India - Seventh Telecommunications Project

Document of } jL E g0P V The World Bank FOR OFFICIAL USE ONLY Report No. P-2334-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR A SEVENTH TELECOMMUNICATIONS PROJECT May 26, 1978 This document has a restricted distribution and may be used by reciplents only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of May 15, 1978) Rs 1 = Paise 100 US$1.00 = Rs 8.51 Rs 1.00 = US$0.1175 Rs 1 million = US$117,500 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the U.S. Dollar/Rupee ex- change rate is subject to change. Conversions in the Appraisal Report were made at US$l to Rs 8.60, which represents the projected exchange rate over the disbursement period). FISCAL YEAR April 1 - March 31 LIST OF ABBREVIATIONS AND ACRONYMS USED IN THIS REPORT DEL - Direct Exchange Line GOI - Government of India HCL - Hindustan Cables Limited HTL - Hindustan Teleprinters Limited ITI - Indian Telephone Industries Limited OCS - Overseas Communications Service OYT - Own Your Telephone PCO - Public Call Office P&T - Posts and Telegraphs Department  FOR OFFICIAL USE ONLY INDIA SEVENTH TELECOMMUNICATIONS PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiaries: Posts and Telegraphs Department (P&T); Indian Telephone Industries Ltd. (ITI); Hindustan Cable Ltd. (HCL); and Hindustan Teleprinters Ltd. (HTL). Amount: US$120 million Terms: 20 years including three years of grace with interest at 7.5% p.a.. Relending Terms: For P&T sub-project: Government of India (GOI) would channel the proceeds as GOI's capital-at- charge to P&T, in accordance with its standard arrangements for financing telecommunications development. P&T pays a dividend on the total capital-at-charge at a rate determined by GOI, currently 6% per annum. For Factories sub-projects: India to ITI, HCL, and HiTL: at an interest rate of not less than 10.25% per annum, minimum, over fifteen years including three years grace. GOI to carry exchange risks. Project Description: The project comprises four subprojects. The main sub-project is a priority component of the P&T Tele- commuanication Branch's investment program for three years (April 1, 1978 to March 31, 1981). It will result in a significant extension of the present tele- commanications network into rural areas of India with the provision of an additional 7,500 rural Public Call Offices (PCOs), and 260,000 new direct exchange lines (DELs) the majority of which will be in the rural areas. It includes the expansion of the trunk and telex networks and imported equipment for the Telecom- munications Research Center and the Training and Technical and Development Circles. The three other This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 11 - subprojects are concerned with upgrading and modernizing the production facilities of the three major government- owned telecommunications equipment manufacturers, Indian Telephone Industries Ltd. (ITI), Hindustan Cables Ltd. (HCL) and Hindustan Teleprinters Ltd. (HTL). They comprise provision of replacement machinery in the production and tool-making units and addition of modern testing and measuring equipment to replace and supplement obsolete and inadequate existing equipment. There are no special risks. Estimated Cost: US$ million Subprojects Foreign Local Total P&T 95.1 553.9 649.0 ITI 8.4 11.0 19.4 HCL 9.0 7.6 16.6 HTL 2.0 1.5 3.5 Sub-total 114.5 574.0 688.5 Contingencies 18.4 111.6 130.0 Total 132.9 685.6 818.5 Financing Plan: US$ million Local Foreign Total Bank - 120 120 P&T 662 10 672 ITI 13 - 13 HCL 9 3 12 HTL 2 - 2 Total 686 133 819 Estimated $ Millions Disbursements: 1979 1980 1981 Bank FY Annual 54 42 24 Cumulative 54 96 120 Rate of Return: 20% Staff Appraisal Report: Report No. 2030a-IN, dated May 26, 1978.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FiDR A SEVENTH TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed loan to India of an amount equivalent to US$120 million to help finance a seventh telecommunications project. The loan would have a term of 20 years, including 3 years grace, with interest at 7.50% per annum. The proceeds of the loan would be channeled in two ways. The bulk of the loan amount (US$100 million) would be channeled to the Posts and Telegraphs (P&T) Department as part of GOI's capital-at-charge, in accordance with the Government of India's (GOI's) standard arrangements for financing telecommunications development. P&T pays a dividend on total capital-at-charge at a rate fixed by GOI, currently at 6% per annum. The balance (US$20 million) would be relent to the public sector companies participating in the Project, at interest no less than 10.25% per annum for 15 years including three years grace. The exchange risk would be borne by GOI. PART I - THE ECONOMY I/ 2. An economic report, "Economic Situation and Prospects of India" (2008-IN dated April 17, 1978), was distributed to the Executive Directors on April 18, 1978. Country data sheets are attached as Annex I. Background 3. India is a vast, continental country with over twenty States divided on linguistic and ethnic grounds with a population of over 620 million people, almost as many as live in Africa and Latin America combined. It has a dual economy. While 79% of its population lives in rural areas their productivity is low. Agriculture's shaLre in value added declined only gradually from about 50% to 43% over the last twenty years. The share of manufacturing has in- creased slowly and, since the late 1960s, has remained approximately constant at about 16%. Industry has a highly diversified structure with import substi- tution and self-sufficiency pushed to the point where India has the capacity to produce virtually every type of consumer and capital good required for a modern economy. As in theb case of many other large economies, the foreign sector plays a relatively minor role; both exports and imports represent about 7% of GDP; foreign saving has supplied only about 5% of gross investment in the recent past. 4. Even though growth has been slow in the past, the economy enjoys many of the prerequisites for sustaining faster growth and development. Although literacy is far from universal, India has large resources of well trained 1/ Parts I and II of this report are identical to the corresponding parts in the President's Report (No. P-2149-IN) on the Second National Seed Project, dated May 17, 1978.  - 2 - administrative, scientific and technical manpower and a dynamic entrepreneural class. Per capita consumption of commercial energy is low by international comparison and power shortages are a way of life; but India is relatively well- placed with regard to primary fuel sources. There are very large reserves of coal and nuclear ores, and considerable hydro-electric potential. Recent petroleum and gas discoveries have begun to be exploited and prospects are bright for further discoveries. The basic elements of the infrastructure needed to serve the economy have been established; in absolute terms the irrigation, railway, telecommunication, road and power systems are each among the largest in the developing, and in some cases the developed, world. However, considerable gaps remain as the situation varies greatly from state to state. 5. Given the size of India's population, its annual increase of 13 mil- lion people is such as to absorb a large portion of any provision to increase standards of living. It is not possible to discern any significant increase in the incomes of the vast mass of the rural and urban poor, who number 200 million with a per capita income of US$70 per annum or less. Although food- grain production may be persistently underestimated, there has been no perma- nent increase in per capita foodgrain consumption recorded in aggregate statistics since 1960/61. Many years after the initial target, primary educa- tion is still not universal. The labor force has grown faster than employment and a considerable backlog of unemployed exists. Nevertheless, there has been progress, with per capita income increasing on trend 1%-1.5% per annum; birth rates falling to below 37 per thousand from levels of 45-50 per thousand at the start of the 1950's; life expectancy increasing from about 32 years in the 1940's to 45-50 years in the 1970's; school enrollment rising from 32% to 65% of children in primary school ages and from 5% to 29% of children in secondary school ages since 1950/51. 