India - Gujarat Irrigation Project

Document of FILE COPY The World Bank FORt OFFICIAL USE ONLY Report No. P-2 285-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE GUJARAT IRRIGATION PROJECT May 10, 1978 This documnt hs a restrdeted dstribatl and may be ued by recipients only In the performnee of their oUdal dudes. Its contents may not otberwtse be disclosed without World Dlank authoriation.  CURRENCY EQUIVALENTS (as of May 4, 1978) Rs 1.00 = Paise 100 US$1.00 = Rs 8.59 Rs 1.00 = US$ 0.1164 Rs 1 million = US$ 116,400 (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 exchange rate is subject to change. Conversions in the Staff App- raisal Report were made at US$1 to Rs 8.60, which represents the projected exchange rate over the disbursement period.) FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS -IP - Medium Irrigation Project GOG - Government of Gujarat CCA - Cultivable Command Area AC - Appraisal Committee CWC - Central Water Commission PWD - Public Works Department O&M - Operation and Maintenance  FOR OFFICIAL USE ONLY INDIA GUJARAT IRRIGATION PROJECT Credit and Project Summary Borrower: India, acting by its President. Beneficiary: State of Gujarat Amount: US$85 million. Terms: Standard Relending Terms: As part of Central Assistance to States for develop- ment projects on terms and conditions applicable at the time. Project Description: The purpose of the project is to use for irrigation the numerous small rivers located throughout the State where large scale irrigation or groundwater development is not possible, and to modernize existing medium irri- gation projects in Gujarat. The project would also improve the data base for planning future irrigation projects in the State. The project consists of: (a) construction, over a five year period, of medium irrigation projects, covering about 63,000 ha throughout the State; (b) modernization of existing medium irrigation projects, covering about 55,000 ha, in order to bring them up to the technical standards agreed for new projects; (c) establishment of a network of automatic discharge measuring stations; (d) carrying out of monitoring and evaluation studies. The project would increase food and cash crop production and thereby improve farmer income, provide additional employment opportunities, especially for landless laborers and small farmers, and reduce the danger of drought and famine in low rainfall areas. It would reduce the This document has a restricted disiribution 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.  - ii1 - percentage of farm households below the average national per capita income (US$150) in the area from 94% to 35% and those below the poverty line (US$70) from 69% to 13%. The project carries the usual risks associated with irrigation projects in India. Additional risks are related to the proce- dures for preparation, appraisal and progress review of medium irrigation projects. These pro- cedures are similar to those introduced under the Orissa Irrigation Project (Cr. 740-IN of September 1977), where they have so far been working well. Estimated (US$ million) Cost: Local Foreign Total Construction of MIPs 67.4 15.7 83.1 Modernization of MIPs 15.8 3.2 19.0 River Gauging Network 0.5 0.2 0.7 Monitoring and Evaluation 0.2 - 0.2 Design and Management 14.4 - 14.4 Base Cost 98.3 19.1 117.4 Physical Contingencies 15.8 3.6 19.4 Expected Price Increases 28.1 5.6 33.7 Total Cost 142.2 28.3 170.5 Financing (US$ million) Plan: Local Foreign Total IDA 56.7 28.3 85.0 Local Financing: GOG 85.5 - 85.5 142.2 28.3 170.5 Estimated Disbursements: (US$ millions) FY79 FY80 FY81 FY82 FY83 FY84 Annual: 3.0 13.0 17.0 19.5 20.0 12.5 Cummulative: 3.0 16.0 33.0 52.5 72.5 85.0 Rate of Return: 20%. Staff Appraisal Report: No. 1943-IN, dated May 18, 1978.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE GUJARAT IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$85 million on standard IDA terms to help finance the implementation of the Government of Gujarat's (GOG's) investment program for medium-scale irrigation projects over the next five years throughout Gujarat. The proceeds of the credit would be channelled to GOG in accordance with the Government of India's (GOI's) standard terms and arrangements for the financing of State devel- opment projects. PART I - THE ECONOMY 1/ 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 share 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 the 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 administrative, scientific and technical manpower and a dynamic entrepreneural class. Per capita consumption of commercial energy is low by international 1/ Parts I and II of this report are substantially the same as Parts I and II of the President's Report for the Jammu-Kashmir Horticulture Project (Report No. P-2251-IN), dated May 4, 1978.  -2- 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 exist. 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  -3- 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 1970's. Other favorable indicators include the spread of an improved system of extension of 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 from 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 Janta 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 commitment to a voluntary family planning program and has budgeted the re- sources 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" projection 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, resulting 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 asborption 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  -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 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, 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 envisioned 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 im- portant 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 deveiopment 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 has 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 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 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. Consequently, 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 in- dustry. 