since the late 1960s has remained approxi- mately constant at a level of 23 percent. There has, however, been a shift in the composition 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. One of India's most impressive achievements since the mid-1960s has been the doubling of the average growth rate of productivity in food- grain production. This has been achieved primarily through the introduc- tion of new, high-yielding seed varieties and through complementary improvements in farming practices. Nevertheless, much remains to be done to consolidate the production growth in the wheat belt and to extend it both to other areas and to other foodgrain crops, most particularly rice. Other crops have, in most cases, shown a slow but fairly constant rate of productivity increase. Irrigation has played a major part in agricultural growth and, by reducing dependence on the monsoon, has reduced variability in  -3- performance. For instance, the drought-induced decline in foodgrain output in 1972/73 was only some 6 percent, coumpared with a fall of almost 20 percent due to the drought in the mid-1960s. At present only about half the potentially irrigable area has been developed. Fuller utiliza- tion of the existing irrigation system and extension of the irrigated areas are, therefore, matters of the highest priority in order to meet India's rising food needs and to protect the econonw against the vagaries of the weather. Land which cannot be irrigated accounts for about 50 percent of the cultivable area; output from non-irrigated land will thus remain inportant and substantial benefits remain to be realized through technical change and investment. 8. Performance of the industrial sector has been variable and to some extent disappointing. Industrial growth averaged about 7 percent a year in the 1950s, rose to 9 percent in the first-half of the 1960s, but declined to scme 5 percent through 1972 and in the past three years has been negligible. The slower growth of recent years is especially worrying. To some extent it was precipitated by the severe drought of 1966 and 1967 and the accornpanying general recession. But it has also been the result of many other factors: the relatively limited opportunities for further import substitution which had from the outset been at the center of the industrialization strategy; the recurring and at times acute bottlenecks in the production of a number of key intermediate goods such as power, steel, and cement; shortages of inport.ed raw materials; and cumbersome administrative procedures. In the past year, the Government has made a number of inportant changes in the regulation and administration of the industrial licensing system, and in the recent budget for 1974/75 has made several tax concessions in order to stimulate the private sector. There are one or two promising signs that these measures may be having some effect, but it is too early to form a balanced overall judgment. 9. The gross domestic savings rate has been in the region of 14 percent for the past decade. While this compares favorably with other countries having similarly low income levels, it has fallen far short of India's resource needs. And although external assistance has been subs- tantial in absolute terms, in relation to national income it has been small, so that the gross investment rate has reached as high as 17 percent in only a few years. More recently, at a time of generally sluggish economic activity and also because of a decline in foreign assistance, the gross investment rate has been only about 14-15 percent. 10. The economy has been passing through an unusually difficult period in the past two years. On top of the stagnation of the industrial sector, agricultural production was severely set back by the drought in 1972/73. Foolstocks have been depleted and there have been severe food shortages in many parts of the country. Prices have risen to very high levels and there has been considerable political unirest. Despite the favorable monsoon in 1973 and the consequently good autumn harvest, as well as large imports in 1973/7I, the food position has remained tight. The situation has been greatly aggravated by the withholding of grain frorn the market for specula- tive and insurance reasons, induced by the prevailing climate of inflation  -4- and shortage, and by the growing realization that the 1974 spring harvest would fall short of earlier expectations. The crop shortfall has been the result of acute shortages of fertilizer and of electric power and diesel for irrigation pumping as well as poor winter rains. All these difficul- ties have meant that performance in the Fourth Plan (1969/70-1973/74) has turned out well below the targets: an aggregate growth rate of 3 percent per annum coapared with the aim of 5.7 percent, with capacity and produc- tion achievements in all the major sectors falling far short of the origiLnal goals. The growth rate of 5.5 percent in 1973/74 represented no more than a recovery from the negative growth the previous year. 11. Shortfalls in agricultural production, both of food crops and crops used for industrial raw materials, have been a prime cause of the inflation which has beset the country for the past two years. Prices have gone up as a direct result of the imbalance between supply and demand, and also indirectly because of the massive budgetary outlays, and consequent deficit financing, needed for drought relief, food subsidies, and crash production programs. The acute shortages of many intermediate and industrial commodities and more recently the surge in import prices have also contributed to the inflationary situation. Inflation is now running at an annual rate of around 25 percent, compared with only 4-5 percent a few years previously. The Government has made several attempts to reduce the rate of inflation, so far with little success. 