6. The rate of growth of GDP has been 3.5% per annum over the period since Independence and 2.8% per annum over the period 1969/70 to 1976/77. These low rates of growth are only partly due to low availability of inves- tible resources, although there have been times that foreign exchange was a severe bottleneck. The net transfer of resources from abroad has never been above 3% of GDP and fell to as little as 0.8% between 1969/70 and 1973/74. India's saving effort has grown steadily since the beginning of planning in 1951, when it was 9% of GDP, to its recent level of 20% of GDP, which compares well with other countries' saving performance at the same level of per capita incomes. Despite a doubling in the rate of investment, from about 10% of GDP in the early 1950's to about 20% at present, the trend rate of GDP growth has not increased. This marks a decline in the efficiency of capital use which transcends fluctuations due to weather, war or international terms of trade shifts. Recent Trends 7. In many respects economic conditions during the last three years have been significantly different from those prevailing in previous years. In the late 1960's and early 1970's, the economy faced several shortages-- foodgrains, agricultural and industrial inputs and foreign exchange--which retarded production and investment and often led to price increases. An  adverse shift in terms of trade starting with the oil price hike in 1973 and continuing with the foodgrain and fertilizer price rises in the following year greatly increased the cost of acquiring these essential commodities abroad. These external shocks combined with a spate of bad weather played havoc with the economy through 1974/75, causing slow growth in production and investment and a record level of inflation. 8. Since the excellent monsoon in the summer of 1975, a new situation has arisen. The period 1975 to 1978 has been characterized by much greater price stability, enhanced agricultural and industrial output and comfortable foodgrain and foreign exchange reserves. The new situation was a combined result of domestic policies and fortuitous circumstances. The increase in foodgrain stocks was only in part due to improved policies and programs. The more decisive factor has been the three good-to-excellent monsoons coming on top of substantial foodgrain imports in 1975 and 1976. Industrial output increased on average by 7% a year in 1975-1978 compared to 3% in 1970-75, due to greater power availability, better management in the public sector, improved labor relations, better transport and some increase in demand derived from increased incomes due to improved harvests, greater exports and higher levels of public investment. The most dramatic turnaround ocurred in the balance of payments, with a sharp real reduction in the import bill helped by good harvests and increased domestic production in iron and steel, fertilizer and oil, which reduced demand for imports. The supply of foreign exchange was also greatly increased by a significant step-up in the volume of exports, an increase in foreign aid and a substantial jump in remittances from Indians working in the Middle East, Europe and America. 9. In 1977/78, the growth of GDP was about 5%, a recovery over the rate of 1.6% in 1976/77 but less than the 8.5% reached two years earlier. Prices, which had been rising during 1976/77 after a decline in 1975/76, were stabilized; wholesale prices at the end of March 1978 stood at about the same level as in March 1977, and the yearly average was only 5.4% above that of the previous year. Exports in 1977/78 are estimated at US$6.4 billion and imports at US$6.6 billion. The inflow of invisibles from abroad at US$1.4 billion and net aid disbursements of US$1.2 billion more than offset the small trade deficit of US$200 million and IMF repurchases of US$330 million to in- crease reserves by US$2.1 billion to US$5.8 billion by end of March 1978. 10. The 1977/78 foodgrain crop may exceed the 1975/76 record level of 121 million tons due to very good weather and increased input use. Support purchases could result in peak foodgrain stocks as high or even higher than in 1977, when they were 21 million tons. In addition to ample and evenly distributed rainfall, more intensive and widespread use of three crucial inputs--irrigation water, fertilizer and extension advice--contributed to the bumper harvest. Fertilizer consumption surged 30% in 1977/78, continuing its recovery from the depressed level of 1974/75. Annual additions to irri- gated area have been on average of 2 million hectares since 1975/76 compared with 1.3 million hectares per annum achieved from 1969 to 1975. An improved extension system, which has been getting heartening results, has been intro- duced in several states and is slated for further coverage.  -4- Development Prospects 11. India faces the future with large stocks of foodgrains, high and rising external reserves, excellent rabi crop expectations, price stability and good prospects for sustaining the improved supply of foreign exchange. The circumstances present a great opportunity for further promoting the devel- opment of the Indian economy. The Draft Five Year Plan for 1978-83, discussed though not yet approved by the National Development Council, responds to this challenge by projecting a rapid growth in real terms of both overall investment and public plan expenditures. Investment is to rise on average by 10.7% per annum and the economy is expected to grow on average by 4.7% per annum during the years 1978-83. 12. The new Draft Plan reveals an intention to reorient the country's development towards improving the living conditions of the poor. This is reflected in its principal objectives: (i) the removal of unemployment and significant underemployment; (ii) an appreciable rise in the standard of living of the poorest sections; and (iii) the provision of basic needs to low income groups. To achieve these objectives, the Government proposes to emphasize agricultural development, cottage and small scale industries, area planning for integrated rural development and the provision of minimum needs. As a first step towards complete removal of unemployment, the Plan envisages the creation of a large number of new jobs through a considerable expansion of construction activity as well as a boost in the consumption levels of the poor--which in turn would require the production of the necessary wage goods, largely in small-scale, labor-intensive units. Specific programs to achieve these objectives are still in the making. 13. In order to achieve a sizable rise in the income of the poorest classes of society, the Draft Plan--in conformity with the Janata Party policy-- places prime emphasis on the development of rural areas. A major impulse for agricultural development will be provided by the expansion of irrigation and related agricultural inputs, such as fertilizers and better farming techniques. The Draft Plan argues that efforts to increase productivity should be sup- plemented by measures with a redistributive impact such as supporting small farmers and small industry with institutional credit and material supplies and assistance for marketing. The Draft Plan also intends to complement the creation of employment and the increase in rural productivity by providing basic services to those groups which have so far been unaffected. For this purpose, the minimum needs program launched at the onset of the Fifth Plan is being revitalized and accelerated. 14. The allocation of the Draft Plan outlay for the next five years reflects these priorities. Out of a total expected spending of US$81 billion, US$35 billion--43%--have been earmarked for rural development programs includ- ing agriculture, irrigation, fertilizer and social infrastructure expenditures directly benefitting the rural areas. The share of these sectors amounted to 37% during the Fifth Plan period and to 40% in the Annual Plan for 1978-79. It can thus be expected to rise further during the next four years. Similarly, spending on the minimum needs program in 1978-83 will absorb 6% of the plan resources, as compared to less than 3% in the Fifth plan. On the other hand, the shares of industry and of transport and communication have been reduced.  - 5 - 15. There is considerable scope for stepping up growth in agriculture. The most promising development is the sharp increase in government outlays and improved project implementation for irrigation. There are also indica- tions that private investment in tubewells is picking up again after a slump in the early 19'9's. Other favorable indicators include the spread of an improved system of extension to more states and the recovery of fertilizer demand. With regard to more productive use of existing capacity, there is an increased awareness in the Government that the benefits of irrigation projects can be much increased not only through command area development, but also through improved design standards in major surface irrigation infrastructure. Nevertheless, comprehensive improvement in water management remains a distant goal, particularly in existing systems and where farms are small and frag- mented. The bulk of the increase in private tubewell development in the last few years has come from the Eastern Region, where more and more farmers are sinking wells to enable them to grow a winter crop of wheat in addition to providing better water control for the summer rice crop. Improved water man- agement would make such investments even more productive. Increased farmer incomes from the recent good harvests, somewhat lower fertilizer prices and grain prices supported at incentive levels have encouraged farmers to apply considerably more fertilizer. Finally, the reorganized and improved extension and research system which has been introduced recently in several states in northern and eastern India holds out the hope that sound advice will reach many more farmers in both irrigated and rainfed areas and will raise their productivity significantly. The improved extension system is an excellent example of how the growth effort can and must be structured so as to increase the incomes of small and marginal farmers, who work 25% of the cultivated land and account for somewhat more than 25% of production; more importantly, these farmers make up about 70% of the rural population and constitute the majority of those living below the poverty level in India. 16. Industrial prospects are somewhat more difficult to discern. Moderate growth in 1977/78 after an excellent year in 1976/77 suggests the persistence of problems plaguing the sector since the mid 1960's--large unutilized capacity, stagnant capital formation in the private sector and low productivity growth. Lower investment than expected, of course, is one of the reasons for low capacity utilization in capital goods industries, which make up a significant portion of the sector. Low buoyancy of demand for industrial products from all sources--not only from investments but also from agriculture, exports and import substitution--has been a basic constraint. Further import substitution cannot be a major source of growth for manufac- tured goods in the future because most opportunities for efficient import substitution have been exploited. Higher effective demand from increased growth of real incomes froim greater productivity in both agriculture and manufacturing, sustained increases in exports and increased investment, particularly from the public sector, all can raise demand for industrial production. 17. The new industrial policy of the Janata government and the orienta- tion of the Draft Five-Year Plan emphasize small scale industry over heavy industry and have accordingly promoted such measures as product reservation, credit rationing, and, within the small scale sector, plans to initiate special efforts for the growth of the "tiny" sector. While the priority accorded to  - 6 - the small scale sector is laudable, there are doubts about the efficacy of the policy measures chosen. Past experience indicates that other factors are also crucial to its development, particularly effective demand, quality control, prices and marketing techniques. Some small scale industry is cap- ital intensive and not well suited to as rapid employment generation as is hoped; nor can all goods be efficiently produced using small scale technology. 18. India's population growth rate of about 2% is not high in comparison with that of most developing countries. Moreover, the rate is on the decline, after growing steadily census to census from 1920 through 1970, both because the birth rate continues to fall and because mortality will not fall as steeply as in the past. Family planning acceptor rates slowed down in the wake of the abandonment of the 1976 population policy after the 1977 general elections and the momentum of the program has yet to be recaptured, particu- larly in Northern India. However, the new Government has reaffirmed its com- mitment to a voluntary family planning program and has budgeted the resources to carry it out. Over the longer term, with a sustained family planning effort, it should be possible to bring the birth rate down from its 1970-75 level of about 37 per thousand to about 23 thousand to the end of the century, implying a population growth rate somewhat under 1.1%. Our "best guess" pro- jection of India's population in the year 2000 is 885 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century; the decline in fertility will, however, bring about an earlier change in the age structure of the population. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and secondary education systems. However, the labor force will continue to grow at a faster rate -- 2.5% per annum -- until well into the 1990's, result- ing in an increasing proportion of the population in the labor force from 40.8% to 45% in 1991. 19. The government's goal to eliminate unemployment in 10 years implies an expansion of the number of jobs at the rate of 9 million per annum -- 7 million new entrants to the labor force and the absorption of 2 million or so formerly unemployed. The majority of these will have to continue to be absorbed -- judging from the prevailing composition of the labor force -- in agriculture and the unorganized small scale sector. The absorptive capacity of the modern organized sector is unfortunately low; its employment elasticity is expected to be no more than 0.5. Given its low current share of output, even rapid growth of this sector would not make much of a dent in the backlog of the unemployed. Employment in the organized sector has been growing at about 2.2% per annum in the past ten years, less than the labor force growth rate, and all of this in the public sector. Private sector employment has not grown at all since 1966. While the labor absorption elasticities of the small scale sector may be higher in some cases than that of the large scale sector, a major effort to expand production must succeed before an appreciable employ- ment impact will materialize. 20. In the short run India's balance of payments should not be a con- straint on growth and development in the next few years. With good medium- term prospects for India's exports, the expected continuation of growth in invisible receipts and the potential for an increase in net aid disbursments,  the net availability of foreign exchange to finance merchandise imports is projected to rise over the next five years, in current prices, from US$8.7 billion in 1977/78 to US$16.7 billion in 1982/83, an average of 14% per annum. Given the unlikely need to increase rapidly imports of some traditionally important items -- e.g., petroleum, fertilizer, foodgrains, edible oil and cotton -- other imports can increase at the rate of 20% a year over the next five years. 21. Altogether, these currently favorable circumstances present the opportunity to double India's trend rate of growth of per capita income from the average annual rate of 1.5% that prevailed for the last thirty years to 3% over the next five, and thereafter. This requires a continued fall in the rate of population growth to below 2% per annum and a rise in the growth of GDP from the historical rate of 3.5% to 5.0% per annum. Both of these targets are within reach. The first should be achieved barring a total abandonment of the family planning program. The second requires improved efficiency and increased investment by both the public and private sectors; it also means more fully harnessing the gains from trade through international specializa- tion implying a strong export effort and continued easier access to imports. In addition to enabling a faster rate of per capita income growth, the present situation allows for increasing the coverage of the population's minimum needs. This requires formulating and administering effective, efficient programs of public investment and, of course, requires larger public outlays. 