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 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 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 - AGRICULTURE AND IRRIGATION IN INDIA General 30. Agriculture is the most important sector in India; it engages 70% of the labor force, has recently contributed about 43% of value added and accounts for a major share of exports. Consequently, investments in agri- culture have been given priority by GOI and the State Governments, espe- cially since the mid-1960s, and deserve continued emphasis in the future. 31. Since independence, the overall growth rate of agricultural pro- duction has averaged about 3% per annum. This low overall rate of growth obscures considerable variations over shorter periods of time, between crops, and between regions. The overall rate is very much affected by the serious droughts in 1965 and 1966 and again in 1972 and 1974. At the same time, the success of high yielding varieties of wheat led to annual increases in wheat production of about 20% between 1967 and 1971, and three consecutive favorable monsoon seasons in 1975, 1976 and 1977 resulted in bumper crops in these years. Other foodgrain crops, notably rice, have not enjoyed anything like the same success as wheat, mainly because of the difficulties of developing high yielding seeds. Consequently, the effects of the green revolution, which primarily affected wheat, have been concentrated in northwestern India. 32. Despite the progress made in many aspects of food production, India's agriculture remains heavily dependent upon the weather. A major factor in reducing this dependence is the expansion of irrigation and the extent to which more effective use can be made of existing investment in irrigation facilities. The Government is also placing emphasis on the im- proved supply of inputs such as seeds and fertilizer, agricultural credit, and extension services. Irrigation 33. Up to 1964/65, the irrigated area in India increased at a rate of only 2.1% per year, of which about two-thirds was from surface water resources  - 10 - and one-third from groundwater. Since then, the rate of increase has about doubled, mainly through an accelerated program of groundwater development. At present, the total irrigated area is approximately 45 million ha, of which about three-fifths is irrigated from surface sources and two-fifths from groundwater. 34. The pace of surface water development remained relatively constant at about 0.5 million ha per year until the end of the Fourth Plan (1969/70- 1973/74). During this period, actual increases in the surface irrigated area lagged behind GOI's physical plan targets for more rapid development. A major problem was the continuing tendency of the States to start a large number of projects, which, given the limited financial resources, could only be constructed slowly so that benefits accrued with much delay. However, in recent years, budgetary allocations have grown rapidly and the authorities have increased their efforts to complete on-going projects. As a result, the new area brought under command in 1976/77 was 1.1 million ha or about twice that achieved in any single year before the start of the Fifth Plan in 1974/75. However, while the increase in area brought under the command of new surface irrigation projects is impressive, the increase in area actually irrigated has been more modest than the figures imply - particularly in the case of major and medium irrigation schemes due to inadequate distribution and drain- age systems. In areas actually receiving water, irrigation efficiencies remain low and water supply is unreliable. 35. The Second Irrigation Commission of 1972 and the National Commis- sion on Agriculture, which reported in 1976, also found that the underutili- zation of irrigation potential was attributable to the lack of integrated development in the irrigation areas, insufficient farmer training, and lack of efficient extension services and of administrative coordination. It has been estimated that the majority of recently completed irrigation projects require additional investments up to US$600 per ha to make them fully pro- ductive. Accordingly, GOI and the State Governments have adopted various measures to improve utilization, and a Command Area Development Department has been set up in the Ministry of Food and Agriculture to coordinate work on selected high priority projects. Such measures for command area develop- ment (CAD) include public investment in irrigation-associated infrastructure - such as drainage, roads, markets, agricultural extension and research - and private investments, mainly at the farm level - such as land shaping and leveling, watercourse lining, field channels and drains. 36. In view of the emergence of high productivity farm technologies dependent on effective water control - and given India's already substantial investment in surface irrigation - the economic return on investment that improves water delivery or facilitates better use of the water provided can be very high. Consequently, rehabilitation and modernization of irriga- tion infrastructure as well as command area development are being given high priority by GOI, and a relatively large proportion of public sector invest- ment in irrigation has been allocated for these purposes. Plan allocations have been supplemented by the resources of agricultural and commercial banks participating in financing command area development programs through farm  - 11 - credit. In addition, major institutional changes have been introduced affect- ing the coordination of services in command areas and the administration of credit. Moreover, new projects are being designed, implemented and operated on the basis of improved technologies. 