12. The domestic economic difficulties together with the recent surge in world commodity prices have severely upset the development program. The Fifth Plan, which was published in draft last December and was due for implementation starting in 197b/75, is currently under revision, and in the interim the Government is proceeding with a substantially scaled-down pro- grain. Capital expenditure is being held down to a level which in real terms is likely to be below that last year. The thrust of the investment program is on the key sectors whose output is in critically short supply: coal, electric power, oil, non-ferrous metals, fertilizer, steel, and transport. Within the tight budget, allocations to the social sectors, most particularly education, have been cut below previous levels. In line with the Government's aim to relieve the pervasive commodity shortages and to stimulate industrial production, the 1 974/75 budget has also made a number of tax and other con- cessions to private industry. But the budget has also introduced additional taxation as well as increases in rates on transport and other public services in order to hold down the budget deficit. 13. Ever since the balance of payments crisis of the late 1950s, a shortage of foreign exchange has constituted one of the most critical con- straints on development of the economy. The recent increases in world commodity prices have added to these problems, at a time when the economy is singularly ill-placed to deal with them. Petroleum has become a very prominent item in the import bill. In 1972/73 imports of crude oil and petroleum products amounted to US$265 million, equivalent to 10 percent of merchandise imports; estimates of the corresponding figures for 1973/74 are US$625 million and 18 percent, and for 1974/75,depending on the availability of external financing and other factors, US$1,300 million and 26 percent.  In the Draft Fifth Plan the Government had already set out ambitious pro- grams of indigenous energy development in order to reduce dependence on imported oil, but these have had to be supplemented by a variety of other measures. The short-term focus is to reduce consumption, by increasing the prices of petroleum products and, more important, by converting oil- burning equipment to coal wherever possible. But there are only limited opportunities for immediately reducing petroleum consumption, and some cutback in supplies appears inevitable. Since the bulk of petroleum con- sumption is concentrated in such vital sectors as agriculture (as feedstock for fertilizer production, and as fuel for irrigation pumping and mechanised farming), goods transport, and industry, with final, private consumption accounting for no more than 10 percent of total consumption, reduced oil supplies are bound to depress overall economic production. Another emphasis of short-term policy is to remove the immediate bottlenecks on coal pro- duction and transport. For the longer term, programs are already under way to raise the efficiency of oil utilization and to step up the pace of development of coal-based fertilizer technology, of oil exploration, and of exploitation of the considerable hydroelectric resources. None of these energy adjustment measures will be easy or quick of attainment and it will be several years before results of appreciable quantitative significance will be realized. 14. The increase in oil prices is only one element in a large widening of the trade deficit. The need for large imports of food and fertilizers, at the exceptionally high prices of the past year, and the price increases in oil, steel, non-ferrous metals, and other vital imports increased the import bill by 37 percent in 1973/74. This increase was partly offset by a 14 percent increase in exports, several export items benefiting from the commodities boom, but the estimated trade gap was about US$650 million com- pared with US$50 million the year before. The outlook for 1974/75 is bleak, as the full effect of the deterioration in the terms of trade comes to be felt. Even with a severe compression of food, fertilizer, and petroleum imports and a probable decline in general maintenance imports in real terms, the total import bill could rise by a further 40 percent if prices continue at their present level. Exports promise to continue doing well, which should reduce the impact of the enlarged import bill. Nevertheless, there is a critical need for external assistance at a much higher level than the US$1,300 million last year, which was itself US$400 million r 45 percent) higher than the previous year. The Government secured 2 million tons of food aid from the USSR last year, half of which remains to be disbursed this year, and has negotiated credits from several oil-producing countries. The Government has also drawn its gold tranche and first credit tranche from the IMF. In addition, the Consortium is discussing what action is possible to help India overcome its difficulties and several members have already announced large increases in their aid programs for 1974/75.  -6- 15. As a result of substantial past borrowings, India's external public debt (disbursed only) stood at US$9.9 billion on March 31, 1973. Debt service in 1973/74 is estimated at US$700 million, equivalent to around 24 percent of export receiptsO This compares with a level of debt service of about US$200 million in the mid-1i060s. In order to mitigate the negative effects on growth of such a high burden of external debt and to forestall any danger of a foreign exchange crisis, from 1968/69 onwards the Consortium has extended debt relief to India. In 1973/74, the most recent year in which this action was taken, the amount of debt relief was about US$185 million. On the assumption that India can obtain its large, new financing requirements on appropriately soft terms, debt service is expected to grow more slowly over the rest of this decade than it did in the 1960s and should be equivalent to around 20 percent of export receipts by 1980. PART II - BANK GROUP OPERATIONS IN INDIA 16. Since 1 949, the Bank Group has made 41 loans and 59 development credits to India totalling US$1,177 million and US$2,573 million (both net of cancellation), respectively. Of these amounts, US$627 million has been repaid, and US$959 million is still undisbursed. Annex II contains a summary statement of disbursements as of April 30, 1974 and notes on the execution of ongoing projects. 17. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million, of which US$6.8 million has been repaid, US$706 million sold and US$6.3 million cancelled. Of the balance of US$21.6 million, US$14.6 million represents loans and US$7.0 million equity. A summary statement of IFO operations as of April 30, 1974, is also included in Annex II (Page 2). 18. 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 industrialization for India's future development, the Bank Group has been active in financing the expansion of output in the fertilizer sector and also, 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 fuller capacity utilization in these sectors. The Bank Group has also been active in supporting infrastructure development for power, telecammmnications, and the railways. Family planning, education, water supply development and related urban investments have also received Bank Group support in recent years.  -7- 19. 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, quick-yielding projects designed to foster agricultural production through the provision of essential inputs such as credit and on-farm investments, command area development of existing irrigation schemes or seed produc- tion form an important aspect of the Bank Group's program for the next year. Special emphasis will be given to projects benefiting small farmers and landless laborers, as in the dairy project described in 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 has been an important feature in recent years, is expected to occupy an even more prominent place in our future program; the use of coal-based technology wil1 receive particular attention. 20. The need for a substantial net transfer of external resources in support of India's ecanomy has been a recurrent theme of Bank economic reports and of the discussions with the India Consortium. The need for readily usable foreign exchange assistance is especially pressing in a time when output and investment have to be adjusted to a radically different price situation. Consequently, Bank Group lending for essential industrial raw materials and components continues to be an essential feature 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 agriculture, education, or family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects, such as the one proposed today, it is important to cover a proportion of local expenditures. 21. Of the external assistance received by India the proportion contributed by the Bank Group has grown significantly. In 1969/70 the Bank Group accounted for 34, 13 and 12 percent respectively of total ccmmitments and gross and net disbursements as compared with an estimated 35, 28 and 42 percent respectively in 1973/74t The contribution of the Bank Group is expected to continue growing. Whereas on March 31, 1973 the Bank Group's share of India's outstanding external public debt was 21 percent, by 1979 it is likely to account for about 30 percent. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1972/73 about 13 percent of India's total debt service payments were to the Bank Group.  O8 - PART III - DAIRYING IN INDIA 22. This project in Karnataka (formerly Mysore) will contribute to the development of the Indian agricultural sector, which accounts for about 40 percent of Indian GNP and enploys 70 percent of the total work force. Although GOI's emphasis in the agricultural sector in recent years has been to increase the output of foodgrains through increasing the availability of improved inputs such as seeds, fertilizers, agricultural credit and irrigation, the Government is making efforts to diversif'y agri- cultural investment, with special attention on the dairy sub-sector. over the past two decades there has been a marked decline in the per capita consumption of milk, a primary source of animal protein for the bulk of the population. Efforts are now being made to improve the situation aiming at an increase in milk production from 21 million tons in 1 972 to 30 million tons by 1979. The proposed project is the first of a series designed to make a significant contribution towards achieving this target. It is the first Bank Group project in support of the dairy/livestock sector in India. 