22. With the enhanced resources at India's disposal, the economy is poised for a higher rate of economic growth. The Government is moving to take advantage of this opportunity with increased public expenditure envi- sioned over the next five years, and the liberalized trade policies recently announced. It is yet too early to know whether the moves made so far will be sufficient to achieve the desired targets or whether additional steps will be necessary. Assured international support for India's development effort will be an important factor in moving the Government to take greater risks in pursuing a dynamic development program directed at meeting the huge needs of its large and impoverished population. PART II - BANK GROUP OPERATIONS IN INDIA 23. Since 1949, the Bank Group has made 53 loans and 97 development credits to India totalling US$2,013 million and US$4,934 million (both net of cancellation), respectively. Of these amounts, US$890 million has been repaid, and US$2,120 million was still undisbursed as of March 31, 1978. Annex II contains a summary statement of disbursements as of March 31, 1978, and notes on the execution of ongoing projects. 24. Since 1957, IFC hbas made 14 commitments in India totalling US$58.4 million, of which US$14.5 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$29.4 million, US$22.9 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of March 31, 1978, is also included in Annex II (page 2).  - 8 - 25. 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 opera- tions. Major irrig-ation, 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 institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and components for selected priority sectors has been instrumental in facilitating better capac- ity utilization in industry. The Bank Group has also been active in support- ing 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. 26. 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, urban development and water supply 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, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefitting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 27. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has success- fully adjusted to the changed world price situation. However, the basic need for foreign assistance, to augment domestic resources, stimulate investment and accelerate economic growth, remains. As in the past, Bank Group assist- ance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Con- sequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high priority sectors as agriculture, irrigation, rural water supply and medium and small scale industry. 28. Although the growth prospects of the economy have improved, India's poverty and needs are such that as much as possible of India's external capi- tal requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and India may be regarded as creditworthy for some supplemental Bank  - 9 - lending. As of March 31, 1978, outstanding loans to India totaled US$1,159 million, of which US$594 million remained to be disbursed, leaving a net amount outstanding of US$565 million. 29. Of thc 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 58%, 24% and 29%, respectively, in 1975/76. On March 31, 1977, India's outstanding and dis- bursed external public debt: was US$13.3 billion, of which the Bank Group's share was 28%. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1976/77, about 14% of India's total debt service payments were to the Bank Group. PART III - THE TELECOMMUNICATIONS SECTOR Background 30. While India has a comparatively large telecommunications network by world standards, with more than 1.7 million direct exchange lines (DELs) and more than two million telephones, the quantity and quality of telephone and telex services is poor compared to many other countries. India's tele- phone density (number of telephones per 100 population) of 0.3 is low compared with Malaysia - 2.7; Papua New Guinea - 1.3; Philippines - 1.2; Thailand - 0.8; and Sri Lanka - 0.5. The average for Asia, excluding Japan, is 0.6 while the world average is 9.6. The telephone density in the major cities of India is also low compared with principal cities in other countries. Densities vary from about 2 for cities such as Hyderabad, Calcutta and Lucknow, to close to 4 for Delhi and Bombay. This compares with telephone densities of 4.6 for Bangkok; 7.7 for Manila; 8.2 for Tehran; 10.8 for Nairobi; and 16.3 for Singapore. 31. The present official waiting list for telephone service in India is about 200,000 of which about 124,000 are in the four major cities. Prospective subscribers normally wait for many years. Moreover, many rural areas and towns are without service, and thus have no officially recorded waiting list. There is consequently a large level of suppressed or hidden demand. 32. Away from the larger towns, the telephone service is provided by a network of long distance public call offices (PCOs) which comprise a single open wire line with a telephone connecting the town or village to the national telephone network. As demand in a rural town grows, a small telephone exchange is installed at the PCO and the original line used as a trunk circuit to the network. In April 1978, there were about 8,000 PCOs and 4,300 small (less than 100 lines) telephone exchanges. Of the 8,000 PCOs, over 7,000 were located in places with a population exceeding 5,000. Of the 45,000 towns with a population exceeding 2,000, only one-third have telephone facilities either in the form of a long distance PCO or telephone exchange.  - 10 - 33. Due to the significant shortage of telephone lines and network over- loading, the calling rates in most large cities in India are very high and the probability of making a successful call is relatively low. For example, in Bombay, Delhi and Calcutta, sampling studies have shown that during business hours 40% to 50% of all call attempts fail because the called telephone is busy. This phenomenon brings about repeated call attempts to busy numbers and, as a result, generates additional traffic throughout the network. This not only creates congestion in the call handling plant, which is shared by all subscribers, but also increases the overall probability of encountering a called subscriber who is busy. The situation is made worse by faulty equipment. 34. There is also a high level of congestion in the long distance net- work brought about by the difficulties of completing calls through the local networks and by the inadequate provision of trunk switching equipment. This particularly affects the automatic trunk network during daytime hours. Manual trunk calls also often encounter delays of two to four hours. In the case of manual trunk calls, it is possible to pay higher charges and get a priority connection. In the longer term, however, the most effective method of improv- ing the trunk service will be by expanding the automatic trunk network; the current draft five-year plan (1978-83) provides for increased additions to the automatic trunk switching system, which will help alleviate congestion. Sector Organization 35. The telecommunications sector in India is state-owned and comprises mainly the Posts and Telegraphs Department (P&T), the Overseas Communications Service and three major public sector telecommunications manufacturing com- panies. In addition to these, there are numerous smaller private manufacturers who act as subcontractors to the major manufacturers. 