India - Kandi Watershed and Area Development Project (Punjab)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2384-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 THE KANDI WATERSHED AND AREA DEVELOPMENT PROJECT June 30, 1980 This documaent hs a retcd drIbution and may be wed by recipients only in the pedrfwmance of their oIcial di. Its contents may not oterwise be disciesnd witbut Worldl Bak authorizstln.  CURRENCY EQUIVALENTS 'as at June 25, 1980) Rs 1.00 = Paise 100 US$1.00 = Rs 7.864735 Rs 1.00 = US$0.127150 Rs 1 million = US$127,250 (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$1 to Rs 8.40.) FISCAL YEAR April 1 - March 31 LIST OF ABBREVIATIONS USED IN THIS REPORT GOI - Government of India GOP - Government of Punjab  FOR OFFICIAL USE ONLY INDIA KANDI WATERSHED AND AREA DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President (GOI) Beneficiary: State of Punjab (GOP) * Amount: US$30 million Terms: 20 years, including 5 years' of grace. Interest rate would be 8.25% per annum. Relending Terms: As part of Central assistance to States for development projects on terms and conditions applicable at the time. GOI would bear the exchange risk. Project Description: The proposed project would be the first stage of an integrated development strategy to rehabilitate the Sub-Himalayan Shiwalik area. It would be a pilot effort with its main focus on institution building aimed at strengthening local capabilities to plan and implement similar projects in the future. The project would contain a package of components designed to: improve the vegeta- tive cover in the upper catchments of the Shiwalik Hills, thereby regulating run-off and reducing soil erosion; protect agricultural land below the Hills from the devas- tation of annual floods; and enhance the productivity of both forest and agricultural land thus protected. The project would be implemented in five watersheds in the Kandi Tract, the Punjab portion of the Shiwaliks. The risks in the project are those inherent in any innovative pilot project. However, as most of the indi- vidual components of the project have been technically proven, the principal risks are associated with the ability of the project authorities to implement an inte- grated development program and to obtain the cooperation of farmers, particularly in the upper catchment areas where grazing controls will be introduced. r 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.  Estimated Costs: Million US Dollars Local Foreign Total Upper Catchments Reforestation and Soil Conservation 7.1 0.1 7.2 Livestock Development 4.8 - 4.8 Subtotal 11.9 0.1 12.0 Flood Control and Irrigation Dholbaha - Flood Control 2.9 0.2 3.1 Dholbaha - Dam and Irrigation 5.9 1.2 7.1 Other Watersheds 11.9 1.3 13.2 Subtotal 20.7 2.7 23.4 Farm Development Horticulture 0.5 - 0.5 Fisheries 0.7 - 0.7 Land Development in Dholbaha 2.2 0.2 2.4 Subtotal 3.4 0.2 3.6 T.A., Research, Training Technical Assistance and Overseas Training 0.7 0.9 1.6 Groundwater Studies 1.4 0.1 1.5 Research 0.7 - 0.7 Subtotal 2.8 1.0 3.8 Project Administration, Monitoring, Evaluation 0.9 0.1 1.0 TOTAL BASE COST 39.7 4.1 43.8 Physical Contingency 4.4 0.5 4.9 Price Contingency 11.0 1.1 12.1 TOTAL PROJECT COST /a 55.1 5.7 60.8 /a Taxes and duties are negligible and, therefore, are not calculated separately. Financing Plan: (US$ Million) Local Foreign Total IBRD 24.3 5.7 30.0 GOI/GOP 30.8 - 30.8 55.1 5.7 60.8  - 3.11 - Estimated Disbursements: (US$ Million) FY81 FY82 FY83 FY84 FY85 Annual 1.8 5.0 7.6 8.0 7.6 Cumulative 1.8 6.8 14.4 22.4 30.0 Rate of Return: 16% for Dholbaha, and not less than 12% for other watersheds. Staff Appraisal Report: No. 2174-IN, dated June 30, 1980   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE KANDI WATERSHED AND AREA DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to India for the equivalent of US$30 million to help finance a project designed to protect and develop agricultural land in the lower Himalayan foothills that is presently subject to serious erosion and flooding. The loan would have a term of 20 years, including 5 years of grace, with interest at 8.25% per annum. The proceeds of the loan would be channelled by the Government of India (GOI) to the Government of Punjab (GOP) on GOI's standard terms and arrangements for financing of State development projects. GOI would bear the exchange risk. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (2933-IN, dated May 1, 1980), was distributed to the Executive Directors on May 14, 1980. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of 663 mil- lion (in mid-1980) and an annual per capita income of US$180. Agriculture continues to dominate India's economy, employing over two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to all those engaged in agricultural activities, especially the landless or nearly landless who have only an insecure grasp on the means of existence. The share of agriculture in GDP at factor cost (measured in 1970/71 prices) has declined from 59.6% in 1950/51 to 40.7% in 1978/79. The share of industry has increased over the same period from 14.5% to 22.7%. But industrialization has not been rapid enough to absorb the growing labor force, nor to bring about the substantial economic transformation that has led to higher productivity and rapid urbanization in some other developing countries. The urban population was 18% of the total in 1960, and is 21% now. 4. Economic growth has been slow in the past. The trend growth rate of GDP was 3.7% per annum from 1950/51 to 1978/79. Slow growth in agriculture -- 2.5% per annum over the same period -- has constrained overall growth, not only because of the high share of agriculture in GDP but also because scarce foreign exchange has often been required to import food. Industrial valued-added has grown more rapidly, at 5.4% per annum between 1950/51 and 1978/79, but this growth has not been as high as in many other countries, nor as high as required if the overall growth of the economy is to be accelerated. Slow growth has persisted despite a quite creditable domestic saving and investment performance. Gross domestic saving more than doubled from 10% of GDP in 1950/51 to 24% in 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Rajasthan Water Supply and Sewerage Project (Report No. P-2831-IN), dated June 2, 1980.  1978/79. Similarly, gross domestic investment as a fraction of GDP rose from 10% in 1950/51 to just over 24% in 1978/79. Foreign savings have never financed a large portion of domestic investment: a peak of about 20% was reached during the early 1960s; by the end of the 1970s, the proportion had returned to much lower levels. External assistance has been low both as a percentage of GDP and in per capita terms. Net external assistance has never risen above 3% of GDP. 5. Except during periods of balance of payments crisis, exports have received relatively little emphasis in India, which has primarily pursued a strategy of import subsitution. As a result, India's share of world trade has fallen consistently since 1950/51. The volume growth of exports between 1950/51 and 1978/79 averaged only 3.0 per annum. The volume of growth of imports over the same period has slightly exceeded that of exports. During the early 1970s, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated drastically, spurring a relatively rapid period of export growth through the mid-1970s. For the five years ending in 1976/77 the volume of India's exports grew on average over 10% per annum, demonstrating that sustained rapid growth was possible. While expanding world markets, par- ticularly in the near-by Middle East, contributed to this process, adjustments in trade policies designed to improve the profitability of exports played a major role. Recent Trends 6. Over the period 1975/76 to 1978/79, growth in real GDP (at factor cost), agricultural value-added and industrial value-added averaged 4.7%, 2.8% and 7.3% per annum, respectively. These trends represent a marginally better growth performance than the long-term trends from 1950/51 to 1975/76. However, GNP is expected to have declined by about 3% in 1979/80 as a result of the drought-induced decrease in agricultural production and input con- straints in other sectors, bringing recent trends back in line with the long- term picture. Industrial production stagnated in 1979/80, largely due to shortfalls in the production of major inputs such as coal, steel and cement, as well as constraints in the provision of infrastructure, notably power and transportation. As a consequence of these developments, the remarkable price stability that characterized the Indian economy after 1975 came to an abrupt end at the close of fiscal year 1978/79. During the Spring and Summer of 1979 the price index rose sharply, so that by September it stood at 18.4% above that of the previous September. Foodgrain prices rose over the Summer and Fall of 1979 but in most markets still prevailed close to the Government's ration prices. Low income groups in urban areas were assured adequate sup- plies of grain at stable prices through the public distribution system. The substantial stocks of foodgrains also provided resources for a large-scale drought relief employment program for low income groups in rural areas. 