37. While emphasizing the need to improve water utilization through command area development, the Government is at the same time pursuing the objective of increasing the area under irrigation, in particular where only incremental investments are required. Thus, completion of on-going irriga- tion developments is given equally high priority as command area development. Agricultural and Irrigation in Gujarat 38. Gujarat, with an area of about 196,000 km2 and a population of about 30.7 million in 1977, is one of India's most advanced States. It is relatively urbanized (29%) and has a large modern manufacturing sector, which together with mining and related activities contributes on average about 30% of Gujarat's net domestic product. But agriculture, whose contribution to Gujarat's net domestic product averages 36%, is predominant in the State's economy. Also, while the industrial sector (valued added) in Gujarat has grown over the last fifteen years at a slower pace (3.7% p.a.) than industry nation-wide (4.6% p.a.), growth of agriculture in the State has been faster (3.0% p.a.) than nationally (2.0% p.a.). Agriculture employs about 65% of the labor force in Gujarat. 39. The State consists of2three distinct geographic areas. First is the Gujarat mainland (85,000 km ) formed by extensive coastal plains flanked by hilly terrain in the east. This area slopes gently towards the west and southwest. The State's four major rivers (Tapi, Narmada, Mahi, and Sabarmati) and numerous small streams, which traverse these plains, cause widespread flood at frequent intervals. Poor natural drainage resulting from the low gradient has caused water-logging and salinity on 2 significant scale. The second area is the Saurashtra peninsula (65,000 km ). A number of small rivers originate in its central table land and run radially into the sea. In recent years over-exploitation of groundwater in the coastal areas has resulted in salt water intrusion into tMe shallow water table. Finally, there is the Kutch land mass (46,000 km ) where large areas are saline and unsuitable for agricultural production without reclamation. 40. Of the 18.8 million ha area of Gujarat, for which land use is reported, about 9.8 million ha are under cultivation. There is little scope for increasing cultivable land except through reclamation of desert, saline and ravine areas. The cropping intensity is only 107%, one of the lowest in India; but, given the low rainfall, it cannot be significantly increased without irrigation. At present, only about 15% of the cropped area (1.58 million ha) is being irrigated. This figure is less than two-thirds of the national average, and only two States (Madhya Pradesh and Maharashtra) have a lower percentage of their cropped areas irrigated. The ultimate potential for irrigation from all sources in Gujarat is estimated at 3.2 million ha, of which roughly 1.5 million ha each would be irrigated from groundwater and from major/medium surface schemes, while the balance would be irrigated from minor surface systems. Development of irrigation from  - 12 - surface sources, however, is limited by a number of factors. All rivers, except Narmada and Tapi, are seasonal. The topography is unfavorable and makes construction of major infrastructure costly. The catchment areas of the major rivers extend to a large part into other States of India, which subjects Gujarat to water sharing agreements with the upper riperian States. Such agreement has not been reached for the Narmada, but the matter is now pending with a GOI tribunal, whose allocation of Narmada waters between Madhya Pradesh, Maharastra and Gujarat is expected within two years. 41. Gujarat's climate and soils are particularly suitable for cotton, groundnuts, and tobacco, and the State produces about one-quarter of India's cotton and groundnuts and about one-third of its tobacco. Cotton and ground- nuts are the most widely grown crops in the State. Cereals - primarily pearl millet, sorghum, wheat and maize - and pulses account for less than half of the cropped area. As a result, Gujarat is a net importer of foodgrains, and in normal years foodgrain production is about I million tons short of the State's requirement of 5.5 million tons. 42. Gujarat has a tropical monsoon climate. Annual rainfall ranges from less than 300 mm in the northwest to over 2,000 mm in a small area in the southeast, but most of the State receives 500-800 mm. However, rainfall is highly unreliable regarding both timeliness and amount, and this has made Gujarat extremely susceptible to droughts, which the State experienced not less than 25 times since 1900. The latest drought years were 1972/73 and 1974/75 when foodgrain production fell to 50% of its normal level. 43. Gujarat's labor force constitutes 31% of its total population. Farmers and agricultural laborers account for 43% and 22%, respectively, of the labor force. About one quarter of the population belong to traditionally disadvantaged groups: tribes (18%) and scheduled castes (7%). In a normal year, about 40% of the rural population has incomes below the poverty line (US$70). Poverty is heaviest in the eastern and southern parts of the State, where two-thirds of the population live below the poverty line. The average farm size in Gujarat is 4.1 ha, but there are large regional variations and in general, due to agro-climatic conditions, farms in the low rainfall areas are significantly larger than in high rainfall areas. The land ceiling in Gujarat is 4.1 to 10.9 ha for land irrigated from a Government source, depend- ing on soil type and reliability of irrigation water. In rainfed areas, the ceiling ranges from 8.1 ha to 21.9 ha. For each family member in excess of five, the ceiling is increased by 20%, up to a maximum increase of 100%. 