India - Integrated Cotton Development Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY CIRCULATING COPY TO BE RETURNED TO REPORTS DESK Report No. P-1743-I REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE INTEGRATED COTTON DEVELOPMENT PROJECT January 14, 1976 This document has a restricted distribution and my be used by reciiients only In the performance of their ofileial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as at December 8, 1975) Rs 1.00 = Paise 100 US$1.00 = Rs 8.91 Rs 1.00 = US$0.1123 Rs 1 million = US$112,250 (Prior to September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then, it has been fixed relative to a "basket" of currencies consisting of the U.S. Dollar, the Pound Sterling, the Deutsch Mark and the Japanese Yen. As all of these currencies are now floating, 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 was the short-term average at the time of pre- paration.) FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOM4ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR TEE INTEGRATED COTTON DmVELOPMENT PROJECT 1. I submit the following report and recommeniation on a proposed development credit to the Government of India (GOI) for the equivalent of US$18 million on standard IDA terms to help finance in integrated cotton development project. The proceeds of the credit wouLd be channeled in two ways. For cotton ginning, cottonseed processing aud seasonal credit facilities, funds would be channeled through the Gover ument of India (GOI) to the Agricultural Refinance and Development Corporation (ARDC). The terms of GOI's lending to ARDC would be for up to 9 years at 6.75% min-imum interest (less 0.252 for prompt payment) for refinancing seasonal credits, and for up to 15 years at 7.25% minimum (less 0.252 for prompt payment) for ginning and cottonseed processing. For civil works, equipment, technical aseistance, training and other supports to various Central and State Goverement agencies, funds would be channeled through the Government of India to various agencies, according to established Government policy, on terms prevailing at the time. 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. Country data sheets are attached as Annex I. 3. India is exceptional among the Bank Group t' member countries for its size and diversity. While India's economic policies and performance have their shortcomings, the sheer magnitude of the task facing the Gov- ernment must be recognized; the country is divided ilto more than 20 states with a population of some 600 million and over 60 languages. The country's poverty and inadequate domestic savings, together with 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 tibe to time, has a pervasive influence over the entire economy and wipen out the results of years of efforts. Thus, the annual growth of nations]l intcoe has averaged a modest 4% during the past 25 years, but only about 1% during the last four years (1971/72-1974/75), which have included two consecutive monsoon failures -- i.e., an actual decline in per capita terms. 1/ Parts I and II in this report are identical to those in the President's Report for a Power Traluission Project (Report No. P-1737-IN) dated December 30, 1975. This document has a restricted distnbution and may be used by reciiients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 2 - 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 stag- nation and possibly even decline. Despite these improvements and although 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 recent 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 improving the 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 deteriora- tion and lagging irrigation development. b. Better use of the vast potentials that have been created by surface irrigation through more expedi- tious project completion and complementary land and on-farm improvements to ensure better manage- ment and higher productivity of water.  c. Acceleration of groundwater development, especially in the Eastern regions, which are figuratively de- scribed as "floating on water," where the untapped potential is large and where consequently there are large opportunities for 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 devel- opment of these potentials, their realization is likelv 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 taupplies and services, especially fertilizer and power for irrigation, which are essential comple- ments of the necessary technical and environmental changes. 7. Greater agricultural success would also make an important contribu- tion 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 fo:r a resumption of modest growth is sustained export volume growth at coMn3iderably 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 capabili- ties, which are overtaxed and diffused in an attempt to guide and control most economic activities, are focused on these areas. The requirement for industrial export stimulation would appear to be more generous and expedi- tious 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  - 4 - 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 short-run difficulties facing India. 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 financing of the Government Budget. To this curtailment of credit to the commercial sector, there was added the deflationary influence arising from a massive trade deficit; as a result, 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 price stability this year. 