36. The P&T is a government department under the jurisdiction of the Ministry of Communications. It is controlled by a seven member board of senior executives, whose chairman is the Secretary of Communications. The Board has adequate autonomy in policy formulation and day-to-day operations. The Telecommunications Branch of P&T operates all public telecommunications facilities within India and to adjacent countries. Overseas Communications Services (OCS) operates all international communications with non-adjacent countries. OCS is in the Ministry of Communications, but is an agency sepa- rate from P&T. The telecommunications manufacturing industry consists of three public sector companies, the Indian Telephone Industries Limited (ITI), the Hindustan Teleprinters Limited (HTL) and the Hindustan Cables Limited (HCL). ITI manufactures mainly telephone exchange, transmission equipment and telephone instruments. HTL manufactures teleprinters and miscellaneous telegraph, telex and data terminal equipment. HCL manufactures virtually all the telephone cable now used in the P&T network. The Telecommunications Branch of P&T employs approximately 250,000 full-time staff and the equivalent of about 130,000 temporary employees. The three manufacturers together have about 30,000 employees.  - 11 - Sector Objectives 37. The main thrust of the draft five-year plan (1978-83) is to expand the availability and quality of service outside the four major urban areas of Delhi, Bombay, Calcutta and Madras. It complements the objective of GOI's national development policy of encouraging development in backward and rural areas, smaller towns and new growth centers. The plan intends to extend some form of telephone service, by 1983, to practically all towns with a population greater than 5,000 and to villages with a population greater than 2,500 in the "hilly and backward" areas. It is proposed to provide 15,000 new long distance public call offices during the five-year period. 38. Three other important sector objectives are: (a) to concentrate investment in metropolitan area in such a manner as to reduce the number and waiting time of the high priority OYT applicants; 1/ (b) to upgrade the qual- ity of service in respect of traffic congestion and transmission performance in both the local and long distance networks; and (c) to steadily increase local equipment manufacturing capabilities to continue the move towards greater self-reliance within the sector. While expansion of local manufacturing will result in significant cost savings for P&T, the industry expansion objective also brings with it the need to maintain applied research and development activities at an adequate level so as to facilitate the orderly adaptation to the Indian situation of new technologies and to provide the skills necesary to sustain good management, operation and maintenance of the equipment in- corporating the new technology. Bank's Role in Sector 39. During the period of Bank association with the sector, the number of telephones has increased from 373,000 in 1962 to more than two million, the trunk network has been expanded and modernized, and an automatic telex network established which currently has more than 20,000 subscribers. The Bank has also assisted the P&T in modernizing its organizational and man- agement structure, and in establishing an Economic Cell which has begun to analyze pricing and investment issues in the sector. 40. The success of Bank Group involvement with the Indian telecommunica- tions sector may also be judged by the declining dependence of the P&T capital works programs on Bank Group financing. Between 1971 and 1981, the annual Bank disbursements to India for telecommunications development would have varied between US$30 million and US$40 million, while the capital works programs would have increased from around US$120 million in the early 1970s to over US$500 million by the early 1980s. 41. A project performance audit has been conducted on the third and fourth lending operations to Telecommunications in India. These projects 1/ OYT stands for "own your telephone" and represents a scheme in which potential subscribers (mostly business and government) who pay rela- tively large advance deposits (up to US$581) receive priority status for obtaining a telephone.  - 12 - were considered by the audit to be successful. The audit found that institu- tional and organizational achievements were substantial including the imple- mentation of commercial accounting and a management information system. The projects also contributed to the development of rural telecommunications and national telecommunications industries. The projects did not, however, achieve the construction targets envisaged, with the result that there was traffic congestion on the system and longer than expected waiting times for connection to the system. Improvement in this area is planned in the proposed project. 42. Bank Group support has also been instrumental in making possible higher investment levels in the telecommunications sector. Equally important have been our contributions toward institutional improvement which have helped P&T make efficient use of available resources and become one of the best man- aged and financially and technically soundest Government enterprises in India. 43. In line with these developments, bank emphasis within this sector has been changing during recent years. While technical and institutional as- pects used to be our main concerns, present emphasis is on the crucial sector problems of unsatisfied demand for connections and chronic congestion of the existing services. We are directly addressing the problems of the three major manufacturing entities in the sector, to provide necessary capital equipment for upgrading and modernizing the factories, and enhance their efficiency and their ability to, supply equipment and materials to P&T in adequate quantities and at comparatively low cost. PART IV - THE PROJECT 44. The project was appraised in January/February 1978, and a Staff Appraisal Report is being circulated separately to the Executive Directors. Negotiations were held in Washington in May 1978. The Borrower's delegation was led by Mr. J.A. Dave, Secretary to the Government of India, Ministry of Communications. A Supplementary Project Data Sheet is attached as Annex III. Program Project Objectives 45. The project has been derived from GOI's five year development plan for the Telecommunications sector. The project comprises a priority component of the first three years of the plan (April 1, 1978 to March 31, 1981) and is geared to providing part of the foreign exchange requirements needed for factory expansion and for expanding telecommunications services for final consumers. The objectives of the five-year plan are broadly as follows: (a) expand and improve the telecommunication services outside the big four metropolitan areas of Delhi, Bombay, Calcutta and Madras, by providing some form of telephone service to all towns with a population over 5,000 and to villages with a population over 2,500 in the hilly and backward areas, by accelerating the expansion of rural public call offices;  - 13 - (b) reduce the number and waiting time of high priority metro- politan applicants; (c) upgrade the quality of service by reducing traffic con- gestion and improving transmission performance, in both the local and long distance networks; and (d) steadily increaise and upgrade local telecommunications manu- facturing capabilities. 46. The plan envisages installation of 1.15 million direct exchange telephone lines, 15,000 public call offices in rural areas and a modest pro- gram to continue conversion of manual telephone exchanges into automatic ex- changes and replacement of old automatic exchanges. The long distance tele- phone system would also be improved through the use of satellites as well as microwave and cable media. Subscribers trunk dialing is also to be extended on all important trunk routes. Project Description 47. The proposed project is designed to help achieve the objectives outlined above over the iEirst three years of the five year plan. It consists of four subprojects: (i) the P&T subproject; (ii) the Indian Telephone Industries subproject; (iii) the Hindustan Cables subproject; and (iv) the Hindustan Teleprinters subproject. The P&T Subproject 48. The P&T subproject will use the bulk of loan proceeds (US$100 mil- lion) and would support P&T's investment program over three years to improve the quantity and quality of telecommunications services in India. The total cost of the P&T subproject is estimated at US$772 million including taxes and duties. The foreign exchange cost is estimated at US$110 million, US$100 mil- lion of which would be covered by the Bank loan; GOI would provide the balance of US$10 million from its own resources. The investments to be financed in- clude the installation of 340,000 lines of local telephone exchange equipment, provision of subscribers' cable and associated equipment which will permit the connection of approximately 260,000 new direct exchange lines; provision of approximately 7,500 new long-distance public call offices in rural and back- ward areas of the nation, extension of the automatic trunk network by the provision of 38,000 lines of trunk exchange equipment, and provision of other equipment needed to extend the telecommunications network. Testing and laboratory equipment to strengthen P&T's applied research and training capabilities would also be provided. 