44. Because of the generally low and unreliable rainfall in Gujarat, irrigation development is a prerequisite for a significant increase of agricultural production, and consequently has been given increasing priority by the Government of Gujarat (GOG) since India's Independence (1947). At that time, there were only two small ancient canal systems in Gujarat and the area irrigated from wells was only 400,000 ha. In the early 1950s, three major surface schemes were started: Mahi Right Bank Canal with a cultivable command area (CCA) of about 143,000 ha; Kakrapar with a CCA of about 225,000 ha; and Shetrunji with a CCA of about 57,000 ha. On all three projects, progress of dam/weir construction was relatively rapid but canal construction  - 13 - was lagging far behind. The Bank Group's first financing for surface irriga- tion development in India financed the construction of the Shetrunji canal system (Cr. 13-IN of November 22, 1961, US$4.5 million). Like other irriga- tion projects of that time, the Shetrunji project failed to achieve its agri- cultural potential due to inadequate agricultural supporting services and lagging construction of field channels and drains by the farmers. The prob- lems encountered with projects such as Shetrunji have since led GOI, the State Governments concerned and the Bank Group to reorient their concept of sound irrigation development toward a more integrated approach. In 1960, the Ukai project was started to provide carry-over storage for the Kakrapar project and to extend the CCA to a total of about 375,000 ha. This project is still under construction and a major program of on-farm development, drainage and modern- ization works has been added. The Kadana Irrigation Project in Gujarat (Cr. 176-IN of February 9, 1970, US$35 million) was the first of a second generation of Bank Group-financed irrigation projects in India. Besides the traditional irrigation infrastructure, this project included some elements of command area development, in particular the construction of field channels, drains and landshaping and financing of these works through institutional credit, the construction of market roads, and an agricultural support program. This project is now basically completed, about two years behind schedule due to two extreme floods, which disrupted dam construction. A project completion report is scheduled for late 1978. Groundwater development in Gujarat has accelerated since Independence. In the 1950s, the area irrigated from wells increased by about 3.5% annually. In the 1960s, the pace of groundwater development almost doubled, and diesel pumps replaced the traditional lift- ing devices. In several areas, the limit of groundwater resources is being approached. The Bank Group has been directly involved in groundwater devel- opment in Gujarat through the Gujarat Agricultural Credit Project (Cr. 191-IN of June 3, 1970, US$35 million), which was fully disbursed on March 31, 1975. A project completion report found that about 81,000 farms representing a total population of 480,000 benefitted directly from the minor irrigation component of the project, rather than 25,000 farms as estimated at appraisal. The overall economic rate of return for the project's minor irrigation component was 28%, compared to the appraisal estimate of 23%. PART IV - THE PROJECT 45. In support of GOG's development plan for medium-scale irrigation, the proposed project would finance, over the five-year period 1978/79 - 1982/83, the construction of new medium irrigation projects (MIPs) and the modernization of existing MIPs. All MIPs that meet technical and economic criteria established among GOI, GOG and the Association would be eligible for financing under the credit. Most important among the criteria are full lining of the canals and extension of the distribution system to serve 8 ha blocks instead of the traditional 40 ha blocks. It is estimated that about one-third of the approximately 30 MIPs now under construction and about ten new MIPs to be started in the next five years would be eligible for financing from the credit. Together, these projects would account for about three-quarters of GOG's total expenditures for construction of MIPs in the period covered by the proposed project. When completed, these MIPs would provide irrigation to some  - 14 - 63,000 ha throughout Gujarat. The project would also provide modernization for about five existing MIPs covering about 55,000 ha, in order to raise them to the standards set by the established criteria. Stream flow measuring and project monitoring and evaluation would also form essential elements of the proposed project. 46. The project was prepared by GOG with assistance from Bank Staff. It would closely follow the pattern introduced by the Orissa Irrigation Proj- ect, for which a US$58 million IDA credit was approved on September 6, 1977 (Cr. 740-IN). The project was appraised in October/November 1977. A sup- plementary Project Data Sheet is attached as Annex III. A report entitled "India - Staff Appraisal Report - Gujarat Irrigation Project," Report No. 1943-IN, dated May 18, 1978, is being circulated separately to the Executive Directors. Negotiations were held in Washington in April/May 1978. The Borrower and GOG were represented by a delegation headed by Mr. J. K. Sibal. The Project 47. The proposed project would support a five-year time-slice (1978/79- 1982/83) of Gujarat's development program for medium irrigation. At present, projections for investments in MIP construction in the project period amount to Rs 1,313.4 million (about US$152.7 million). In addition, budget expendi- tures totalling Rs 220 million (US$25.6 million) are projected for moderniza- tion of existing medium irrigation schemes through FY1982/83. The size of the program has been determined on the basis of GOG's budgetary limitations. It does already take into account the additional funds that GOI would make available to GOG from the proposed credit, but excludes potential advance plan assistance from GOI, the annual total of which has averaged about Rs 150 million in the past. GOG's capacity to implement projects of this kind has not been a limiting factor; in fact, it appears that GOG would have no difficulty implementing a more ambitious MIP program. The project would include con- struction, over the next five years, of medium irrigation projects covering about 63,000 ha throughout Gujarat. Eligibility of MIPs for inclusion in the project would be determined through special procedures (para. 48 below) and on the basis of criteria (para. 51 below) agreed upon among the Association, GOI and GOG. IDA financing would cover all expenditures on MIPs designed and constructed in accordance with the agreed criteria during the 1978/79-1982/83 period. On-going MIPs and MIPs started in 1978/79 would be completed under the project while MIPs started in 1979/80 or later would only be financed from the credit up to 1982/83. However, any MIP started under the credit