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 averted, 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 priva- tion 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 marginally lower 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 alac, some improvement in the operation of the deficient power system through special efforts to raise the low capacity utilization of thermal plants and by it more systematic allo- cation of available power, with special priority for rebquirements of agri- cultural irrigation and fertilizer production. Power shortage has remained, nevertheless, a severe constraint on the economies of rnany regions. Among other critical shortages, the supply situation eased in the course of the year, especially for fertilizer, steel and non-ferrous metals. The fer- tilizer situation was brought into better balance by a combination of substantial imports and some lag in demand attributable 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 47% jump in the import bill. Economies in import volume helped. More importantly, there was also an increase of 282 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 Mone- tary 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) by only about US$50 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, though still very difficult, has started much more favorably than last year. With an excellent spring (rabi) crop, and a favorable summer monsoon, fcodgrain production is confidently predicted to achieve a record of over 110 million tons. Inflation continues to be tightly curbed, and the wholesale pric:e index for July 1975 was actually 2.1% lower than a year earlier. With gocod rains and greatly increased coal production, the power situation has improved, and the Govern- ment's expectation is of 20% growth in power generatic,n over the year. However, although the performance of several public industries has improved consider- ably, demand, particularly for consumer goods, continues to stagnate, and the Government's target of 5-6% growth is unlikely to be achieved. Industrial growth of 3-4% now appears much more likely. 15. Exports in terms of rupees rose by 15% in the first six months of 1975/76 over the corresponding period of 1974/75. Th:Ls rise reflects both the effects of exchange depreciation and significant vrolume increases. Despite a continued good export performance, the tradc deficit is likely to be as much as US$1.8 billion, compared with about US$1.7 billion last year, and hardly any trade deficit at all in 1972/73, which was before India's terms of trade worsened. 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$2.4 billion, or about the same level as 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, especially with the expected pick-up of the economy. 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 aid about evenly divided between bilateral and World Bank Group sources. Eastern Europe is expected to provide perhaps US$100 mil- lion, which is down considerably from last year in the absence of further food assistance from the USSR. India has already drawn US$240 million from this year's Oil Facility, and can reasonably expect about US$570 mil- lion from disbursements out of Consortium pledges made in June. This leaves US$600 million to be financed from other sources, including an inevitable drawdown of foreign exchange reserves, which stood at US$1,392 million at August 31, 1975. 17. To highlight the crucial variables in India's longer-term pay- ments outlook, the May 1975 economic report contains some projections, for the 10 years following 1975/76, illustrating India's debt management prob- lem. Broadly speaking, the conclusion which emerges is that a modest in- crease in India's import capability - an average of 5.2% per annum after allowing for inflation - could be achieved, provided: (a) new aid commit- ments in real terms (including IMF facilities and the aid provided by oil producers) remain approximately at 1974/75 levels, (b) India's exports attain an average volume growth of about 8% between 1976/77 and 1985/86, and (c) the bulk of new aid continues to be provided on concessional terms. Given the above assumptions, 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. India's external public debt out- standing and disbursed on March 31, 1974, stood at US$10.2 billion. 18. A considerably improved export performance, which will require policy measures to improve incentives, is crucial to a successful develop- ment effort. To the degree that exports fall short of the 8% growth target, India would not be able to increase her borrowing to meet a larger balance of payments deficit; the result would be slower growth throughout the eco- nomy. Against this background, it is encouraging that the Government is showing an increased determination to exploit India's export potential. Many measures have been announced that will make exports both more profit- able and easier to produce. For example, priority is being given to ex- porters' need for scarce raw materials; exporters will be protected against rises in the price of steel that occur after the signing of contracts; pro- duction for export beyond authorized capacity will be permitted automati- cally; cash assistance rates will be increased to take fixed costs into account; and import replenishment licenses will be liberalized.  PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 44 loans- and 75 development credits to India totaling US$1,436 million and US$3,6:15 million (both net of cancellation), respectively. Of these amounts, US$721 million has been repaid, and US$1,519 million was still undisbursed as of November 30, 1975. Annex II contains a sumary statement of disbursements as of November 30, 1975, and notes on the execution of ongoing projects. 20. Since 1957, IFC has made 14 commitments in India totaling US$51.8 million, of which US$9.6 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$27.7 million, US$21.2 mil- lion represents loans and US$6.5 million equity. A stmmary statement of IFC operations as of November 30, 1975, 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, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institu- tions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and com- ponents for selected priority sectors has been instrumental in facilitating better capacity utilization in industry. The Bank Group has also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and 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. 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, and seed production form an important aspect of the Bank Group's program for the next years. Special emphasis will be given to projects benefitting small f'armers. 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 thte Government in an effort to identify and prepare projects specifically designed to facilitate 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  - 8 - 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 com- ponent of projects tends to be especially low in such high-priority areas as agriculture, 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%, 28% and 42%, respectively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. Whereas on March 31, 1974, the Bank Group's share of India's outstanding external public debt was 23%, by 1979 it is likely to account for about 25%. Because Bank Group assistance to India is predomi- nantly 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 - COTTON PRODUCTION IN INDIA General 25. Agriculture is the dominant sector in India, accounting for about 45% of GNP and employing about 70% of the total work force. Although the Government of India's (GOI) principal objective in the agricultural sector in recent years has been to increase the output of foodgrains, it is also attempting to increase the yield and output of important cash crops such as cotton. Of about 55 million cultivators, about 13 million produce cotton. Over 5 million workers are employed in ginning, textiles and associated industries. In 1973/74, there were almost 700 fully mechanized cotton textile mills with 18.5 million spindles and over 200,000 looms, and 175,000 motorized and 3 million manually operated handlooms in the country. About 9,000 million meters of cloth were produced, and the value added from registered estab- lishments (employing 10 or more persons) was Rs 7,200 million, representing about 20% of value added in manufacturing. The contribution to export earn- ings is considerable though somewhat unstable; in 1973/74, export of cotton textiles and cloth was Rs 2,900 million or just under 12% of all exports. Cotton Cultivation 26. India plants about 25% of the world's cotton crop and produces only 8% to 10% of the world's supply. The production of about 5.8 million bales of lint (180 kg each) and 2 million tons of cottonseed on 7.7 million  -9- ha uses about 5% of the national gross cropped area and about 15% of the national labor force. Average kapas yields (cotton bolls with 35% seed and 65% lint) in India range between 350 and 400 kg, and are amongst the lowest in the world. The area, production, and yield of cotton have been stable over the past ten years. Furthermore, staple lengths produced are not in balance with the need of spinning mills. To supply its continuously expand- ing textile industry, India currently needs to import over 750,000 bales of hirsutum and barbadense types whose foreign exchange requirements are only partially offset by export of indigenous short staple cottons. Since the area under cotton cannot be expanded without prejudicing important food crop requirements, it is evident that efforts must now be devoted to in- creasing the per hectare yield. 27. About three fifths of the area under cotton in India is planted to indigenous varieties under relatively harsh and low rainfall conditions. Only one fifth of the cotton area is irrigated. Lint yields differ widely between varieties and conditions; irrigated areas average 320 kg/ha; rain- fed areas average only 68 kg/ha. Poor quality seed, including varieties with a low response to fertilizers, and inefficient plant protection are responsible for such low productivity. There is a high potential for in- creasing cotton production in India. With accelerated research to breed more suitable and higher yielding cotton varieties, provision of improved seed, more intensive use of insect and disease control services, and improved cultural practices, output can be increased substantially. Research 28. Research is supported by the Indian Council for Agricultural