7. In agriculture the positive results of large investments and appro- priate policies over the past few years are becoming increasingly evident and have withstood the test of a severe drought. Agricultural production, which had increased by 14.5% in 1977/78 and 3.4% in 1978/79 to record levels each year, fell about 8-9% in 1979/80. Foodgrain production is estimated to have  declined from 131.4 million tons in 1978/79 to 118-120 million tons in 1979/80. Considering that 1979/80 was a year of acute drought, coming after two succes- sive years of record output, the foodgrain production achieved--still the fourth highest in Indian history--provides a measure of the contribution that expanded irrigation, extension and other inputs have made to Indian agriculture. Furthermore, the capacity of India's irrigation potential to counteract drought conditions was not adequately tested because of the diesel shortages which inhibited the utilization of groundwater resources. Rapid growth in the use of basic inputs for agricultural production has continued. Additions to the area under irrigation have almost doubled from 1.3 million hectares during the five-year period ending in 1973/74 to about 2.5 million additional hectares a year during the most recent three-year period. Fertilizer consumption in 1979/80 exceeded five million nutrient tons, a level almost 80% higher than in 1975/76. 8. As the new decade begins, the Indian economy is shifting from a situation of resource surplus, which had been a temporary phenomenon of the late 1970s, to one of resource scarcity. Investment has again overtaken domestic savings, and the scope for further increases in the latter appears limited. Marginal savings rates have recently been well above 30% in the household sector. Future increases in savings will depend largely on enhanced profitability of public sector enterprises. Impending resource scarcity is even more apparent in the foreign sector. Between 1975/76 and 1978/79 India's current account deficit had remained comfortably small in relation both to GDP and to a growing pipeline of aid commitments. This was primarily due to favorable terms of trade movements and rapidly growing net invisibles which masked adverse underlying trends in the volume of exports, which has barely grown since 1976/77. Particularly serious is the evident decline in the quantum of manufactured non-traditional exports which had contributed much to the export growth of the first half of the decade. A combination of strong domestic, and slack international demand, exacerbated until recently by apparent lessened interest in export promotion, have been the major casual factors. 9. In contrast, imports have grown rapidly in volume terms and there have been important changes in composition. As a result of the accumulation and maintenance of foodgrain stocks, foodgrain imports--which had been a traditional item in the balance of payments--have declined to insignificant levels since 1977/78. Reflecting the impact of the liberalized import policy adopted by the Government, non-foodgrain imports increased sharply, so that their level in 1978/79 was over 80% higher than in 1975/76. In large part, the liberalization in import policy and increase in imports were limited to raw materials, basic commodities and intermediate goods; consumer goods remained banned and capital goods imports were permitted only on a selective basis. Strong new pressures on the balance of payments have developed during 1979/80. The terms of trade again deteriorated markedly as a consequence of unexpectedly large increases in petroleum prices, which caused the oil import bill to double in 1979/80, accounting for more than 80% of the total estimated US$2.5 billion increase in imports, and bringing India's total import bill to about US$11 billion. Petroleum imports as a proportion of exports now exceed 50%.  -4- Development Prospects 10. The experience of recent years illustrates that India does have the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless has a highly diversified structure and is capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure--irrigation, railways, telecommunications, roads and ports--is extensive compared to many countries, although there is considerable scope for expansion as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and sufficient access to foreign savings, India has the capability for managing these considerable resources to accelerate its long- term growth. 11. The new Indian Government installed in January 1980 is in the process of formulating its policies and programs. A new Plan for the period 1981-86 is being prepared to replace the Draft Five-Year Plan for 1978-83. At this stage it is not possible to comment on the new development strategy; however, it is unlikely that the priorities accorded to agriculture and power will be lessened. Furthermore, developments in India as well as in the world economy during 1979/80 have brought to the surface urgent issues which will need the attention of policy-makers, irrespective of the broader context of development strategy that the new Government may adopt. Among these issues are the following: (a) the bottlenecks in infrastructure and related constraints in production of several basic industrial inputs; (b) the new policy options emerging in agriculture; (c) the need to substitute less costly energy sources for imported petroleum; and (d) the anticipated deterioration of the balance of payments in the near future. 12. The higher capital formation rates of the past few years augur well for future income growth. However, there are signs that, relative to existing demands, the past investment program has led to disproportionally low growth in certain crucial sectors, namely power, coal, transport services, steel and cement. Potential output growth in sectors which have benefitted from large investments in the recent past may not materialize unless these input bottle- necks are alleviated. In the case of coal, steel and cement, domestic produc- tion appears to be clearly justified on grounds of comparative advantage, and the aim of policy is self-sufficiency. All these are tradeable commodities. Although in 1979/80 they were not imported in sufficient amounts to eliminate the shortages, increased short-term reliance on imports may be necessary to alleviate slowdowns and dislocation in using industries. In the case of sectors in which there is no option to import--power and transportation-- the planning of capacity expansion becomes even more crucial. Although there is scope for improvement in the shortrun performance of these sectors, major investments in balancing and modernization programs as well as new capacity are needed in order to provide adequate and stable growth in the medium term. The presence of infrastructural constraints and shortages of basic industrial inputs demonstrates that the expansion of industrial outout leads to competing claims on scarce resources which must be efficiently allocated among different industries.  -5- 13. The substantial increase in the world price of petroleum in 1979, together with the expectation that this pattern will not be reversed in the near future, raises several issues concerning energy prospects for India. India imports the equivalent of about 50% of its petroleum consumption. In order to implement its policy of minimizing dependence on foreign oil, the Government intends to rapidly expand its oil exploration program, to increase the utilization of its vast coal reserves and to increase the development of India's considerable hydroelectric potential. However, recent shortages of coal and power are symptomatic of operational problems reflecting, in part, past planning and investment decisions which are inhibiting the timely imple- mentation of India's long-term conversion program. The interdependencies in the economy currently make petroleum demand a residual which is contingent on the operation of many other sectors and which has significant implications for the balance of payments. 14. In agriculture, despite the 1979 drought, economic policies, devel- opment programs and secular trends all seem favorable for sustaining a period of high growth during the 1980s. India should end the 1979/80 rabi season with grain stocks of about 15 million tons, without having imported foodgrains during the year. This is partly due to the bumper crop of 1978/79, but also reflects the trends of the last decade which point to a consistent improvement in foodgrain availability in the economy. In view of the acceleration in the use of agricultural inputs and the projected fall in the population growth rate, the long-run prospects for foodgrain supply and demand balances look favorable. Persistent shortage seems unlikely, and it is probable that a wide range of policy options will become much more practical as the overriding emphasis on foodgrains can be somewhat relaxed. These options include a slowly falling real price of foodgrains to increase the affordability of foodgrains to low- income families, further rationalization of domestic markets and prices, and diversification to the production of other higher value crops. This prospect will involve only a gradual shift in emphasis rather than a dramatic break with past policies. 15. Foreign exchange reserves still provide some cushion that can help the Government of India in short-term supply management, but this situation is likely to be short-lived. Rising import prices and uncertainties in the prospects for exports and invisible receipts have led to a serious and rapid deterioration in India's balance of payments prospects. Reserves were only marginally higher in March 1980 than the level of a year earlier and, in terms of import coverage, fell below the 8-month level for the first time since 1977. A sharp decline in the reserve level is expected in 1980/81. At best, India's reserves may provide a cushion for two more years, and even that is conditional on the maintenance of aid flows and workers' remittances and on moderation in oil price rises. 16. India's medium-term development prospects are mixed. Progress has been made and continues to be made, particularly in agriculture, but the economy faces a period of difficult adjustments in the coming years. Invest- ments required to relieve short-term supply constraints must compete with longer-term programs to accelerate growth and to develop India's considerable  -6 - physical and human resources. The balancing of these objectives will place a difficult burden on the framers of India's next Five-Year Plan. The primary focus must be on the implementation of appropriate domestic adjustment policies, although the aid community can and should play an important role in ensuring that India's efforts do not fail due to inadequate foreign resources. 17. The annual population growth rate declined from 2.2% in the late 1960s to below 2% at present and is expected to continue falling to around 1.6% by the latter half of the 1980s. Despite the declining trend in the rate of population increase, a net reproduction rate of one (replacement level) will only be achieved around the year 2020. At that time, the population of India is estimated to reach 1.2 billion persons, an increase of about 81% over the mid 1980 level of 663 million. Family planning has played an important role in achieving the fertility decline in the past decade, and the extent of a further decline will be greatly influenced by the continuation of a success- ful official family planning program. The family planning performance data for 1978/79 and the first ten months of 1979/80 clearly indicate a come back from the sharp decline observed in virtually all major contraceptive methods during 1977/78. Except for male sterilizations, the number of acceptors for all contraceptive methods surpassed the 1974/75 levels in 1978/79. While the increase in the total acceptors of IUD and conventional contraceptives was modest, female sterilizations increased by about 40% between 1977/78 and 1978/79. Data for the first ten months of 1979/80 confirm a secular upward trend in overall performance. So far, policy makers have not made major attempts to accelerate the male sterilization program. Instead, they have opted for policies that would yield relatively modest but sustainable results with increased emphasis on non-terminal methods. 18. Beyond the effects of overall economic growth and constrained popula- tion growth, the reduction of poverty in India requires special attention to ways of raising the income and productivity of low-income groups. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. In addition to marginal holdings of physical assets, the poor are ill-endowed with human resources, being disproportionately represented among the illiterate, the malnourished and those having otherwise poor health status. Improvements in the living standards of the poor will depend to a large extent on the over- all growth of the economy, mainly on productivity increases in agriculture and non-farm rural employment, but also on the expansion of employment oppor- tunities in urban areas. These developments will have to stem largely from market forces which, however, can be greatly facilitated by appropriate gov- ernment policies and investment priorities. There is also a role for direct government actions in faster implementation of land reform (though the scope for significant reduction in poverty through redistribution is quite limited in India), in increasing the supply of credit available to small farmers and rural artisans and finally in broadening the provision of those services which enhance the human capital of the poor and improve living standards. Many of the latter are elements of the Minimum Needs Program which has been an integral part of Indian planning for the past decade. Progress has been slow but steady in the expansion of primary education, the extension of rural  - 7 - health facilities and the provision of secure village water supplies. Recent innovations, including the community health volunteer program and the national adult literacy campaign, are encouraging evidence that well-targetted, rela- tively low-cost programs can lead to enhanced prospects for India's poor. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 57 loans and 121 development credits to India totalling US$2,529 million and US$7,540 million (both net of cancellation), respectively. Of these amounts, US$1,060 million had been repaid, and US$3,173 million was still undisbursed as of April 30, 1980. Bank Group disbursements to India in the current fiscal year through April 30, 1980, totalled US$561 million, representing an increase of about 26% over the same period last year. Annex II contains a summary statement of disbursements as of April 30, 1980, and notes on the execution of ongoing projects. 20. Since 1959, IFC has made 18 commitments in India totalling US$72.5 million, of which US$18.6 million has been repaid, US$7.6 million sold and US$7.5 million cancelled. Of the balance of US$38.8 million, US$30.3 mil- lion represents loans and US$8.5 million equity. A summary statement of IFC operations as of May 31, 1980, is also included in Annex II (page 5). 21. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit operations and in providing direct support to major and medium irrigation. Marketing, seed development, agricultural extension, 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 capacity utilization in industry. The Bank Group has also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, water supply development, and urban investments have also received Bank Group support in recent years. 22. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, power, water supply and other infrastructure sectors remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs, particularly water and credit for on-farm investments, will continue to receive emphasis. Improved water management and intensification and streamlining of extension systems  -8- form an important institution-building aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefit- ting small farmers. The Bank Group's continuing role in the fertilizer sector also assists India in the more efficient provision of another key input in the agricultural growth process. 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 infra- structure and industrial investments will focus on those subsectors which have recently emerged as key constraints on India's overall growth, primarily power and transportation. 23. 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 part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid 1970s. However, the need for increased foreign assistance to adjust to an even greater deter- ioration in balance of payments prospects during the 1980s by augmenting domestic resources and stimulating investment, remains. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity 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, and water supply. 24. India's poverty and needs are such that as much as possible of India's external capital 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 should be regarded as credit- worthy for some supplemental Bank lending. The ratio of India's debt service to the level of exports was 12% in 1978/79 and is projected to remain below 20% through 1995/96. As of March 31, 1980, outstanding loans to India held by the Bank totaled US$1,516 million, of which US$556 million remained to be disbursed, leaving a net amount outstanding of US$960 million. 25. 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 62%, 27% and 38%, respectively, in 1978/79. On March 31, 1979, India's outstanding and dis- bursed external public debt was US$15.3 billion, of which the Bank Group's share was US$4.6 billion or 30% (IDA's US$4.0 billion and IBRD's US$0.6 bil- lion). Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1978/79, about 17.5% of India's total debt service payments were to the Bank Group.  -9- PART III - PUNJAB AND THE KANDI TRACT The State of Punjab 26. The State of Punjab, situated in northwest India, has an area of about 50,000 square kilometers, and a population of some 16 million which is growing at about 1.9% per year. By almost all economic indicators, Punjab is the most advanced State in India. Per capita income, at about US$235 in 1977/78 compared to about US$140 for all-India, is the highest in the country; between 1960/61 and 1977/78 State income in constant terms grew at an annual rate of 5.2%. Although 75% of the population is rural, the rural areas are more developed and accessible than in the rest of India. Nearly 80% of villages are connected by metalled roads and most have electricity and drink- ing water. Yet, as with most states in India, there are pockets of poverty. A 1978 study on "Rural Poverty and Agricultural Growth in India", carried out by the Bank's Development Research Center, showed that 24% of the rural population of Punjab live below the absolute level of poverty. 27. Agriculture provides the key to Punjab's impressive growth record. At current prices, agriculture and related activities account for over 60% of the State income, and provide employment for about 70% of the work force. Although Punjab is one of the smallest States in India, it continues to make a major contribution to meeting the shortfall in India's foodgrain require- ments. In 1976/77, Punjab provided 3.9 million tons of wheat and rice, representing nearly 50% of its production, for export to deficit States. Foodgrain production increased at 7.7% per annum in the sixteen years from 1960/61, a remarkable achievement over so long a period. This has been brought about by annual increases in yields of some 5% and in cropped area of 2.7%. The main factors responsible for the impressive agricultural pro- duction record are: (a) an increase in the area under high yielding crop varieties (90% of wheat and rice is sown to such varieties); (b) an increase in the use of fertilizer and pesticide (consump- tion of fertilizer is 60 kg/ha in Punjab as compared to about 20 kg/ha for all-India); and (c) an increase in the irrigated area (86% of the State's net area sown is irrigated as compared to about 25% for all- India). 28. Unfortunately, production trends over the last few years suggest that the easy benefits of the green revolution have been reaped. Wheat yields have been stagnant for the past five or six years; there is little scope for expanding the area under high yielding or improved varieties, and the cropping intensity is already high at 144%. Moreover, groundwater and surface supplies are almost exhausted. It is estimated that 80% of the groundwater potential is now tapped and that groundwater resources of the State will be fully exploited within the next ten years. Thus, further expansion of production from irrigated agriculture will require increased efficiency of water use.  - 10 - 29. To regain momentum, the thrust of GOP's agricultural development strategy is now two-fold: firstly, to increase production further by improv- ing the efficiency of use of existing resources and secondly, to concentrate efforts on developing backward and neglected areas of the State. The first objective will be met by improving the efficiency of already existing irriga- tion systems. This will be achieved by improving the water conveyance system and land development and irrigation practices at the farm level. IDA is supporting these efforts through an irrigation project in Punjab (Cr. 889-IN). Overall efficiency will also be improved by upgrading arrangements for market- ing and distribution of inputs; to this end, GOP is undertaking an integrated rural development program. GOP's second objective will be addressed through the proposed project, which seeks to solve the dual problems of developing a backward area and repairing the ravages of erosion. A solution to the latter problem will also enable the rapid development of a considerable area of high-potential land which lies largely unexploited because of the constant threat of devastation caused by uncontrolled run-off from adjacent hills. The Kandi Tract 30. The largest undeveloped area of Punjab is the Himalayan2submoun- tainous zone, known as the Kandi Tract. It covers about 4,600 km (9% of the State) and contains some 6% of Punjab's population. This zone includes part of the Shiwalik range of hills which extend across the whole of northern India and Nepal at the foothills of the Himalayas. The Punjab Shiwaliks run for about 250 km along the northeastern part of the State, bordering Himachal Pradesh. The Kandi Tract includes all land within the Punjab Shiwalik Hills, together with a narrow band of largely undeveloped farmland. This band lies immediately below the hills and to the north of the State's main highway, which runs from Chandigarh in the southeast to Dasuya in the northwest (see map). 31. Prior to the middle of the last century, the Punjab Shiwalik Hills were strictly preserved and no cultivation, grazing or exploitation of timber was permitted. At that time the hills were covered with thick forests with an undercover of shrubs and grasses. Perennial streams flowed from the hills and supported agriculture in the plains below. However, after the forests were handed over to villages as additions to their village common lands in the middle of last century, unrestricted tree felling and overgrazing destroyed the vegetative cover. Heavy rain eroded the weakly cemented soils of the upper catchments and the streams became seasonal torrents carrying large amounts of sand and gravel down to the plains below spreading out in a fan- like fashion. These torrents are locally know as "choes". Within Punjab, there are some 21 major and 120 smaller choes that disgorge from steep, rough, highly erodible catchments in the Shiwaliks and flow through the gently rolling Kandi Tract into the Rivers Sutlej and Beas. 32. At first the choes brought fertile silt, whose presence was welcomed by the farmers, but later the silt was replaced by sand which overlaid the fields and destroyed them. By 1895, these choes had spread over and ruined thousands of hectares of valuable agricultural land in the plains. Recogniz- ing that the basic cause of the problem was loss of vegetative cover in the hills, the Government passed the Punjab Land Preservation (Choes) Act in 1902.  - 11 - This allowed areas to be closed to grazing, controlled the type of livestock permitted within grazing areas and could prohibit tree felling, cultivation and quarrying. Two categories of land were recognized under Sections 4 and 5 of the Act. In Section 4 areas, farmers were allowed: (a) to keep cattle and sheep but not goats or camels; and (b) to extract fuelwood, small timber and fodder for their own needs. Section 5 areas were closed to all livestock, and extraction of fuelwood and small timber was prohibited; fodder grass cut- ting, however, was permitted. The Act was not implemented with any vigor until the late 1930s and even then only for a few years and in a small number of upper catchments. From the 1950s to mid-1970s, lack of funds for refores- tation and soil conservation works, together with increases in the livestock and human populations led to even further degradation, particularly in the Section 4 areas which were generally situated close to habitations at the lower end of the upper catchments. The result is severe gully erosion, devastation of the plain lands below through flooding and sedimentation deposit and an exceedingly sparse vegetative cover in the hills. 33. Fortunately, adjacent to the project area is now an excellent example of successful Shiwalik Hill upper catchment rehabilitation, using exactly the techniques proposed for this project. In 1965, some 2,500 ha of land in the Kansil Khol catchment was handed over to the Forestry Department. Livestock was excluded, trees and grasses were planted and soil conservation structures were put in wherever needed. The results have been spectacular. Two years after closure, grasses and shrubs were evident on all but the steepest slopes. Now some 80% of the area is covered with vegetation and includes well estab- lished plantations of trees and bhabhar grass. Within 20 years it is expected that the catchment will be 70% rehabilitated; that is, it will have recovered 70% of its original soil holding and moisture retention properties. 34. Present Situation. Year after year, the torrents (choes) continue to cause heavy flood and sediment damage. Because of this, there has been little investment in infrastructure in the Kandi area and farmers have not invested in irrigation and land development. The result is that the majority of people in the Kandi Tract live below the absolute level of poverty. Yields of wheat are 700 kg/ha against a State average of 2,500 kg/ha. Less than 10% of the cropped area is irrigated compared to over 80% for the State as a whole. Fertilizer consumption per hectare is less than one-third of the State average, and high-yielding varieties of seed are used in only 17% of the area in wheat as compared to a 90% State average. These figures relate to cropped area, but only 58% of the potential agricultural land is cropped; the rest is made up of natural grasslands, scrub and choe beds. Moreover, social services (schools, public dispensaries, drinking water supplies and roads) in the project area are far below the State average. Finally, a factor which cannot be quantified is that those living below the hills exist in continual fear of flood damage, including loss of life, livestock and homes. 35. Scope for Improvement in Agricultural Production. Considerable scope exists for improvement of crop yields under rainfed conditions. Since 1971, the Soils Department of the Punjab Agricultural University has been conducting trials in the Kandi Tract. Results show that, given flood protec- tion, present yields can be more than doubled by following simple improvements. These involve the adoption of soil and water conservation practices, requiring partial land levelling and raising of bunds around fields, creation of a dust  - 12 - mulch once summer crops are removed, planting of improved crop varieties, correct seed rates and spacing and use of small amounts of fertilizer (40 kg/ha of a compound fertilizer) drilled with the seed at planting. Produc- tion of winter crops can be assured if a light irrigation can be given immediately after planting. 36. Agricultural Support Services. The support services in Punjab are generally very satisfactory and are adequate for the implementation of the proposed project. Punjab Agricultural University is responsible for the State's agricultural research, which is comprehensive and practical, being aimed at solving the problems of the farmers and at achieving better utili- zation of farm resources. The All-India Coordinated Dryland Farming Research Project in Hoshiarpur District, supervised by the University, is developing packages of practices for dryland farming areas. Agricultural extension is undertaken by the State's Department of Agriculture, assisted by the University, and is satisfactory. Agricultural credit is well provided in the State except in the backward areas (including Kandi), where land values are low and farmers have difficulty in raising sufficient collateral to be eligible for long-term institutional credit. In such areas, the State Government provides credit from budgetary sources. There is a well developed distribution system for seeds, fertilizers and pesticides. Certified seed of all principal crops is produced and distributed by the State Seed Corporation, whose development is assisted by a Bank Loan (1273-IN). Marketing, processing and storage facili- ties are also adequate in the State to handle any increase in demand that would be created as a result of the proposed project. Bank Group Activities in Punjab 37. The Bank Group has been directly involved in agricultural develop- ment in Punjab through a number of projects, since 1961. The Punjab Flood Protection and Drainage Project (Credit 15-IN of November 1961) provided US$10 million for flood protection and surface drainage, and was fully dis- bursed by September 1966. The Punjab Agricultural Credit Project (Credit 203-In of June 1970) provided US$27.5 million to help finance a program for farm mechanization, and it has been fully disbursed. The Integrated Cotton Development Project (Credit 610-IN of February 1976) and the National Seed Project (Loan 1273-IN of June 1976), which include Punjab among a number of other States, are currently being implemented. The Punjab Irrigation Project (Credit 889-IN of March 1979) has provided US$129 million to help Punjab implement a five-year time slice of Punjab's irrigation development program, and the project is currently under implementation. In addition, a US$38 million credit for the Punjab Water Supply and Sewerage Project (Credit 848-IN of October 1978) is assisting Punjab to help improve and expand water supply and sewerage facilities in eight towns in the State. PART IV - THE PROJECT 38. The project was prepared by the Government of the State of Punjab (GOP) with assistance from the Bank resident staff in India. It was appraised in May 1978, and negotiations were held in Washington in October 1978. A follow up mission visited India in March 1980, to update cost estimates,  - 13 - review the economic justification and ascertain the status of initial imple- mentation actions (see paragraph 39). The Indian negotiating delegation included Mr. K.S. Bains, Development Commissioner and Secretary of Agricul- ture, Government of Punjab, and Mr. J.K. Sibal, Director, Department of Economic Affairs, Ministry of Finance, Government of India. The Staff Appraisal Report (No. 2174-IN) is being circulated separately. A supple- mentary Project Data Sheet is attached as Annex III. 39. A major part of the project would encompass technical innovations to be designed and carried out with the help of an international team of multi-disciplinary consultants (see paragraphs 45 and 49). Recognizing the difficulties involved in arranging such a team, it was decided to defer pre- sentation of this project to the Executive Directors until the recruitment of the consultants had been finalized. A contract with a suitable consulting firm has now been signed. Project Description 40. The proposed project would be the first integrated attempt to pro- tect and develop the Sub-Himalayan Shiwalik area. It would be a pilot effort combining a package of complementary investments, most of which have been tried at one time or other but have failed to bring expected results because they were tried on a piecemeal basis. Its primary objective would be to lay the basis for future investments on a larger scale. Thus, the focus of the project is on institution building to strengthen local capability to plan, implement and monitor similar projects. The basic unit of project planning and implementation would be the watershed. Because watersheds in the Shilwalik hills differ significantly in size, topography, hydrology and degree of vegetatative cover, the project would be implemented in five water- sheds so as to obtain useful lessons for future replication. The five year project would comprise: (a) Rehabilitation of upper catchments to control runoff and erosion from the hills, through soil conservation, revege- tation (including tree and grass planting) and a compre- hensive development package for farmers and livestock owners; (c) Development of farm land protected from floods through land development (including land levelling, terracing and bunding), irrigation, and horticulture, livestock, poultry and fisheries development; and (d) Technical assistance, Studies, Research and Staff and Farmer Training. 