49. Under the project, a number of steps would be taken to enhance P&T's operational effectiveness. One such step is that P&T would establish a new traffic engineering group under the Member Telecommunications Development, where it would be closely associated with network planning and development. P&T has also strengthened its Economic Cell, established under the Sixth  - 14 - Telecommunications project. This unit is now beginning to function effectively and is recognized by management as a valuable addition to the organization. The Economic Cell is adequately staffed to carry out several major studies at hand. 50. In order to improve the quality of service, the P&T had established a number of expert committees, over the last two years, to analyze problems and recommend corrective measures covering various aspects of network perform- ance. While several of the committees' recommendations have been implemented, there are others requiring action. One such area that requires action is the implementation of the recommendations of a Committee on the Working of Metro- politan Telephone Districts, currently under review by the P&T Board. Progress of the studies and of the implementation of the recommendations would be fol- lowed up during Bank's progress review missions. 51. P&T finances. As a Government department, P&T's budget forms part of the national budget. All of its funds are paid into the Central Govern- ment's consolidated fund, and all funds made available to P&T are through parliamentary appropriation. Funds which are provided by the Government in excess of the Telecommunications Branch's internal generation, including that obtained from long-term external financing, are called capital-at-charge. P&T pays dividends on capital-at-charge at a rate determined by GOI, currently at 6% per annum. P&T keeps separate accounts for its telecommunications and postal operations. For its Telecommunications Branch, P&T maintains commer- cial accrual accounts in addition to the conventional Government cash accounts. 52. A substantial amount of funds generated by the Telecommunications Branch is transferred to cover the losses of the postal operations. The Government maintains telecommunication's tariffs at a level which permits such transfer of funds to the Postal Branch without damaging the Telecommun- ications Branch's ability to meet it financial requirements. Such transfers during the three-year project period (1978/79, 1979/80, and 1980/81) are estimated to be $84 million, $100 million and $120 million respectively, which would represent over 30% of the Telecommunications Branch's profits during those years. 53. The Branch's operating results during the fiscal years 1975 through 1977 have been satisfactory and rates of return on net assets in operation have been 19.0%, 16.3% and 29.0%, respectively. However, these rates of return have been computed on the original cost of assets and therefore tend to overstate real returns. The operating ratio during this period, again applying depreciation to original cost, varied from 55% to 72%. Other finan- cial indicators reflect an acceptable financial performance with current ratios of at least 3.1 times; debt-equity ratios of no more than 24/76 and an internal cash generation during the period of 56% of the fund required after covering debt services and postal losses. 54. Projected earnings indicate that the Telecommunications Branch will achieve rates of return on revalued net plant in operation (see paragraph 55) of 15% in 1979, 14.3% in 1980 and 13.7% in 1981 based on the existing tariff. The gradual decline of the rate of return is due to the large size of the  - 15 - additions being made to existing assets and the lag in the full use of the new facilities. The operating ratio remains constant at about 60. The financial position would remain strong throughout the project period with debt-equity ratios of no more than 23/77, current ratios of at least 2.9 times, and debt service and postal transfer coverage of at least 3.3 times. 55. Under previous agreement with the Bank Group, the Telecommunications Branch was required to review the value of its net fixed assets in operation at least every five years and determine whether it was necessary to adjust the value to reflect current prices. As with the previous agreements, the pro- posed agreement requires the Branch to take all measures required to realize an annual rate of return of not less than 11% on the average net value of the Branch's fixed assets in operation (Section 4.03 of the Loan Agreement). How- ever, until the valuation study is completed, it will not be possible to deter- mine whether or not this rate of return has been achieved. Therefore, during negotiations of the proposed project, the P&T agreed to complete the review of its assests not later than March 31, 1980, and commencing fiscal year 1981 to make necessary adjustments to the value or the purpose of rate of return calculations (Section 4.04 of the Loan Agreement). Until then, the P&T would also take all measures necessary to produce at least 60% of Branch's annual capital expenditures from internal sources (Section 4.05 of the Loan Agreement). The forecasts for FYs79-83 indicate that such contributions to capital expendi- tures would be achieved at the present tariff levels. The ITI Subproject 56. ITI is the largest of the three main telecommunications equipment manufacturers. Its production units consist of factories located at Bangalore, Naini and Rae Bareli employing 18,000, 4,000, and 1,500 people respectively. In addition, it has an electronic switching division at Palghat and a com- ponents division at Srinagar. The company manufactures switching equipment, transmission equipment, telephone instruments and other miscellaneous tele- communications equipment. Approximately 85% of its output is purchased by P&T. About 13% is sold to GOI entities such as Railways and Overseas Com- munications Service and to private industry. About 2% is exported. 57. ITI has expanded its output roughly in parallel with the growing demands of P&T although at present it is unable to produce sufficient switch- ing equipment to meet the requirements of P&T's program. It has developed and is extending local production capability of transmission equipment and is progressively reducing the need to import complete systems. It has an active import substitution program designed to reduce the import content in raw materials and components of its locally manufactured equipment. Its products are comparable in quality with internationally procured equipment and prices are competitive. Its total turnover has grown from Rs 419 million (US$48.7 million) in FY73 to Rs 881 million (US$102 million) in FY77. The objective of the ITI subproject is to ensure that ITI can increase its outputs to meet the requirements of P&T. ITI's capability to assure the quality of its pro- ducts also needs to be strengthened; this would be done under the project by improving procedures and installing more modern equipment. The investments  - 16 - to be financed include more modern testing and measuring equipment and the replacement of obsolete machines in production and tool room units of ITI. The facilities of the microcircuit laboratory in Bangalore would be expanded, and the project would also provide increased computer capacity for purposes of production and management control. 58. The cost of the subproject is US$23.6 million including US$10.3 million of foreign exchange which would be covered by the Bank loan. The HCL Subproject 59. HCL produces a wide variety of telephone cables and line wire with a total output of approximately US$50 million in FY77. It has factories at Rupnarainpur and Hyderabad where it employs 3,000 and 900 people, respectively. 