Research (ICAR) at about 30 field stations and 12 agricultural universities. During the last five or six years, several new varieties have been evolved. However, they do not meet all of the desired objectives. There is no improved variety adapted to the rainfed and irrigated conditions of the project states or to market demand for medium staple cotton. Additional research is needed to evolve higher yielding varieties that mature in less than 180 days, have a higher resistance to insects and diseases, and have textile qualities con- sistent with market demand. Seed 29. Less than 3% of the cotton area is planted with genetically pure seed, free from seedborne insects and diseases. The National Seeds Corpora- tion (NSC) produces and distributes less than 600 of the 150,000 tons of cot- ton seed required annually. Plant breeders at the agricultural universities are responsible for producing Breeder and Foundatior. seed of the varieties evolved and accepted for distribution to growers. However, they lack the resources to produce the quantities or quality of seed needed for improved production. Plant Protection 30. Less than 5% of the cotton area receives effective plant pro- tection. Failure to control insects is a primary cause of low yields. One  - 10 - of the major crop destroying insects, pink bollworm, carries over from one crop to the next imbedded in the cotton seed and stalks. A major component of an effective insect and disease control program would be the complete area- wide destruction of all plant residues and the application of appropriate and timely sprays. Ginning and Cottonseed Processing 31. Ginning and cottonseed processing also have a high potential for improvement. Roller and saw gins are used. Over three fourths of the roller gins are obsolete and operate without pre-cleaners. Lint processed by such equipment contains 3% to 6% unginned seeds, hulls, leaves and dirt, resulting in lower incomes to the growers and ginners. Saw gins are generally more efficient but when saws are not replaced regularly they produce lint with impurities, thus reducing market value. Cotton presses and storage facilities are also inadequate. 32. Income from cotton can be increased through more efficient cot- tonseed processing facilities. At present, of the two million tons of cot- tonseed produced annually, about 55% is fed directly to livestock, 40% is processed into cottonseed oil and cake, and 5% is used for planting. Formu- lated feed, made from deoiled cottonseed cake, would be more digestible to livestock and of a higher nutritional value. Most of the 0.8 million tons of cottonseed is processed with expeller-type equipment and procedures which do not remove the linters and hulls or heat the crushed seed to deactivate the gossypol (a toxic vegetable alkaloid pigment contained in cottonseed). The resulting cottonseed cake contains all of the linters, hulls, and gossypol and about half of the original oil. This is exported in cake form and fetches a low unit value, while vegetable oil is imported in its stead, representing an unnecessary foreign exchange outlay. Modern processing technology maximizes production of valuable by-products (linters, hulls, crude cottonseed oil, and cottonseed cake and meal). India's existing solvent plant capacity would need to be more than doubled to process the current production of vegetable oils, including cottonseed. Cotton Production in Haryana, Punjab and Maharashtra 33. The cotton area in Haryana increased from 54,000 ha in 1950/51 to 260,000 ha in 1973/74. Most of the increase was in Hissar district, from 21,000 ha to 215,000 ha. Likewise, the yield per ha increased from 508 kg kapas per hectare in 1950/51 to 865 kg/ha in 1973/74. Most of the increase was the result of adding irrigation from the Bhakra Dam system and shifting from arboreum to hirsutum varieties. Most cotton farmers own and operate their own land, with about a third of them owning under one hectare and three quarters under five hectares. Hissar district lies within the Indo- Gangetic alluvial plain with a semiarid to arid climate. The proposed project area of 110,000 ha cotton in Hissar district is irrigated. Both hirsutum (American Upland) and arboreum (indigenous) varieties are planted with seeds obtained from commercial ginners and State Government. The seed lacks assured genetic purity, freedom from insects, and acceptable germina- tion. Use of plant protection chemicals and fertilizers in the area is low.  - 11 - 34. Punjab plants about 500,000 ha of cotton, and cotton is the major irrigated kharif crop in Faridkot, Ferozepur, Bhatinds. and Sangrur districts of Punjab. These districts adjoin the Hissar district: of Haryana. Roughly one-half of the cotton area is planted with hirsutum varieties, one-half arboreums. Yields exceed 1,000 Kg/ha kapas, the highest in India. Land tenure, cultural practices, soils, climate, groundwater supply and quality in the four Punjab districts are similar to those found in Hissar. Rain- fall in Punjab is slightly more, growers have a more assured supply of irrigation water and use more fertilizers and plant protection chemicals. About 75% of all aerial spraying on cotton in India iE done in Punjab. 