would be completed in accordance with the agreed criteria (Section 2.02(a) of the Project Agreement). About ten MIPs under construction that can be modified to meet the agreed technical and economic criteria and about ten new MIPs are likely to be included in the project. The five-year expenditures on construction of MIPs that meet the criteria are estimated at Rs 948 million (US$110.2 million), of which about one-quarter would be for completion of on- going and three-quarters for new MIPs. The balance of Rs 365.4 million (US$42.5 million), out of the total five-year MIP construction program of Rs 1,313.4 million mentioned above, consists of MIPs that cannot be modified to meet the agreed criteria. In addition, the project would encompass existing MIPs, covering 55,000 ha, that can be modernized to meet the standards established  - 15 - for new MIPs. Five-year expenditures for MIP modernization works are esti- mated at Rs 220 million (US$25.6 million). A network of automatic discharge measuring stations to improve the hydrological data base for the planning of future major and medium projects, and project monitoring and evaluation studies would also be included. 48. Basic data requirements, specific criteria for planning, design and construction, and standards of economic viability have been established for MIPs to be included in the project. The economic criteria would ensure that individual MIPs would have an economic rate of return of at least 12%. The procedure of financing a time-slice of GOG's medium irrigation program, in combination with the establishment of technical and economic criteria, pro- vides an opportunity to review in depth a large part of Gujarat's irrigation sector and to make an impact, statewide, on technical and economic standards applied in MIPs. 49. Each MIP would consist of an earthfill storage dam with a gated spillway, a fully lined canal network delivering water through outlets serv- ing 8 ha blocks, and a drainage network connected to natural drains. The average cost would be about US$1,740 per irrigated ha, ranging from US$1,400 to about US$2,090 per ha. This is substantially higher than in major irri- gation projects of the same standards in India (averaging US$1,160 per ha). This is so since in a typical MIP the (costly) dam accounts for about two- thirds, and the distribution network for one-third, of project cost, while in major irrigation projects this ratio typically is reversed. Due to size, number and distribution of MIPs throughout the State, it would not be feasible to establish command area development organizations for individual projects. Instead, proper water supply to each farm would be ensured by the extension of the canal system from the standard 40 ha outlets down to turnouts serving 8 ha blocks. Assurances have been obtained from GOG that the State department of agriculture would establish irrigation demonstration plots in each MIP area, prepare a layout for each 8 ha block served by an outlet, showing the design of water courses, field channels and land shaping, and assist the farmers in implementing these works (Section 2.02(c) and (d) of the Project Agreement). In addition, GOG has given assurances that staffing of the agricultural ex- tension services in each MIP area would conform with statewide standards to be established by GOG and the Association and, thus, would essentially follow the pattern adopted in other Bank Group financed command area development and agricultural extension projects in India (Section 3.05 of the Project Agree- ment). An assurance has also been obtained from GOG that it would, if neces- sary, strengthen the input supply, credit, storage and marketing facilities available to farmers in MIP areas (Section 3.08 of the Project Agreement). 50. Modernization of existing MIPs, which is also included in the proposed project, is part of a larger program of GOG to redress the major deficiencies of both major and medium irrigation schemes which have been built previously to lower standards. The principal works would be: to extend the canal system down to regulated outlets serving 8 ha blocks, on the average; lining of the whole canal system; addition of control structures to enable a  - 16 - better regulation of water deliveries; and local drainage works. Costs of these works are estimated at US$465 per ha. A river gauging network included in the project, consisting primarily of automatic river stage recorders, would allow continuous river flow measurements instead of the currently practiced float measurements twice daily, and thus improve the hydrological data base for planning future projects. Project monitoring and evaluation would focus on the costs and benefits associated with the improved design and construction standards introduced under the project. Project Implementation 51. Appraisal and progress review by IDA of individual MIPs would not be practical. Instead, these would be carried out by the Appraisal Committee (AC) of GOI's Central Water Commission (CWC), which was established for the same purpose in the framework of the recently approved Orissa Irrigation Proj- ect (para. 46 above). The procedures for sub-project preparation, appraisal and progress review would conform to those established for the Orissa Project. The AC is headed by a Chief Engineer, who reports to the Member, Planning and Progress, of CWC. Its staff at present consists of a director, six engineers, two agriculturalists and one economist. The AC's appraisal and review work under the Orissa project has been satisfactory. The AC would be further strengthened during the implementation of the proposed project and, thus, CWC has made arrangements to gradually increase AC's staff in accordance with specified manpower co-efficients, which would be adjusted in the light of experience gained during project implementation. Under the general guidance of IDA, the AC would appraise and monitor the progress of individual MIPs in accordance with the technical and economic criteria and procedures agreed with IDA (paras. 