60. HCL's output goes primarily to the P&T but it also produces cables for other customers such as Indian Railways and is meeting with some success on the export market. It has been able to meet fully P&T's requirements apart from small size, jelly filled distribution cable and small diameter coaxial cable. The company undertakes a reasonable amount of research and development, designed mainly to improve its existing products. It plans to increase this effort and initiate some work in the field of optical fibers with a view to improving its firsthand knowledge of this emerging and poten- tially important technology. 61. Its products are technically good and its prices are competitive in the international market. Its output has grown from Rs 150 million (US$18 million) in FY74 to over Rs 450 million (US$50 million) in FY77. 62. As is the case with ITI, HCL's output plans are based on P&T's re- quirements for the expansion of the telecommunications network and the sub- project provides for capital equipment necessary to increase output in line with the requirements of the P&T subprojects. As in the case of ITI, HCL's capability to assure the quality of its products needs to be strengthened, and this would be done under the project. Over the period from FY79 to FY82, the project would enable HCL to increase the output of large size telephone cables by approximately 40% and small size, jelly filled distribution cable and small diameter coaxial cable by more than 100%. 63. The works to achieve these objectives comprise the replacement of cable production machines which have reached the end of their economic life, and the provision of new machines, plant and testing instruments. Also in- cluded is some research and development equipment mainly related to building up some experience for future manufacture of optical fiber cables which are likely to play a large part in future expansion of the P&T transmission net- work. 64. The estimated cost of the subproject is US$19 million, including US$10.4 millon in foreign exchange. It is proposed that the Bank loan would finance US$7.5 million of the foreign cost. GOI would finance the balance.  - 17 - The HTL Subproject 65. HTL produces teleprinters, electric typewriters, data modems and miscellaneous items of teliegraph and data equipment. Its main product line is the teleprinter which, together with spares and accessories, accounts for more than 95% of its outpult. The company was established in 1960 and its factory is located at Madras. It currently employs about 2,000 people. 66. Since 1970, it has been producing between 5,000 and 6,000 tele- printers per year, of whicln 60 to 70% are sold to P&T, about 30% to other customers and about 2% exported. It has maintained its capacity at a level sufficient to meet P&T's requirements and has the potential to do so in the future. 67. The price of its products is competitive by world standards and they are technically sound. Its major product, the teleprinter, is cheaper than internationally produced machines but is not of modern design and its operating and maintenance costs are greater than for more expensive equipment of more modern technology. Nevertheless, it is judged adequate for the Indian telecommunications network and has won export orders. HTL has a small research and development group which requires expansion as is planned. 68. HTL's output is largely governed by P&T's requirements and the objective of the HTL subproject is to enable factory output to be increased to match the incremental requirement of the P&T subproject and ongoing planned requirements. To meet this objective, the production capacity for teleprinters must be increased from approximately 7,000 per year in FY78 to 10,000 per year in FY83. HTL's procedures for assuring the quality of its products would also be strengthened under the project. 69. The subproject comprises, in the main, replacement of worn out and obsolete machines in the production and tool room areas of the factory. In addition, some provision is included for testing and measuring equipment in order to upgrade HTL's modest research and development capability. This is necessary so as to enable it to improve its existing products and to give it experience with modern technology applicable to the telegraph and data field. 70. The estimated c,Dst of this subproject is US$4 million with a for- eign exchange content of IJS$2.2 million which is proposed for Bank financing. Implementation 71. For the P&T subproject all installation and maintenance of telecom- munications equipment would be by P&T's technical staff with support from manufacturers' specialists where new technologies are involved. The large and technically competent P&T staff, supported by the existing comprehensive train- ing programs, would ensure an adequate supply of technicians and line staff for installation and future maintenance of project facilities. The manufacturing units would install the equipment to be provided under the project by factory personnel who are competent to complete the installation without difficulty.  - 18 - Project Costs and Financing 72. The total project cost -- of all subprojects -- is US$818.4 million, of which US$133 million represents the foreign exchange cost. The Bank loan of US$120 million would be applied against the foreign exchange costs, leaving US$13 million of foreign exchange to be provided by GOI. The Telecommunica- tions Branch of P&T would be able to generate internally 69% of its financial requirements and will obtain the remainder from borrowing, Government contribu- tion and subscribers' deposits. 73. The total cost of all factories sub-projects is US$46.6 million, including US$22.9 million in foreign exchange of which the Bank would finance US$20 million. GOI would relend the Bank's contribution to the individual factories under subsidiary loan agreements to be entered into between GOI and each of the three factories (ITI, HTL and HCL), which would have to be approved by the Bank. The relending terms would include annual interest at no less than 10.25% and a repayment period of fifteen years including three year's grace period (Section 3.01(c) of the Loan Agreement). The remainder of the investment requirements of the factories ($26.6 million) would be met from internal cash generation and from borrowings. Procurement and Disbursement 74. All equipment imported directly by P&T and financed by the Bank for the P&T subproject (US$40 million) would be procured on the basis of international competitive bidding (ICB) in accordance with the Bank Group's Guidelines. All equipment and materials to be financed by the Bank for the factories subprojects (US$20 million) would also be procured under ICB. 75. As with previous lending operations, ICB is not proposed for those equipment items in the P&T subproject (US$60 million) for which considerations of economy and efficiency give a clear advantage to domestic factories in providing telecommunications systems of this size with closely coordinated local supply of both equipment and cables. Close coordination is particularly important for cable supply where many sizes and wire gauges are involved and where supplies are destined for thousands of individual works throughout India within each program. For switching and transmission equipment, there is fur- ther strong justification for reasons of economy, compatibility and standard- ization. Examination during appraisal confirmed that the items produced by the factories were comparable in quality with internationally procured equip- ment and prices were competitive. Bank financing in this case is limited to the foreign exchange content (raw materials required for production) of the domestically procured goods. These raw materials will be procured by the three factories using ICB or prudent international shopping as may be appropriate. 