35. Maharashtra farmers plant about 2.8 million ha (about 37% of the national cotton area), but produce only 1.0 to 1.5 million bales of lint (only 20% to' 25% of the national production) each year. In the 50,000 ha of project area in Amraoti district, the average holdi.ng has about two hec- tares in cotton each year. Cotton is produced under rainfed conditions. Less than 2% of the area is irrigated. Rainfall averages 785 mm and is highly variable ranging from a low of 550 mm to a high of over 1,400 mm. Cotton yields are below average when rainfall is eithetr above or below normal by 20% or more. About 80% of the area is plan:ed with inferior seed obtained by growers from their cotton gin or markceter. There is no assurance of varietal purity, or viability, or freedom from insects and diseases. Plant protection is inadequate and fertilizer use is low. Cotton Ginning and Cottonseed Processing in the Projei:t Districts 36. In Sirsa (Haryana) and Puntjab, roller gins process about one third of the kapas, saw gins the balance. In Amraoti (Maharashtra), only roller gins are used. Existing gins operate without pre-cleamers and with worn-out saws. With additional production from the project, naw capacity would be required. New equipment and effective training should enhance the value of the lint. 37. Currently, only one third of the cottonseed in Sirsa is processed, with traditional expeller-type presses. In Amraoti, whilst most of the seed is processed, the quality of oil is low and the linters and hulls are wasted. Improvement of the existing processing facilities and the addition of new units would increase returns and reduce imports. PART IV - THE PROJECT 38. Exploratory discussions for a possible integrated cotton develop- ment project were held in India, in November 1972. This was followed by a preparation mission in February 1973; and subsequently in December 1973, GOI submitted a project proposal. The project was appraised in March/April 1974 and updated in April/May 1975. The rather long time taken in the preparation of this project is attributable to a number of changes which occurred in the scope and size of the project in the course of processing as well as the time required to reach agreement on methods and procedures for cotton plant  - 1 2 - protection and research components of the project. Negotiations were held in Washington from November 24 to December 2, 1975. The Borrower was represented by Messrs. Agha, Additional Secretary, Ministry of Agriculture; Arvind Pande, Deputy Secretary, DEA; C. Kempanna, Assistant Director General, ICAR; G.L. Bailur, Agricultural Production Commissioner, Haryana; Paramjit Singh, Development Commissioner, Punjab; K. Rajan, Managing Director, Maharashtra Agro-Industries Corporation; and M.A. Chidambaram, Managing Director, ARDC. A project and credit summary is attached as Annex III. Project Description 39. The project is designed to pioneer key improvements in three rep- resentative Indian cotton-growing areas; one each in Haryana and Punjab (irri- gated) and one in Maharashtra (rainfed). Total area involved would be 183,000 ha, little over 2Z of India's total planted cotton area, comprising 110,000 ha in Hissar district (Haryana), 23,000 ha in Muktsar block of Faridkot district (Punjab) and 50,000 ha in Amraoti district (Maharashtra). The project in- cludes: (i) accelerated research to breed and multiply seed of more suitable and higher yielding varieties and to devise improved cultural practices; (ii) provision of Certified seed, intensive insect and disease control, and improvement of other cotton production facilities for 120,000 cotton growers; (iii) modernization and expansion of cottonseed ginning and processing; (iv) incremental seasonal production credit to cotton growers; and (v) in- tensive training of research and extension staff, cotton growers, ginners and processors. 40. The research component, supervised by the Indian Council for Agri- cultural Research (ICAR) and executed by the agricultural universities in Haryana, Maharashtra and Punjab, would be directed towards breeding and in- troducing higher yielding, faster maturing (150-160 days) varieties resistant to insects and diseases, and with acceptable staple length and textile quali- ties. Varieties developed would be field tested under improved cultural prac- tices in the project areas. The universities concerned would be responsible for the production of Breeder and Foundation seed for multiplication into certified seed by state seed corporations and others. 41. The existing agricultural extension service in Sirsa (Haryana), Muktsar (Punjab) and Amraoti (Maharashtra) would be strengthened and trans- formed into a Cotton Development Service (CDS). It would provide growers with advice on production practices, a plant protection service to protect cotton from insects and diseases, and a marketing service. Assisted by ICAR, the universities and consultants, it would provide intensive training to ex- tension staff, cotton growers, plant protection technicians, cotton ginners, and processors. The CDS would also continue to provide extension services for non-cotton related agricultural activities in the project area. 42. In two states with larger project areas - Haryana and Maharashtra - the project would also provide replacement of saws for existing saw gins, precleaners on existing roller gins, improvement of existing gins, and new gins and presses as required to meet expanded production. Cottonseed pro- cessing facilities would be augmented by improvement and modernization in  - 13 - existing factories and by provision of new facilities through the coopera- tive system to process the cottonseed in these two st:ates. In Punjab, re- habilitation of existing gins in Faridkot district would be provided. 