India - Chambal Command Area Development Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1645-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE CHAMBAL COMMAND AREA DEVELOPMENT PROJECT (MADHYA PRADESH) June 5, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 (as at May 8, 1975) US$1.00 Rs. 8.10 Rs. 1.00 US$0.123 Rs. 1 million US$123,446 (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 were made at US$1 to Rs. 8.00, which is the short-term average exchange rate.) FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE CHAMBAL COMMAND AREA DEVELOPMENT PROJECT (MADHYA PRADESH) 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$24 million on standard IDA terms to help finance a project for command area development in the Chambal region of Madhya Pradesh. The proceeds of the credit - except for part of on-farm development works (US$1.9 million) and part of technical assistance (US$0.8 million) - would be channelled to the Government of Madhya Pradesh in accordance with the Government of India's standard terms and arrangements for the financing of State development projects. For on-farm development full package works, the Government of India (GOI) would relend US$1.9 million of the credit to the Agricultural Refinance Corporation (ARC) for 9 and 15 years at not less than 6.75% and 7.25% per annum respec- tively. ARC would in turn on-lend the funds to the Madhya Pradesh State Cooperative Land Development Bank (LDB) and to participating commercial banks in the project area at annual interest of not less than 7.5%. The LDBs and the commercial banks would relend the funds to farmers for up to 12 years at an interest rate of not less than 10.5% annually. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (691a-IN dated May 1, 1975) was distributed to the Executive Directors on May 20, 1975. 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 difficulty of its economic conditions. While India's economic policies and performance have their shortcomings, the sheer magnitude of the task facing the Government must be recognized. Governing a country divided into more than 20 States with a population of some 600 million and over 60 languages is an extraordinary responsibility. The country's poverty, supplemented by a net transfer of external resources averaging in recent years only about US$1 per head per annum, have imposed sharp limitations on the rate of growth. Account must be taken, also, of the uncertainties imposed by the erratic 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 efforts. Thus, the growth of national income has averaged a modest 4% during the past 25 years, but only about 1% during the last four years, which have included two consecutive monsoon failures -- i.e., an actual decline in per capita terms. 4. Since independence 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 al- though the distribution of income in India is relatively even by comparison with most developing countries, there has been little impact upon the living standards of the vast masses of the urban and rural population. The Govern- ment 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 re- cent years a variety of programs specifically designed to alleviate poverty. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 45% 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 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. 6. Despite the slow pace of change.and despite the undeniable magni- tude of the problems confronting her, India has the potential in a number of important fields to mount a development effort which has a reasonable chance of success in the longer run. In agriculture, as discussed in the economic report of May 1975, the particular opportunities of substantial promise for a manageable Indian food situation over the next decade are: (a) Rejuvenation of the green revolution. in wheat which has taken place in recent years in the Northwest and to a lesser extent in Bihar and West Bengal, but which has been losing momentum since about 1970. This is the result of deficiencies which can be corrected -- most importantly seed deterioration and lagging irrigation development. (b) Better use of the vast potentials that have been created by surface irrigation through more expeditious project completion and complementary land and on-farm improve- ments to ensure better management and higher productivity of water. (c) Acceleration of groundwater development, especially in the Eastern regions, which are figuratively described as "floating on water," where the untapped potential is large and where consequently there are large opportunities for  - 3 - multiple cropping, better water management and greater crop security. (d) Promotion of increased production of monsoon rice, based on improved varieties which as yet have had only modest success but which are expected, on the basis of current research, to open the way to much greater productivity over India's vast rain-fed rice producing areas during the next few years. (e) Pursuit of the promising, although somewhat less definite, potential for greater productivity in dryland cultivation and for extensive introduction of higher yielding varieties of coarse grains. Because of the difficulties likely to be encountered in the effective de- velopment of these potentials, their realization is likely to follow uneven time patterns, probably coming in bursts of expanded production as in the case of the green revolution. And, along with administrative concentration and effectiveness, they will all require provision of the supplies and serv- ices, especially fertilizer and power for irrigation, which are essential complements of the necessary technical and environmental changes. 