76. For direct imports for the P&T subproject and all procurement for the factory subprojects, disbursements would be made against the cost of imports of equipment and materials. In the case of P&T purchases from the local factories, as in the past, disbursement would be made against invoices to the P&T of a percentage of the purchase price calculated to represent the  - 19 - foreign exchange content of the goods supplied for the sub-project. These percentages are currently estimated as follows for purchases from: ITI: 25% of the selling price HCL: 36% of the selling price; and HTL: 6% of the selling price. These percentages would be subject to review and revised if necessary in the light of changes in the situation. Economic Justification and Risk 77. In India there is a large and growing unsatisfied demand for tele- communications services which is unlikely to be fully met in the foreseeable future. Given this situation, GOI is paying increasing attention to allocat- ing efficiently the limited resources available to the telecommunications sector. During the 1979-83 planning period investment priorities will be in rural and smaller district centers, and in those portions of the large metro- politan areas in which there is still a large unmet demand by high priority users. 78. Economic benefits from telecommunications arise from the more effi- cient use of resources made possible in other sectors of the economy. Pro- ductivity is improved, waste is avoided, the disadvantages of distance and of dispersal of people and productive units are reduced and markets are greatly expanded. For example, telecommunication links facilitate regional develop- ment in backward areas, and the management of infrastructure projects; without them, the efficient marketing of perishable commodities is impossible. Bene- fits from the proposed project should touch all segments of the population in India. Indirectly, government administration and private business should obtain efficiency since telecommunications is the least-cost means of commu- nication for a wide variety of economic and social welfare activities. A direct impact will be felt by applicants of high priority in business and commerce and by the population in rural and backward areas. 79. The 15,000 additional rural public call offices, the 2,300 additional small rural exchanges, and the approximately 700,000 new direct exchange lines allocated to district centers and cities other than Bombay, Calcutta, Delhi and Madras should help facilitate the achievement of the government's goal of stimulating economic development outside of the major metropolitan areas, encouraging decentralization, and reducing transport and communication-related costs in a wide spectrum of economic and social sectors. In particular, the provision of services related to agricultural extension and to health, welfare, and education in rural areas involves, in many cases, use of staff with limited expertise who can benefit by obtaining direction and advice over the telephone from more qualified personnel at main centers. As a result of this emphasis on investment outside the larger metropolitan areas, a major improvement in quality of service will be made in smaller cities and district centers, while in smaller towns and villages potentially 60 million people will receive local public access to telephone facilities for the first time.  - 20 - 80. The Telecommunications Branch of P&T has a much wider impact on communications and other activities in India than is apparent from telephone statistics. For example, the universal access postal service receives a transfer of funds from the Telecommunications Branch sufficient to cover postal losses. In 1977 over 19% of the total capital and operating costs of the Postal Branch of P&T was covered out of telecommunications revenues. Overall during the 1979-83 period Government will receive from the Telecom- munications Branch net revenues of Rs 9,231 million. 81. As the resources allocated to the telecommunications sector in India are insufficient to meet demand in full, pricing policy is another means by which the benefits of services are focussed on high priority users. Currently, the pricing mechanism is used to ration access and to promote priority usage of the system. Pricing policy is further used to promote cheaper local serv- ice for those residing outside the large cities and in the rural areas. Both the required high priority user and regular advance deposits, and the monthly telephone rental charges, are generally less in the smaller telephone service areas. 82. Given the externalities associated with telecommunications, the discount rate which equalizes the projects' expected stream of revenues with capital and operating costs is a conservative estimate of the project's economic return. The financial rate of return is 20% -- a 10% increase in costs, a 10% decline in revenues and a two-year delay in program completion imply a rate of not less than 14%. When labor and foreign exchange are shadow-priced, the economic rate of return is 22%. 83. The program is technically feasible and involves no special risks. The subproject objectives are well defined and the implementing institutions are adequately staffed and experienced to carry out the project without undue difficulty. PART V - LEGAL INSTRUMENTS AND AUTHORITY 84. The draft Loan Agreement between India and the Bank, the draft Pro- ject Agreement between ITI, HCL and HTL and the Bank, and the Recommendation of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 85. Special conditions of the project are listed in Section III of Annex III. 86. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 21 - PART VI - RECOMMENDATION 87. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 26, 1978   ANNEX I Page 1 INDIA - SOCIAL INOICATORS DATA SHEET LAND AREA (THOU KM2) - INDIA REFERENCE COUNTRIES (1970) TOTAL 3280.5 MOST RECENT AGRIC. 1797.5 1960 1970 ESTIMATE INDONESIA PHILIPPINES BRAZIL** GNP PER CAPITA (US$) 60.0 lQ0.0 150.0 130.0 230.0 550.0 POPULATION AND VITAL STATISTICS POPULATION (MID-YR. MILLION) 434.9 547.6 620.4 /a 117.6 36.9 92.8 POPULATION DENSITY PER SQUARE KM. 133.0 16170 189.0 62.0 123.0 11.0 PER SQ. KM. AGRICULTURAL LAND 247.0 308.0 345.0 411.0 375.0 49.0 VITAL STATIStICS CRUDE BIRTH RATE U/THOU, AV) 43.2 41.0 37.0 45.9 44.2 38.4 CRUDE DEATH RATE (/THOU,AV) 23.9 19.0 17.0 20.6 13.2 9.9 INFANT MORTALITY RATE (/THOU) 139.0/a .. 130.0 81.0 110.0 LIFE EXPECTANCY AT BIRTH (YRS) 41.7 47.2 49.5 .. 55.6 59.4 GROSS REPROOUCTION RATE 3.2 2.9 2.8 3.2 3.3 2.8 POPULATION GROWTH RATE (%) TOTAL 2,0 2.3 2.1 2.0 3.0 2.9 URBAN 2.5Lb 3.2 3.1 3.7/a 4.0 5.0 URBAN POPULAtION (% OF TOTAL) 17.9 19.8 20.6 17.5Lb 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 44.0 45.6 42.0 15 TO 64 YEARS 55.9 55.3 56.7 53.5 51.6 55.0 65 YEARS AND OVER 3.1 3.1 3.2 2.5 2.8 3.0 AGE DEPENDENCY RATIO 0.8 0.8 D. 0.9 0.9 0.8 ECONOMIC DEPENDENCY RATIO l.CLe 1.1/a J..L/ . 1.5 1 5 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14585.0 37658.0 259.3 320.0 250.0 USERS (X OF MARRIED WOMEN) .. .. 18.7 .. 2.0 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 175000.0 218000.0 261000.0/a 12400.0 28400.0 LABOR FORCE IN AGRICULTURE (X) 71.0 69.0 69.0 .. ss.o/a 40.4 UNEMPLOYED (% OF LABOR FORCE) 4.8 /d 4.4 /b 4.4'/c,d , 1.6 7.5 INCOME DISTRIBUTION % OF PRIVATE INCOME REC D BY- HIGHEST 5% OF HOUSEHOLDS 26.7 25.0 / .. .. .. 35-0/a HIGHEST 20% OF HOUSEHOLDS 51.7 53.1 {c ., ,. 54,0 62.7/a LOWEST 20% OF HOUSEHOLDS 4.1 4.7 78 * . 3 6 3 07wr LOWEST 40% OF HOUSEHOLDS 13.6 13.1 - *- 117 7a DISTRIBUTION OF LAND OWNERSHIP X OWNEO BY TOP 10% OF OWNERS .4 .. ., . .. 46.0 % OWNED bY SMALLEST iO% OWNERS 5 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 5840.0._e 4890.0 4220.0 26370.0 .. 1910.0 POPULATION PER NURSING PERSON 5310.0.A 220.0/d 3080.0 / 7630.0/ *- 3220.0.1. POPULATION PER HOSPITAL BED 2590.0o h 1610.0 .. 1640.0 850.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 95.D 92.0 89.0 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 48 n 43.0 45.0 64.0 -OF WHICH ANIMAL AND PULSE 19.0/i 18.0 12.6 14.0 22.0 39.0 DEATH RATE (/THOU) AGES 1-4 44.0 .. .. ,, 6.6 EDUCATION ADJUSTED ENSCOLLMEN 41.0 63.0 65.0 75.0 113.0 87.0 SECONDARY SCHOOL 23.0 30.0 29.0 15.0 49.0 68.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 11.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (X OF SECONDARY) 8.0 ., 29.0 6.0 lb 17.0 ADULT LITERACY RATE (X) 24.0 33.0 36.F0A 59.0 64.0 HOUSING PERSONS PER ROOM (URBAN) 2,6 2.8 .. .. 2.1 1.0 OCCUPIED DWELLINGS WITHOUT PIPED WATER M%) .. .. .. .. 76.0 73.0 /C ACCESS TO ELECTRICITY (X OF ALL DWELLINGS) .. .. .. .. 23.0 48.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) .. .. * *- 7.0 8.0 CONSUMPTION RADIO RECEIVERS (PER THOU POP) 5.0 21.0 25.0 114.0 39.0 60.0 PASSENGER CARS (PER THOU POP) 0.7 1.0 1.0 2.0 8.0 25.0 ELECTRICITY (KWH/YR PER CAP) 46.0 114.0 143.0 20.0 235.0 491.0 NEWSPRINT (KG/YR PER CAP) 0.2 0.3 0.3 0.3 2.0 2.7