43. A Seasonal Credit Fund (SCF), refinanced through ARDC, would assist growers to obtain their additional credit needis for Certified seed, plant protection services, fertilizers and other production inputs. The project's compulsory requirements to use Certified seed of the designated varieties and plant protection services would, within five years, increase input costs from about Rs 1,300 per ha to Rs 2,100 per ha in Hissar, from about Rs 1,650 to Rs 2,650 per ha in Muktsar, and from about Rs 600 to Rs 1,200 per ha in Amraoti. 44. The project would provide intensive training in various activities and at various stages of the project. CDS, assisted by ICAR, the universi- ties, the Cotton Technology Research Laboratory (located in Bombay) and the consultants, would organize an intensive training program for its own staff, cotton growers, ginners, and processors. Key research and extension staff would be sent overseas for studies and practical expe.rience. To meet the immediate needs of expertise in cotton breeding, plant protection and crop management, consultants with international experience would be engaged by ICAR and assigned to the universities and CDS. Project Implementation 45. Success of this project depends on the willingness of some 120,000 farmers to accept modern improved cultural practices and plant protection methods and consequent higher investment costs involved. However, the high financial returns from such investments should providle sufficient inducement for farmers to participate in the project. The project will also provide for an effective Cotton Development Service operating in the project area and adequate input and credit facilities. Improvements in existing organizations and the creation of new ones would provide the needed management and coor- dination. These organizations should be capable of persuading the growers to accept changes voluntarily but, at the same time, legal arrangements would be required to enforce the compulsory use of Certified seed and strict plant protection methods. 46. An Integrated Cotton Development Coordinating Committee (ICDC), organized by GOI at the Center, would be responsible for overall coordina- tion of the project. It would also arrange for an independent agency to evaluate the project's overall impact. Project management and coordination at the state level would be handled by Project Management Committees (PMC) under the chairmanship of the respective Agriculture Secretaries. The ICDC and the three State PMCs have already been established. ICAR would coor- dinate and supervise the research program to be implemented by the agricultural universities in the three states - Haryana, Maharasthra, and Punjab. The agricultural universities would assist CDS to train i:ts field staff and growers. It would be a condition of effectiveness that ICAR had engaged qualified and experienced consultants in cotton breecling, plant protection and crop management to assist the Universities and CDS in project implementa- tion (see Sections 3.02 and 6.01(d) of The Development Credit Agreement).  - 14 - 47. A Project Director with the rank of Joint Director of Agriculture would manage and supervise the CDS staff and program. Each CDS, with its three wings - Extension, Plant Protection, and Marketing and Industry - would provide intensive production services to cotton growers, organize and execute the plant protection program, and assist ginners and processors to improve their operations and plan additional investments. GOI, GOH, and GOM have agreed on overall plans for the organization and operation of each CDS (see Sections 2.02 of Haryana, Punjab and Maharashtra Project Agreements). 48. The production and distribution of certified cotton seed of the recommended varieties in each state would be the responsibility of the state seed development corporations. Seed corporations have already been estab- lished in each of these three states. GOH, GOP and GOM have assured IDA that the required tonnage of certified seeds for this project would be made available through programs acceptable to IDA (Section 2.06 of Haryana, Punjab and Maharashtra Project Agreements). Seed quality would be assured through state seed certification agencies. It would be a condition of disbursement of any IDA funds under the project to Haryana that a Seeds Certification Agency be established to comply with suitable seed quality standards (Schedule 1, para 4(b)(ii) of the Development Credit Agreement). Punjab and Maharashtra each have such agencies which, however would need further strengthening. It is expected that IDA will consider financing production and distribution of certified seeds by the State Seed Corporations under a proposed National Seeds project expected to be presented to the Board later in this fiscal year. This latter project would also make provision for strengthening of seed certification agencies. 