45 and 47 above). Suitable MIPs have been identified in the Perspective Plan of Gujarat 1974-84. Initial investigations for proposed MIPs are carried out by a Water Resource Investigation Circle of GOG, whose report would also include preliminary designs, cost estimates and a tentative imple- mentation plan. GOG has given assurances that a Project Preparation Committee, headed by the District Development Officer, would be established for each MIP to be financed under the proposed credit (Section 2.02(b) of the Project Agreement). Subsequent to the approval by GOG technical and administrative departments and by the Chief Engineer (Irrigation Projects), and after inc- lusion of approved MIPs proposals in GOG's annual development plan,. which would in turn require the approval by GOI's Planning Commission, the selected MIPs would be submitted to the AC for appraisal. The AC would visit the project area and for each MIP prepare a project summary, to be submitted to the Association. If the MIP meets all established criteria, costs less than Rs 70 million ($8.1 million) and has a benefit/cost ratio better than 1.0, the CWC/AC would be authorized to approve the project. In all other cases, the project would be reviewed in detail by IDA, which would base its decision on an analysis of Project Reports and Summaries supplemented by field visits, if necessary. It is expected that about 8 eligible MIPs representing more than 60% of the IDA financed investment program, would be subject to prior IDA review and approval. Preparation, appraisal and approval of moderniza- tion of existing MIPs, essentially lining of canals down to 8 ha outlets, would follow the same procedures. In addition, Bank Group staff would participate in CWC/AC's appraisal of the first modernization project.  - 1 7 - 52. The AC would also closely monitor the progress of preparation, implementation and operation of the MIPs. Periodic progress reports would be submitted to IDA. The main activities of IDA would concentrate on assess- ing the quality of AC appraisal and review work, spot checking whether the agreed criteria have been followed, reviewing procurement procedures, check- ing the financial records kept by GOG, assessing the continuing appropriate- ness of the established criteria, and examining content, timing and adequacy of the reports to be submitted by the AC to the Association. 53. The Irrigation Projects Branch of GOG's Public Works Department (PWD) would be responsible for the implementation of all irrigation works. Progress of project implementation would be reviewed by the AC three times during each year. The Irrigation Branch of PWD is in charge of operation and maintenance. GOG has given assurances that, under arrangements satis- factory to the Association, the dams and related structures constructed under the project would be periodically inspected in accordance with sound engineer- ing practice to determine whether there are any deficiencies that may endanger their safety (Section 3.06 of the draft Project Agreement). Assurances have also been obtained from GOG that it would provide adequate funds at all times to operate and maintain the facilities completed under the project in accord- ance with sound engineering standards (Section 3.07 of the Project Agreement). In 1977, a Project Preparation and Monitoring Cell with a multidisciplinary staff was established in order to better integrate agricultural development aspects in the planning of irrigation projects. Water allocation, on a rotational basis, would be established at the beginning of each irrigation season by the Canal Advisory Committee, which includes staff from PWD and GOG's Department of Agriculture, and farmers' representatives. This com- mittee would be strengthened so as to enable it to coordinate all other activities pertaining to irrigated agriculture. Project Cost and Financing 54. The estimated total cost of the project is US$170.5 million equiv- alent (net of taxes and duties, which are negligible), including US$28.3 million (17%) in foreign exchange. The principal cost components, net of physical and price contingencies, are: construction of MIPs (US$83.1 million) and modernization of MIPs (US$19.0 million). The balance is made up by river gauging networks (US$0.7 million), monitoring and evaluation studies (US$0.2 million), design and management (US$14.4 million), physical contingencies (US$19.4 million) and expected price increases (US$33.7 million). 55. The proposed credit of US$85.0 million would cover 50% of project cost, including all foreign exchange cost and US$56.7 million of local costs. Local cost financing is justified in India for projects such as this for the reasons discussed in para. 27 above. GOG would finance the remaining 50% of project costs. GOI would channel the proceeds of the credit to GOG on the standard terms and arrangements on which development funds are being provided to State governments by the Center. 56. The United States Government and GOI are at present considering the possibility of channelling US$30 million of US-AID funds to GOG in support of GOG's development plan for MIPs in addition to the proposed IDA credit.  - 18 - If this proposal materializes, GOG would be able to step up the pace of medium irrigation development, to which it attaches highest priority. Its outlays for this purpose over the next five years would be revised from US$170.5 million to about US$215 million. The additional funds would be used in the same way as the proceeds of the proposed credit. In particular, the mechanism, developed by GOI, GOG and the Association, for preparation, appraisal, approval and imple- mentation of MIPs (para. 51 above) would be adopted for the additional invest- ment. Procurement would also follow the pattern set up under the proposed IDA credit. It may, however, become necessary at the time to adjust disbursements from the proposed credit in such a way as to ensure that funds from the IDA credit and from the US-AID are disbursed in the ratio 85:30. The economic justification of the proposed IDA project would not be adversely affected by the increase of GOG's medium irrigation program. Nor would any additional risks arise. Procurement and Disbursement 57. The proceeds of the proposed credit would be used to finance: civil works for the construction of new MIPs (US$67.0 million), civil works for the modernization of existing MIPs (US$16.0 million), equipment and vehicles (US$300,000) and technical services (US$200,000). The remaining US$1.5 million would be left unallocated. 