7. The revival of agricultural success would also make an important contribution to India's perenially difficult balance of payments situation, which is frequently aggravated by the need for large food imports. From the balance of payments viewpoint, another essential ingredient for a resumption of modest growth is sustained export volume growth at consider- ably higher rates than have been achieved historically. In view of the composition of Indian exports, the momentum for such growth would have to be provided primarily by the rapid expansion of industrial exports which, in addition to easing the foreign exchange constraint, would act as an important stimulant to industrial growth -- notably absent since the mid- sixties. In the field of energy, too, there is considerable potential in the development of recently discovered oil resources and in the continued expansion of coal production. 8. It is hard, however, to conceive of the timely and effective exploitation of these various potentials unless administrative capabilities, which are overtaxed and diffused in an attempt to guide and control most economic activities, are focused on these areas. The requirement for in- dustrial export stimulation would appear to be more generous and expeditious incentives, sufficiently attractive and reliable to induce domestic producers to venture into the competitive pressures of world markets. Finally, realization of India's potential will undoubtedly also require a considerable infusion of external assistance, both to ease the payments constraints and to supplement the limited domestic resources available for development. 9. While there is thus potential for resuming the interrupted process of growth, there remains the formidable obstacle of the current difficulties facing India. The short-term problem is much the same as it appeared last  -4- year, with the important exception that the efforts made to adjust to changed circumstances and the responsiveness of aid givers to India's needs should mitigate the hardships that lie ahead. Last year began with deficient winter rains and a poor spring harvest, with one of the worst Government wheat procurement experiences on record, with a prospective balance of payments deficit of US$2.5 billion or twice as much as in the preceding year, with inflation running at an annual rate of 30% and a fiscal situation seemingly out of hand, and with serious energy and material shortages and little prospect for alleviating them through imports within the severe constraints of the balance of payments. It was hardly surprising in this situation that adjustment to immediate difficulties was the prime economic preoccupation. Growth had necessarily to take a second place to short-run exigencies in the emphasis of economic policy in this first year of the Fifth Five-Year Plan period. 10. Monetary expansion, which had been running at a rate of 15% in 1973/74, was reduced through tight credit restrictions. The burden of these restrictions was borne largely by private and Government commercial activities, without a significant reduction in the rate of increase in net bank financ- ing of the Government Budget. However, by curtailing credit to the commer- cial sector and by using net reserves (through drawings on the International Monetary Fund), the rate of monetary expansion in 1974/75 was reduced to about 6%, or less than half that of the previous year. This, in combination with some improvements in physical supply, relieved the upward pressure on prices, and there was even a small price reduction in the second half of the fiscal year. With continuing tight monetary policies, prospects are for greater price stability this year than last. 11. The food problem was probably the single most threatening element on the economic scene last year. A poor harvest and low procurement in the spring was only the start of agricultural adversities. Next was failure of the mid-year monsoon in many key agricultural areas and a monsoon (kharif) crop which fell below that of 1973 by about 5 million tons. The result was a severe shortage of domestic foodgrains for the public distribution system, with availabilities only about half of an austere level of requirements. A real food crisis was avoided, however, by imports of more than 6 million tons of foodgrains during the year ending in March 1975; this was almost twice as much as the imports of 1973/74. With these imports and with relative empha- sis on food distribution in the cities rather than the countryside, where supply conditions were presumed to be not quite so unmanageable, the threat- ening food situation was weathered, although not without hunger and privation for a great many of the rural poor who were unable to afford much of what food was available. 12. The oil situation was managed, although at double the cost for a reduced import level, by curbs on consumption and by substitution. Motor spirits were heavily taxed to reduce consumption by about 20%; factories and power plants were converted from fuel oil to coal wherever possible and supplies of fuel oil were reduced by more than 15%; coal production, after years of stagnation, was increased by about 13%, and, after a poor start,  transport managed to keep up with the additional coal in spite of serious labor troubles on the railways. There was also some improvement in the operation of the deficient power system through special efforts to raise the low capacity utilization of thermal plants and by a more systematic allo- cation of available power, with special priority for requirements of agri- cultural irrigation and fertilizer production. Power shortage has remained, nevertheless, a severe constraint on the economies of many regions. Among other critical shortages, the supply situation eased in the course of the year, especially for fertilizer, steel and non-ferrous metals. This happened in fertilizer mainly because of the policy of importing all the fertilizer available from restricted world supplies and because of lagging demand attrib- utable largely to poor weather and sharply increased prices. Steel and other metal supplies also improved during the year, with some increase in domestic production in the case of steel and also because of price resistance and uncertainty in a sluggish industrial situation. 