41. Rehabilitation of Upper Catchments. The key component of the project is the rehabilitation of the badly denuded and eroded upper catchment areas of the five watersheds. This would control runoff and erosion, and would be achieved through a program of soil conservation and revegetation over about 24,000 hectares of upper catchments in the five watersheds. These measures would only succeed if the upper catchment areas are closed to live- stock grazing and unrestricted extraction of fuelwood and timber. GOP would,  - 14 - therefore, effect the closure (Section 2.09 of the Project Agreement). To ensure that the closure is effective, a comprehensive development package would be offered to livestock owners and other farmers presently living in the upper catchments (see paragraph 44). 42. To repair the ravages of erosion and to induce the process of revege- tation, small conservation structures would be constructed in gullies of the upper catchment to augment reforestation and grass planting planned for non- gully areas. Many of the structures would complete the task of gully stabil- ization after two or three years; thereafter, vegetation would take over the task of soil protection. Where gullies have been stabilized, vegetative recolonization would be assisted by planting pioneer species. 43. The prime purpose of replanting would be to reduce water flows and the amount of sediment carried by runoff. It would also increase productiv- ity of the upper catchments. For replanting, the techniques and species that have proved most successful in the past would be used, until the research to be provided under the project indicates better alternatives (see paragraph 50). Two types of tree/grass combination would be established to provide fodder required for stall-fed cattle and to supply raw material for paper pulp manufacture and rope making. Other varieties that would provide small timber, fuelwood and resin would also be included where ecology permits. The project would also provide forest service roads, forest nurseries, land preparation, planting, weeding, maintenance, fire protection and incremental staff, build- ings, vehicles and equipment required to carry out the program. 44. Villagers recognize the need to close the area for grazing and unrestricted extraction of fuel wood and timber before the land can be pro- tected and developed. But the closure would affect their livelihood, creating immediate hardship particularly to the poorest sections of the population who would have to part with their free-grazing livestock. To alleviate this hardship, the project provides for a comprehensive package to develop these hill areas. Firstly, to ensure full public cooperation, several local and State-level elected representatives would be involved in project implemen- tation (see paragraph 52). Secondly, GOP would intensify its program of agricultural extension, marketing and other services in the project area. Thirdly, the project would provide a livestock exchange program - to exchange improved cattle and sheep for free-grazing, low-yielding cattle, buffaloes and goats--and would include demonstrations and training of the farmers in new enterprises like poultry, fisheries and piggery. The new cattle will be stall-fed and provision would be made for hay-making equipment, fodder seed, fodder stores, veterinary services, etc. Finally, GOP would give priority to improving health and education facilities, water supply and roads in the project area. GOP would furnish for the Bank's review the details of the com- prehensive program to be carried for the benefit of the farmers affected by the closure in the upper catchments. In case of Dholbaha watershed, such details would be submitted by December 31, 1980 (Section 2.13 of the Project Agreement). 45. Flood Control and Irrigation. The reforestation and soil conser- vation measures to be undertaken in the upper catchments would considerably reduce the incidence of flash floods and the amount of sediment carried  - 15 - by runoff. Total monsoon runoff would not, however, be significantly reduced, and without flood protection works, agricultural land below the hills would still be subject to flooding. The proposed project would provide for the protection and irrigation of the agricultural land lying within the influence of Dholbaha, the largest watershed in the Kandi Tract, and four other water- sheds so as to provide useful lessons for future replications. GOP technicians have been able to formulate a satisfactory development plan for Dholbaha. But efforts to formulate plans for the other four smaller watersheds, applying the Dholbaha model, have not yielded satisfactory results. GOP has therefore finalized consultancy arrangements with an international team of multi- disciplinary specialists (see paragraph 49). This team would assist GOP to prepare plans for about ten watersheds. Four of these watersheds, whose development would be technically feasible and have at least a 12% economic rate of return, would be implemented during the project period (Section 2.10 of the Project Agreement). The remaining six watersheds are expected to be developed by GOP outside this project. Bank's approval of the detailed imple- mentation plan would be a condition of disbursement against expenditures on each of the four watersheds (paragraph 3(b) of Schedule 1 to the Loan Agree- ment). 46. The flood protection and irrigation works in Dholbaha would include: construction of an earthfill dam with a 25.6 million cubic meters storage reservoir to provide an assured source of irrigation and to moderate floods; a distribution system to irrigate an average of 3,000 hectares in winter season out of a cultivable command area of 3,750 hectares, and levees and protective works to convey flood runoff and sediment to the Beas River. The irrigation distribution system and watercourses would be lined. Design standards of the works are similar to those being used in the on-going Punjab Irrigation Project (Credit 889-IN). 47. Farm Development. In order to realize the full potential economic benefit of project works, it would be necessary to undertake land development in areas to be irrigated and protected from flood. It would also be neces- sary to undertake soil conservation measures on waste land or land cut up by gullies to prevent further erosion. The project, therefore, provides for bench terracing on land with slopes above 2%, land levelling and gully recla- mation. The objective of these practices would be to reclaim some of the existing waste land, increase productive potential on existing cultivated land and reduce soil erosion. The combined effect of the project activities (flood protection, irrigation and land development) would be to increase the cultivable area by nearly 60% and to increase substantially the agricultural potential of these lands. 48. To augment GOP's horticulture development program in the area, the project would provide for the establishment, equipping, staffing and opera- tion of a 25 ha nursery-cum-progeny orchard. In order to ensure an adequate supply of fish fry for stocking reservoirs to be constructed under the project and to improve the overall fingerling position in the State as a whole, the project would provide for the establishment, staffing and operation of a hatchery to be located on the banks of the Sutlej River.  - 16 - 49. Technical Assistance, Research and Training. There is limited experience in India with the comprehensive and multi-disciplinary analysis required for development of watersheds of the type found in the Shiwaliks. The project would, therefore, provide for technical assistance to meet this need. Internationally recruited consultants are expected to introduce tech- nical innovations and improved planning techniques and thereby build GOP's capability to plan and execute projects of a similar nature in the future. These consultants would assist in designing the four watersheds, other than Dholbaha, to be implemented under the proposed project, and would also help GOP in preparing additional six watershed development schemes expected to be implemented by GOP. The consultancy team would consist of: a watershed planning specialist, as the team leader (24 man-months); a small watershed hydrologist (18 man-months); a water resource engineer (24 man-months); a sedimentationist (4 man-months); a groundwater specialist (6 man-months); and other specialists (3 man-months). It is expected that some of the con- sultants' contracts would be extended beyond the specified periods. The project, therefore, would make provision for a total of 120 man-months of technical assistance in the form of internationally recruited consultants, at an estimated cost of US$8,500 per man-month. The project also provides for a locally recruited project economist to work with the team. The terms of reference of the consultants have been discussed and agreed with the Bank. 50. The project would support and strengthen project-related research being carried out by the GOP Forestry Department and the Punjab Agricultural University. A new research farm would be established for experimentation in water harvesting techniques and soil and water conservation practices. Funds would also be provided for incremental staff, construction of laboratories and staff quarters, equipment and vehicles. In order to assess the effect of project works on groundwater replenishment in the area and to find means of economically increasing groundwater recharge, the project would include a five-year program of groundwater investigations and trials to strengthen both GOP's information base for planning future projects and its capacity to monitor the hydrologic effects of groundwater development. 51. A major aspect of the proposed project would be the in-service train- ing to be provided by the team of consultants to the staff of the Directorate of Water Resources to enable the staff to undertake such works themselves in the future. The project would also provide for overseas training of seven specialists of the Directorate of Water Resources. Local training of the staff is also provided. Provision has also been made for farmers' training in agriculture, forestry and conservation. Project Implementation 52. The project would be implemented by a number of GOP Departments and the Punjab Agricultural University. Public cooperation, particularly of the villagers in the project area, is vital as the project would affect their way of life. Fortunately, there is strong evidence of public support as well as the interest and capability of the GOP agencies. To ensure coordination at the highest level a Policy Review Committee, chaired by the Chief Minister of the State, has been established under the project. This Committee comprises Secretaries and the heads of participating Departments, Deputy Commissioners from concerned districts, the Vice Chancellor of the University as well as elected representatives from the project areas.  - 17 - 53. Overall responsibility for project implementation, however, lies with the Financial Commissioner, who is also the Secretary of Agriculture and Forests. A Project Implementation Committee chaired by the Commissioner has been set up for project implementation. A Project Coordinator has been appointed to assist the Commissioner. The Coordinator heads a small Program Planning and Coordination Unit responsible for day to day operations and ensuring coordination at the working level of the participating Departments. At the local level coordination is achieved through District Level Committees. 54. Monitoring and reporting of physical progress and financial inputs would be the responsibility of the Director of each concerned Department. Punjab Agricultural University would assume primary responsibility for evalua- tion of the effects of project actions. The University, in consultation with the Project Coordinator and the GOP Department involved, would prepare and submit to the Bank, by December 31, 1980, a detailed proposal to conduct a continuous evaluation of the economic and social effects of the project (Section 2.12 of the Project Agreement). Project Cost and Financing 55. The total project cost is estimated at US$60.8 million equivalent (including taxes and duties, which are insignificant), of which US$5.7 million is in foreign exchange. The proposed loan of US$30 million would finance about 50% of the total cost including all foreign exchange; the balance would be met by GOI and GOP. In accordance with GOP policy for backward areas, farm development (land levelling and purchase of cross-bred cattle and sheep) would be financed from budgetary sources and would be recovered by GOP as part of land revenue. Retroactive financing up to US$1.0 million would be provided from April 1, 1979 to cover eligible expenditures for soil conservation, land levelling and revegetation work carried out in Dholbaha and about four other watersheds; consultant services and overseas training; cattle and sheep to be used in the livestock exchange program for the upper catchments; and farm development in the area to be protected by Dholbaha Dam. 56. Direct cost recovery is not proposed for flood protection works. Unlike an irrigation scheme, where beneficiaries are easy to identify, it is difficult to pinpoint which farmers should pay for the cost of flood protec- tion works. Flood damage varies from year to year, with some land subject to perennial flooding and some only occasionally inundated. On the other hand, the flood protection works would benefit large numbers of people not directly affected by flooding as they would protect roads and bridges, and would lead to secondary benefits, such as investments in permanent housing and small-scale industry. Moreover, since most of the people in the Kandi Tract live below the absolute level of poverty, GOP has declared it a "backward area" with a resulting policy not to recover flood protection cost through direct means. The cost would nevertheless be partly recovered through marketing fees and other indirect taxes. Water and water related charges for irrigation would be collected in accordance with State practice, and would be identical to those applied under the Punjab Irrigation Project (Credit 889-IN of March 1979). Water Charges are different for each crop. They also reflect operating and maintenance costs and are periodically revised to take into account the increases in agricultural productivity. Typically, the water charges now average Rs 35 per ha per crop in Punjab.  - 18 - Procurement and Disbursements 57. The main item to be financed under the loan would be civil works. Dholbaha dam (US$5.4 million) would be constructed by labor intensive methods in the dry seasons over three years; the irrigation system for Dholbaha dam (US$1.0 million) would be small and labor-intensive; flood protection works in Dholbaha (US$2.1 million) and flood control and irrigation works in the other four watersheds to be selected (US$15.1 million) would be restricted to the dry seasons over five years and would be labor intensive, individually very small and scattered over a large area. Such contracts would not be suitable for ICB procedures, and they would be let on the basis of local competitive bidding, advertised locally, and in accordance with procedures satisfactory to the Bank. Invitations to tender would be advertised locally in accordance with general conditions of contract and implementation guidelines agreed with GOP. Minor works would be awarded under piece work contracts. Force account would be used only when required by safety or quality considerations and would be limited to a maximum of 30% of civil works contracts for flood protection, dams, irrigation works and bridges. 