49. Government regulations would be formulated under the existing laws to: (i) specify variety (varieties) of cotton that can be planted in the specified CDS areas; (ii) require compulsory plant protection in the speci- fied areas; (iii) prohibit blending of different varieties of kapas before and during ginning and baling, and require appropriate identification and labeling; and (iv) control the movement and utilization of cottonseed into and within a notified area. GOH, GOP and GOM have agreed that the actions described above would be taken (Section 2.08 of the Haryana, Punjab and Maharashtra Project Agreements). 50. ADRC would be responsible for refinancing loans made by commercial banks for ginning and processing facilities, and for seasonal credit to growers. Most cotton and cottonseed processing improvement loans would be made to existing private firms and cooperatives. It is expected that all new plants in the project areas will be owned by cooperatives. These organi- zations will present their proposals to ARDC for assessment before formal- izing loan applications under the project. 51. The Seasonal Credit Fund (SCF) would finance the full incremental seasonal inputs required by cotton growers in the project areas, over and above those currently obtainable from existing institutional sources. The SCF would be a revolving fund and is estimated to reach a maximum of Rs 92 million by the end of the disbursement period. It is estimated that the  - 15 - number of farmers availing themselves of this credit facility would increase from the present 35% to about 65% of those in the prcject areas, while about 30% would finance the package of inputs from their own resources. ARDC will oversee the SCF operations. An estimated 5% of the growers would not be eligible for SCF financing and would be unable to obt:ain funds elsewhere, although they would be required to use the compulsory seed and plant protect- ion inputs. GOH, GOP and GOM intend to supply certified seed and plant protection services in such cases and recover the cooits through Land Revenue charges. Project Cost and Financing 52. The total project cost of US$36 million equivalent includes US$13 million equivalent (36%) in foreign exchange. The proposed Credit of US$18 million would finance 50% of project costs :Lncluding the whole of foreign exchange costs plus $5 million of local costs. About 22% of IDA credit would support the costs of research and CDS through the Government agencies, and 38% would finance growers' incremental input needs, while the rest would supply 75% of ARDC refinancing for ginning and processing. The remaining local costs would be financed by Central and State Governments, ARDC, local lending agencies and ultimate borrowers. Details of cost estimates and financing are given in Annex III. 53. The IDA proceeds under the project would be applied as follows: (a) US$2.5 million - Civil works and equipment for ICAR, the universities, and CDS; (b) US$0.8 million - Consultancy services and overseas training; (c) US$5.4 million - Loans for cotton ginnery and cottonseed processing investments; (d) US$7.5 million - Seasonal Credit Fund; and (e) US$1.8 million - Unallocated contingencies. 54. IDA funds for investments in civil works and equipment for ICAR, the universities and CDS, and for consultancy services and training would be channeled from GOI to ICAR or to the state governments concerned. The IDA proceeds for cotton ginnery and seed processing facilities, and the seasonal credit fund, would be channeled from GOI to ARDC. ARDC would refinance loans made by local banks. The terms of GOI's lending to ARDC would be for up to 9 years at 6.75% minimum interest (less 0.25% for prompt payment) for refinancing seasonal credits, and for up to 15 years at 7.25% minimum (less 0.25% for prompt payment) for ginning and cotton- seed processing. For civil works, equipment, technical assistance, training and other supports to various Central and State Government agencies, funds would be channeled through the Government of India to various agencies,  - 16 - according to the established Government policy, on terms prevailing at the time. The ultimate borrowers for ginnery and cottonseed processing will receive up to 75% of the equipment and civil works at a rate not less than 11% per annum for a period not exceeding 15 years. The cotton growers will be lent at a rate not less than 11% per annum and for periods not exceeding 10 months. Details of these arrangements and terms are specified in Annex III. Procurement and Disbursement 55. Civil works and equipment, amounting to about US$5 million for the various government agencies, would be procured through local competitive bidding procedures which have been reviewed by IDA and are satisfactory. The civil works involved are small and scattered, and phased over five years. The equipment would be procured over five years by a dozen different gov- ernment agencies, and consists of hundreds of small items including spares. There is adequate availability of the items required and satisfactory com- petition, including representation of foreign suppliers by local agents. GOI would advise IDA (for prior review and comment) of the bidding and eval- uation procedures to be used for civil works and bulked equipment orders expected to exceed US$50,000 before tariff duties and taxes. IDA would also be kept informed of procurement procedures used for all civil works and equipment orders below US$50,000. 