13. Last year's balance of payments turned out to be manageable in spite of a 45% jump in the import bill. Economies in import volume helped. More important, there was also an increase of 22% in the value of exports. The main payments support, however, was an increase of about US$1 billion in external financing, made up of large drawings on the International Monetary Fund including the Fund's Oil Facility, larger aid from the India Consortium including the World Bank Group, oil purchases on credit, a million tons of wheat on loan from the USSR, and additional food aid from several other countries. With all this, in 1974/75 India had to draw on its gross reserves (US$1,416 million as of March 31, 1974) only by about US$40 million, but external debt service requirements in the medium term were increased, as were obligations to the IMF. 14. This year (1975/76) the economic situation has started more favor- ably than last year, with the expectation of a better harvest and larger procurement from the spring (rabi) crop, with easier conditions in other material supplies, and with much less inflation. The payments situation, however, is no less critical. 15. The 1975/76 trade deficit is projected at about US$2,025 million. This compares with about US$1,815 million last year, but with hardly any trade deficit at all in 1972/73, which was before India's terms of trade worsened sharply as prices of imported oil, grain, fertilizer and other es- sential goods went up. Adding to the 1975/76 trade deficit another US$800 million of payments on external obligations and taking account also of probable net invisible receipts, this year's overall balance of payments deficit seems likely to come to about US$2,635 million, or about US$160 mil- lion more than last year. These enormous deficits persist in any reasonable calculation of minimum import requirements of fuel, food, fertilizer and other essentials, for which further compression seems hardly feasible, even at the low level at which the economy is functioning. 16. Fortunately nearly half of this year's prospective deficit (about US$1,155 million) can be covered from gross disbursements of previously committed foreign aid, including just over a billion dollars of Consortium  -6- aid about evenly divided between bilateral and World Bank Group sources. Eastern Europe is expected to provide nearly all the rest, perhaps US$100 million, which is down considerably from last year in the absence of further food assistance from the USSR. All this leaves a balance of US$1,500 mil- lion to be financed from disbursements out of new aid commitments in the cur- rent year and to some extent by an inevitable drawdown of foreign exchange reserves. 17. India's external public debt outstanding and disbursed on March 31, 1974 stood at US$10.2 billion. The recent increases in external borrowing have, of course, serious implications for India's longer-term balance of payments. To highlight the crucial variables in India's longer-term payments outlook, the May 1975 economic report contains some projections of India's import capability during the 10 years following 1975/76. Broadly speaking, the conclusion which emerges is that a modest increase in India's import capability - an average of 5.2% per annum after allowing for inflation - could be achieved, provided: (i) new aid commitments in real terms (includ- ing IMF facilities and the aid provided by oil producers) remain approximately at 1974/75 levels; (ii) India's exports attain an average volume growth of about 8% between 1976/77 and 1985/86; and (iii) the bulk of new aid continues to be provided on concessional terms. Given the above assumptions, plus further assumptions about world inflation and India's export price index, the debt service ratio (expressed as a percentage of export earnings) would rise from about 19% in 1974/75 to 23% in 1979/80 and then decline slowly. 18. While there is thus a basis for cautious hope, the policy measures necessary for a sustained increase in exports do not yet seem to have been adopted by the Government. To the degree that exports fall short of the 8% growth target, India's creditworthiness will be reduced, and she will face greater difficulty in borrowing to meet a larger balance of payments deficit; the result would be slower growth throughout the economy. Thus, a con- siderably improved export performance is crucial to a successful development effort. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 44 loans and 72 development credits to India totalling US$1,437 million and US$3,404 million (both net of cancellation), respectively. Of these amounts, US$685 million has been repaid, and US$1,598 million was still undisbursed as of April 30, 1975. Annex II contains a summary statement of disbursements as of April 30, 1975, and notes on the execution of ongoing projects. 20. Since 1957, IFC has made 14 comnitments in india totalling US$51.8 million, of which US$8.4 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$29.5 million, US$22.4 mil- lion represents loans and US$7.1 million equity. A sunmary statement of IFC operations as of April 30, 1975, is also included in Annex II (page 2).  -7- 21. In recent years, the emphasis o' 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 fe,t'lizer production. Apart from investments in fertilizer plants, the Bank Group has lent support to the in- dustrial sector through its sizeable assistance to development finance institutions, in particular ICICI. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facil- itating better capacity utilization in these sectors. The Bank Group has also been active in supporting infrastructure development for power, tele- communications 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 irriga- tion schemes, fertilizer and seeds form an important aspect of the Bank Group's program for the next years. Special emphasis will be given to projects designed to increase the productivity of small farmers and landless laborers. Lending in support of infrastructure and industrial investments will focus on energy-related projects. Repeater credits for power and rail- ways 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 continue to occupy a prominent place in the future program. 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 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 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, 1974, the Bank Group share of India's outstanding external public debt was 23%, 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 1974/75 about 14% of India's total debt service payments were to the Bank Group. PART III - AGRICULTURE AND IRRIGATION IN INDIA General 25. Agriculture is the most important sector in India; it engages 70% of the labor force, has recently contributed an average of about 45% of GNP, and accounts for a major share of exports. Consequently, investments in agriculture have been given priority by GOI and the State Governments, especially since the mid-1960s, and deserve continued emphasis over the next five years. 26. Since independence, the overall growth rate of agricultural pro- duction has averaged about 3% per annum. This low overall rate of growth in the agriculture sector obscures considerable variations over shorter periods of time, between crops, and between regions. The overall rate has been very much affected by the serious droughts in 1965 and 1966 and again in 1972 and 1974. At the same time, the success of high yielding varieties of wheat produced increases in wheat production of about 20% p.a. between 1967 and 1971. Other foodgrain crops, notably rice, have not enjoyed anything like the same success, as the introduction of high yielding varieties has encountered difficulties arising from local climatic and ecological con- ditions. The effects of the green revolution, which primarily affected wheat, have been concentrated in north western India, very largely on account of the availability of irrigation in that area. 27. Despite the progress made in many aspects of food production, India's agriculture remains heavily dependent upon the weather. A major factor in reducing this dependence will be the rehabilitation and expansion of irrigation and the more effective use of existing investment in irrigation facilities. The Government is a'lso placing emphasis on the improved supply of inputs such as seeds and fertilizer, agricultural credit, and extension services. Irrigation 28. Over the first half of the twentieth century, the area under irri- gction in India increased by only about 1% p.a. to reach slightly more than  - 9 - 20 million hectares in 1950/51, or about one fifth of India's cultivated land. Out of these 20 million hectares, about half was served by major and medium irrigation works. 29. Irrigation development has appropriately received increased atten- tion since independence, and substantial resources were devoted to it through- out the four Five Year Plans. Outlays for irrigation development during the first three Plans and during the three Annual Plans 1966-69 totalled Rs 26.8 billion, and the fourth Plan allocated Rs 16 billion to irrigation. While minor surface irrigation increased only slightly from 6.4 million ha to 7.5 million ha, the area covered by major and medium systems and by ground- water utilization more than doubled to 21.4 million hectares and 16.0 million hectares respectively compared with an estimated ultimate potential for irrigation of 57 million hectares from major and medium schemes, 15 mil- lion hectares from minor surface irrigation and 35 million hectares from groundwater utilization. But of the new additional acreage of about 10 mil- lion ha under major and medium schemes, only 80% was being utilized, and much of that inefficiently. 30. The Second Irrigation Commnission of 1972 and the National Commis- sion on Agriculture, which reported in 1973, found that the under-utilization of irrigation potential was attributable to the lack of integrated develop- ment in the irrigated areas, insufficient farmer training and extension service, and lack of administrative coordination. It has been estimated that the major part of recently completed irrigation projects require additional investments of upto US$600 per ha before they can become fully productive. Accordingly, for the Fifth Plan period (1974-79) various measures have been designed to improve utilization, and a Command Area Development Department has been set up it the Ministry of Food and Agriculture to coordinate work on a list of high priority projects. 31. In view of the emergence of farm technologies dependent on effective water control - and given the substantial investment India has already made in major irrigation - the economic return on improved water delivery systems is high. Consequently, command area development has been given high priority under the Fifth Plan proposals, and a relatively large proportion of public sector investment in irrigation has been allocated for this purpose. Further funds, doubling this allocation, will be made available from institutional sources for credit. In addition, major institutional changes have been proposed affecting the coordination of services in command areas and the administration of credit. Agriculture and Irrigation in Madhya Pradesh 2 32. Madhya Pradesh, with an area of 442,800 km , is the largest State in India. It is a predominantly agricultural State, 84% of its 42 million population (in 1971) being rural. About 40% of the total area of the State is cultivated. Only 8% of the cultivated area (1.64 million ha) is irrigated; the rest depends on rainfall, which averages about 800 mm per year with 95% occurring from June to October.  - 10 - 33. Agriculture an