58. Civil works would be labor intensive, relatively small and scat- tered throughout the State, and restricted to seasonal construction. In these circumstances, it would not be feasible or economic to combine them into contracts large enough to attract international contractors. It is therefore, proposed that they be carried out by local contractors in accord- ance with GOG's present practice for on-going MIPs. Current practice is to contract most of the construction works for dams, spillways and distribution networks after local competitive bidding. Gujarat has a well developed con- struction industry and the procedures for local competitive bidding are satisfactory. Some of the minor works would be awarded under small unit price contracts. Force account would be used only when required by safety or quality considerations, or where the use of heavy machinery is required, and would be limited to a maximum of 10% of all civil works. The estimated cost of vehicles and equipment to be procured under the project is US$292,000 net of contingencies. All of this total represents contracts of less than US$100,000 each, for which international competitive bidding would be quite inefficient. These items would therefore be procured through normal procure- ment procedures of GOG, which are acceptable to IDA. 59. The proceeds of the credit would be disbursed for approved MIPs against 60% of expenditures on civil works. Disbursements for directly imported vehicles and equipment would be made against the foreign exchange cost. For locally procured items, disbursements would be against the ex- factory price or, where the ex-factory price is not available, against 70% of cost. For technical services, disbursements would be made against 100% of expenditures. Disbursements for force account work and for payments of less than Rs 100,000 under civil works contracts and Rs 50,000 for vehicles and equipment would be made against certificates of expenditure submitted by GOG. The supporting documents for these payments would not be submitted to the  - 19 - Association but would be retained by GOG for inspection by IDA project review missions. Full documentation would be required for all other disbursements. The credit would be expected to be fully disbursed by June 30, 1984, about one year after completion of the project. Benefits and Economic Justification 60. The proposed project would assist in expanding the area under irriga- tion by about 82,000 ha and increase the productivity of existing irrigation projects. At full development, the project would increase foodgrain production by 113,000 tons, oilseed production by 25,000 tons and cotton production by 27,000 tons. It would generate about 10,000 and 12,000 additional full time jobs in farm and non-farm sectors, respectively. The increased agricultural production, net of input costs, would be worth about US$43 million equivalent annually. Foreign exchange savings would amount to US$52 million per annum. 61. According to the economic criteria for the selection of MIPs, CWCIAC would be authorized to approve projects with an economic rate of return exceed- ing 12%. Based on an average investment cost of US$1,740 per ha and on projec- ted typical cropping patterns, the average economic rate of return of MIPs to be constructed (81% of project base cost) is estimated at about 19%. For modernization of MIPs (19% of project base cost), costing US$470 per ha on average, the economic rate of return is estimated at 26%. The average economic rate of return on these components, which account for 99% of project cost net of contingencies, is 01%. 62. Net farm incomes would rise substantially under the project. At present, they are estimated at about Rs 1,910 for the medium size farm (about 2.0 ha) in Mainland Gujarat, where over three-quarters of the area to be covered by GOG's five year MIP program is located, and at about Rs 4,520 for the median size farm (about 5.0 ha) in Saurashtra peninsula. The project would raise net farm incomes roughly five-fold. The percentage of farm households below the poverty line (US$70) would be reduced from 69% to 13%. Similarly, the share of farm households with a per capita income less than the national average (US$150) would fall from 94% to 35%. Cost Recovery 63. If costs for capital investment under the project were to be recovered from beneficiaries over 50 years at 10% annual interest, the annual charge to farmers would amount to about Rs 1,510 per ha. Recovery of costs for operation and maintenance (O&M) would require an additional charge of Rs 70 per ha annually. 64. The prime vehicle in Gujarat for recovering capital and O&M cost for irrigation works is the water charge. Water charges depend on crops and range at present from Rs 27/ha for kharif crops other than paddy to Rs 585/ha for sugarcane. For the projected cropping pattern of the MIPs, the water rate would average about Rs 104/ha. In addition, a local cess of 20% is levied on the water rate, which would bring the total assessment up to about Rs 125/ha. The present water rates in Gujarat, together with those in Maharashtra, are the highest in India. GOG reviews and revises the water charge every two or  - 20 - three years. Over the last decade, the rates have increased about 2% annually in real terms, reflecting increased agricultural productivity. The next re- view of water charges is scheduled for June 1978. In addition, GOG is in principle authorized by the Irrigation Act to collect a betterment levy, the amount of which would be determined by the increase in land value due to the specific irrigation project. However, the assessment of the betterment levy has been successfully challenged in the courts as in most other States, and the betterment levy is not being collected in Gujarat. Additional revenues would, however, accrue to GOG from incremental tax collection. GOG's revenues from the agricultural sales tax would increase by an estimated Rs 120 per ha brought under irrigation from MIPs. Taking into account all actually col- lected charges and taxes, total GOG revenues would increase by Rs 245/ha due to the project and, assuming a discount factor of 10%, GOG would, thus, recover about 16% of the Rs 1,580/ha required annually (para 63 above) to recover costs of O&M and of capital investment. 