56. Contracts for civil works and equipment for individual ginners and cottonseed processors (totalling about US$12 million) would be awarded under local competitive bidding procedures that would be supervised by ARDC. The procedures would be sent to IDA for review and comment. In every case where an individual loan exceeded US$500,000, ARDC would provide IDA with the in- vestment feasibility report, including procurement proposals, for prior review and comment. International competitive bidding would not be suita- ble because the borrowers' main equipment need would require compatibility with existing installations, and prompt and effective after sales service (including training, maintenance and spares) that only a domestically based supplier can provide adequately. Both foreign and local manufacturers are represented by local agents, and competition is satisfactory. 57. As is customary in the case of agricultural credit operations, international competitive bidding procedures would not be suitable for loans from SCF to finance production inputs. Such loans would be advanced to individual cotton growers and in small amounts. Growers would use the proceeds to buy Certified seed supplied to retailers by the state seed corporations, to pay for plant protection services and to purchase other inputs from local sources, where there is a reasonable choice at competitive prices. About US$10 million would be available through SCF for these purposes. 58. IDA disbursements would be as follows: (i) 50% of the cost of civil works and equipment incurred by ICAR, the universities and CDS; (ii) 100% of costs of consultants and overseas training; (iii) 75% of ARDC disbursements for loans to ginners and processors; and (iv) 75% of ARDC  - 17 - disbursements made through SCF. Disbursements under (iii) and (iv) would be made against certification by ARDC, documents of *,hich would be available for inspection by IDA during project supervision. Economic Benefits and Risks 59. Major benefits would accrue through increa&3ed yields arising from higher-yielding seeds, improved plant protection, better access to growers' credit, and increased ginning and processing efficienicy. The integrated cotton production package is expected to increase cotton yields from the current 900 to 1,600 kg/ha in Hissar, from 1,250 to 2,000 kg/ha in Muktsar (Punjab), and from 320 to 560 kg/ha in Amraoti in five years. The incre- mental increase in output over twenty years would be about 0.8 million tons of higher quality lint and 1.5 million tons of cottouseed with a gross value of about US$750 million. Agricultural beneficiaries would include about 120,000 farm families and 200,000 landless laborers, the vast majority of whom are from very low-income families, engaged in th1e production and har- vesting of cotton. An additional 2,000 jobs would be created in marketing and processing. An estimated 65% of the additional farm and industry employ- ment created by the project would benefit the lower 40% of India's income earners. 60. Investments in the improvement and expansion of the project area cotton ginning industry would increase the value of Lint ginned by about Rs 560 (US$70) per ton. Investments in the cottonseed industry would enable the conversion of 1.5 million tons of seed into higher quality by-products. All of the edible oil recovered, about 250,000 tons valued at US$250 million (1980 price estimate), would substitute for imports. The recovery of linters, hulls and cottonseed meal would provide valuable by- products currently wasted. 61. The economic rate of return ranges from 10% for ginners and 34% for cottonseed processing plants to rates over 100 percent for the on-farm plus extension and research investments. The weighted average rate of return for the whole project is also over 100 percent. However, there is a larger element of risk in this project than is usual. This is because of (a) the difficulties of having some 120,000 cotton growing in the project area make compulsory nse of a specific cotton variety and plant protection measures and (b) the high sensitivity of the project to any situation adversely affecting cotton yields and revenues, such as weather, failure to control pests and diseases effectively, or low prices. Nevertheless, if the long- standing stagnation in cotton production in India is to be broken, the benefits to be obtained from a successful project justlfy the risks, con- sidering that the research, techniques and institutions pioneered under it (on little over 2% of India's cotton area) could then be extended to other areas.  - 18 - PART V - LEGAL INSTRUMIENTS AND AUTHORITY 62. The draft Development Credit Agreement between India and the Asso- ciation, the draft Project Agreements between the Association and the States of Haryana, Maharashtra and Punjab, the draft ARDC Agreement between the Association and Agricultural Refinance and Development Corporation, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement, and the text of a draft Resolution approving the proposed development credit are being distributed to the Executive Directors separately. 63. Features of the draft agreement of special interest are referred to in paragraphs 46, 47, 48 and 49 of this report. 64. 1 am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 65. I recommend that the Executive Directors approve the proposed credit. Robert S. 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