23. A large proportion of the world's bovine population is located in India. It has 17 percent of the worlds cattle and 50 percent of its buffaloes. However, the indigenous varieties of cattle (which make-up the bulk of cattle) and buffaloes produce very low yields of milk. Their main contribution has been to provide draft power and to support a small live- stock industry which accounts for only 14 percent of the total agricultural sector's share of GNP and for about 5 percent of total exports. In order to significantly increase milk production, a large scale effort to develop higher yielding animals, together with expansion of facilities of animal health care and breeding are required. 24. The crossbreeding of indigenous cattle with exotic varieties in order to get higher yielding dairy cattle has been conducted in India for many years, but past efforts have achieved only limited success and, with one rather notable exception, have not been accompanied by adequate institutional support, effective organization of small and marginal pro- ducers (who account for the bulk of milk production) into economically viable production units, nor by development of sufficient facilities for milk collection, processing, and marketing. Nor has there been adequate provision of animal health care and technical services tofIarmers. Dairying in India remains essentially a subsidiary farm activity. Few farmers use their land principally for dairy production. Most of the milk that is marketed is produced by (i) the landless (rural and urban) who maintain mostly just one cow per household and who purchase all feeds, (ii) small farmers who grow a portion of the feed (mainly strawJ) for a herd which ranges from 1 to 5 cows, and (iii) milk colonies and cattle resettlements where large groups of animals are kept. There is also in India an acute shortage of animal feed, the major portion of which is low quality. If a significant increase in milk production is to be achieved, additional amounts of feed must be made available or an increasing amount of the available feed supply must be reserved for high producing animals. The demand for cereal grains as human food and the favorable export position of oilseeds and oilcake preclude any significant increase in the future supply of concentrate feed for livestock. Therefore, it is important to  -9- develcp animal production systems which will result in more efficient use of available supplies and to encourage development of higher quality forages, particularly by integrating fodder crops into the existing cropping pattern. 25. A notable bright spot in the Indian dairy picture is the successful experience of the Kaira District Cooperative Milk Producers Union Ltd. (AMUL). AMUL is centered on the formation and operation of hundreds of village milk producers cooperatives (a typical member owns two buffaloes and tills less than 1 ha). The village cooperatives are welded together into a cooperative Union which owns and operates facili- ties for milk and feed processing, collection and distribution and provides its members with a full range of technical services. The Union is respon- sible for setting milk prices and obligated to buy milk in any quantity from members. Thus, the fanmer is assured of a year-round outlet for his milk at fair prices. Members are provided with a package of services which includes routine veterinary health coverage, concentrate feed, fodder seed, and training. The outstanding success of the AWL experience has encouraged GOI and a number of other States to foster the establishment of similar programs in other parts of the country. Status of Dairy Development in Karnataka 26. Although its environment and experience differ considerably from Gujarat, the home State of AMUL, Karnataka is a progressive dairy state. It is foremost in crossbreeding with a total of about 100,000 cross- bred cattle. Some of the best extension and animal health services in the country are available in the State. There are nine milk processing plants and about 45 chilling centers in the major milkshed areas, of which 2 plants and 10 chilling centers are in the project area. The present project is designed to build on the foundations already laid, and to further develop the state dairy industry using AMWL as a model. PART IV - THE PROJECT 27. The project was prepared by the staff of the Animal Husbandry and Veterinary Services Department in Kaniataka along guidelines from the GOI Animal Husbandry Division of the Ministry of Agriculture. During prepara- tion, assistance was given by two Bank Group pre-appraisal/preparation missions in February/March and April/May 1973. The project was appraised in October 1973. Negotiations were held in Washington from May 13, 1974 to May 15, 1974. The Borrower was represented by Mr. G. Venkataramanan, Deputy Secretary, Department of Economic Affairs and Mr.V. K. Malik, Director, Agriculture. AIC was represented by Mr. Chidambaram, Managing Director. The State of Karnataka was represented by Mr. K. So N. Murthy, Secretary (Agriculture); Mr. P. B. Karumbiah, Director, Aniral Husbandry; and Mr. B. S. Muddappa, Project Coordinator. A report entitled "Appraisal of Dairy Development Project" (Report No. 431a-IN, dated May 21, 1974) is being circu- lated to the Executive Directors separately. A credit and project summary is attached as Annex III.  -1 0- 'e Project Description 2