65. As a result of the project, net farm incomes would increase about fivefold (for present incomes see para. 62 above). The average "project rent" (net incremental income less the necessary rewards to the farm family for its labor, entrepreneurship and cultivation risk) is estimated at Rs 3,000 per ha at full development of the project. Since total annual charges to the farmers (para. 64 above) would represent only about 9% of the project rent, they would leave ample incentive to project farmers to use irrigation water. In fact, there would appear to be scope for a significant increase in the water-related charges. However, there are large variations between farmers in the benefits accruing from irrigation. Until it is technically and administratively pos- sible to levy water charges on the basis of the volume of water actually used, the Government will tend to set water charges at a level sufficiently low to give sufficient incentive to the use of irrigation water by farmers at canal "tailends," where water supply is less reliable and benefits from such irri- gation fairly low. The technical standards introduced under the project are specifically designed to ensure that each farmers in the command area receives a reliable water supply. Thus, there is a clear justification for collecting higher charges from the farmers benefitting from new or modernized MIPs. Consequently, an agreement has been reached with GOG that it would, by Decem- ber 31, 1982, review the water and water-related charges in the State, and implement a system of such charges to ensure recovery of annual operation and maintenance costs and, to the extent possible, cost of infrastructure investment. This system would be based on the outcome of the review after paying due regard to IDA's comments. Due consideration would also be given to incentives for, and payment capacity of, farmers (Section 3.03 of the Project Agreement). Project Risk 66. The risks associated with the project are essentially those normally associated with irrigation projects in India. A special risk stems from the delegation of primary responsibility for field appraisal, approval and routine progress reviews for qualifying MIPs to a relatively new, little tested organ- ization in the Central Government. However, the arrangements for approval of the sub-projects and the expanded reporting requirements that would permit the Association to identify problems early and to intervene directly, if necessary, would minimize this risk.  - 21 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 67. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the State of Gujarat, and the Recommendation of the Committee provided for in Article V Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 68. Special conditions of the project are listed in Section III of Annex III. 69. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATIONS 7O. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments May 10, 1978   ANNEX I Page 1 INDIA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2 - INDIA REFERENCE COUNTRIES (1970) TOTAL 3260.5 MOST RECENT AGRIC. 1797.5 1900 1970 ESTIMATE INDONESIA PHILIPPINES BRAZIL** _- - -- -- -- -- -- -- -- -- -- -- -- -- - -- _- -- -- -- ---- - _-- -- -- -- - -- _-- -- -- -- --- GNP PER CAPITA (USsl 60.0 100.0 150.0 130.0 230.0 550.0 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. 133.0 167.0 189.0 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 (/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 (YES) 41.7 47.2 49.5 .. 55.8 S9.4 GROSS REPRODUCTION RATE 3.2 2.9 2.B 3.2 3.3 2.8 POPULATION GROWTH RATE (%) TOTAL 2:51 b.0 2.3 2.1 2.0 3.0 2.9 URBAN 2.5 . 3.2 3.1 3.7/a 4.0 5.0 URUAN POPULATION (% OF TOTAL) 17.9 19.8 20.6 17. 51 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.8 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.t 3.1 3.2 2.6 2.8 3.0 AGE DEPENDENCY RATIO 0.8 0.8 9.6 0.9 0.9 0.6 ECONOMIC DEPENDENCY RATIO tA. 1 '.1j .. t FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14585.0 37658.0 259.3 320.0 250.0 USERS (% OF MARRIED WOMEN) .. .. 18.7 -. 2.0 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 175000.0 218000.0 261000.0/a 12400.0 29400.0 LABOR FORCE IN AGRICULTURE (1) 71.0 69.0 69.0 .. 55.o/a 40.4 UNEMPLOYED (x OF LABOR FORCE) 4.8 /d 4.4 /b 4.4J5,. .. 7.6 7.5 INCOME DISTRIBUTION X OF PRIVATE INCOME RECOD BY- HIGHEST 5% OF HOUSEHOLDS 26.7 25.0 /c .. . .- 35.0/a HIGHEST 20% OF HOUSEHOLDS 51.7 53.1 7 .. 54.0 62.075 LOWEST 20% OF HOUSEHOLDS 4.1 4.7 . 36 3-0 LONEST 401 Of HOUSEHOLDS 13.6 13.1 3i.. *- 10 .1, DISTRIBUTION OF LAND OWNERSHIP X OWNED By TOP 10% OF OWNERS .. .. .. . .. 45.0 X OWNED BY SMALLEST 10% OWNERS .. .. .. . . 1.5 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 5840.0Le_ 4890.0 4220.0 26370.0 .. 1910.0 POPULATION PER NURSING PERSON 5310.0. 220.0/d 3680.0/e 7830.0/ - . 3220.0 b POPULATION PER HOSPITAL BED 2590.0 L 1610.0 .. 1640. 6- 850.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 95.0 92.0 89.0 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 48.0 43.0 45.0 64.0 -OF WHICH AND PULSE 19.0] 16.0 12.6 14.0 22.0 39.0 DEATH RATE (/THOU) AGES t-4 44.0 .. .. .. 6.6 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 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 t2.0 11.0 12.0 18.0 11.0 VOCATIONAL ENROLLMENT (X OF SECONDARY) 6.0 .. .. 29.0 S.o tb 17.0 ADULT LITERACY RATE (x) 24.0 33.0 36.O. 59.0 .. 64.0 HOUSING PERSONS PER ROOM (URBAN) 2.6 2.8 .. .. 2.1 1.0 OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) . .. .. .. 76.0 73.0 /c ACCESS TO ELECTRICITY (x OF ALL DWELLINGS) .. .. . .. 23.0 48.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (I) .. .. .. .. 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.o ELECTRICITY (KWH/YR PER CAP) 46.0 114.0 143.0 20.0 23S.0 491.0 NEWSPRINT (KG/YR PER CAP) 0.2 0.3 0.3 0.3 2.0 2.7