58. Vehicles and equipment (US$1.6 million) include small off-the-shelf equipment items, which would be bulked for local competitive bidding wherever possible, or purchased through normal trade channels if required in small quantities (less than US$100,000); and field vehicles, which would be pro- cured locally through standard GOP procedures acceptable to the Bank to ensure availability of spare parts and services. GOP's standard procurement procedures for vehicles and equipment are satisfactory. Land development comprising levelling, bench terracing, gully plugging, etc. (US$2.3 million), would be carried out by force account by the Soil Conservation Department at standard Government rates. Reforestation and soil conservation measures (US$6.6 million) in the upper catchments would be carried out primarily by the Forestry Department on force account, except for some small works which would be built through piece work contracts. Purchase of improved cattle and sheep (US$3.8 million) for farmers in the hills would be by prudent shopping by the Animal Husbandry Department in accordance with procedures satisfatory to the Association. International consultants (US$1.6 million) have been recruited in accordance with the Bank guidelines. The balance of basic project costs, which would not involve procurement, would be for technical assistance, research and training (US$1.2 million), land acquisition (US$2.3 million), staff salaries and operating expenses (US$5.7 million), and price contingen- cies (US$12.1 million). 59. Disbursements from the proposed loan would cover: (a) 100% of the cost of consultancy services and overseas training; (b) soil conservation and revegetation works in the upper catch- ments at the rate of Rs 2,300 per ha (US$273) against a certificate stating that soil conservation works have been completed and that trees and grasses have been planted.  - 19 - (c) 70% of the cost of civil works expenditures (including land levelling and other soil conservation measures) but excluding those in (b) above; (d) 70% of the cost of well drilling and construction of settling and recharge basins for groundwater investigations; (e) 100% of the cost of locally manufactured goods procured ex-factory, or 70% of the cost of other locally procured goods; (f) 70% of the cost of cattle and sheep; and (g) 50% of the cost of salaries of incremental staff. 60. Disbursements for force account work and for payments of less than Rs 300,000 under civil works contracts and Rs 150,000 for equipment and vehicles would be made against certificates of expenditure. Documentation for these works would be retained by GOP and made available for inspection by the Bank during review missions. Full documentation would be required for all other disbursements. Certificates of expenditures would be audited at least once every six months and a report submitted to the Bank promptly there- after. Project Benefits and Risks 61. The proposed project would reverse ecological degradation in the lower foothills of the Himalayas, protect and develop agricultural land that is presently subject to serious erosion and flooding, and lay a sound basis for future development of similar areas in Punjab and elsewhere in India. It would largely be confined to the most backward and neglected area of the State and, consequently, would primarily benefit those living at or near absolute poverty. The principal economic benefit of the project would be an increase in agricultural production and incomes of farmers and livestock owners. This would be achieved by reforestation and soil conservation measures in the upper catchments, developing potential agricultural land in the Dholbaha watershed, and carrying out similar works in four other watersheds. 62. Because the project would be the first integrated attempt to tackle the problems of the Himalayan sub-mountainous zone, there is no similar ex- perience in India on which to base an estimate of project benefits with any degree of accuracy. Moreover, the long-term benefits from strengthening GOP's capability to plan, execute, and monitor future projects in the sub- mountainous zone cannot be quantified. However, there is no doubt that the quantifiable benefits of the project are adequate to justify the project. The expected economic rate of return from investments in the Dholbaha watershed is estimated at 16%. The return in the other four watersheds is likely to be comparable to that for Dholbaha and, in any case, would exceed 12%, since only plans for those watersheds that have an acceptable return would be approved by the Bank. These rates are calculated using direct production benefits only and are thus conservative. They would be higher were it possible to quantify flood damage and the substantial environmental and the other indirect benefits of the project. The project would directly benefit 11,000 farm families in the  - 20 - upper catchment areas and 12,000 in the areas below the hills. Most of the beneficiaries live in the Kandi area, which has a particularly high proportion of families who live below the absolute poverty level in India. 63. Because of its pilot nature, the project involves a number of risks. First, the proposed closure of the upper catchments to grazing would imme- diately affect villagers' way of life. They would have to part with their free-grazing cattle and goats and get used to stall-feeding cattle and sheep. There is a risk that the villagers would not accept this change. This ques- tion has been investigated thoroughly by the appraisal mission's sociologist. Interviews with local leaders and farmers indicate that farmers are aware of the benefits and would welcome the change, provided they are compensated for loss of income in the initial years (see paragraph 44). Secondly, imple- mentation of the project would involve the effective coordination of the activities of several GOP agencies. The project includes adequate measures to ensure coordination and provides for coordinating committees at various levels. Thirdly, there is a risk that flood control may reduce groundwater recharge in the plains. The groundwater investigation provided in the project would study this matter in detail, and would attempt to find alternative methods to recharge the groundwater. Finally, there is a risk that technical problems may emerge necessitating additional works. For example, the proposed flood channel as designed may pick up excessive amounts of sediment in the upper parts of the channel and deposit it in the lower parts of the channel, clogging it. If the project monitoring mechanism shows this happening, designs would be altered involving minor increases (roughly 3%) in costs. The con- sultants provided in the project are expected to quickly identify the technical problems as they emerge and recommend appropriate actions. The overall benefits to be derived from the project far outweigh the possible risks. PART V - LEGAL INSTRUMENT AND AUTHORITY 64. The draft Loan Agreement between India and the Bank, the Project Agreement between the Bank and the State of Punjab and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed to Executive Directors separately. 65. The features of the draft agreements of special interest are listed in Section III of Annex III. 66. An additional condition of disbursement, specified in paragraph 3(b) of Schedule 1 to the Loan Agreement, would be the Bank's prior approval of the detailed implementation plans for the flood protection and irrigation works in the lower catchments of the four watersheds other than Dholbaha. 67. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 21 - PART VI - RECOMMENDATION 68. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President June 30, 1980   ANNEX I Page 1 of 5 INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVEGES LAND AREA (THOUSAND SQ. KM.) MtST RECENT ESTIMATEJ.2 T0TAL 3287.6 AGRICULTURAL 1824. 0 MOST RECENT LOW INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE lb ASIA 6 PACIFIC ASIA & PACIFIC GNP PER CAPITA (US$) 60.0 90.0 18Q.0 197.9 894.8 ENERGY CONSUMpTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 108.0/c 141.0/c 176.0/e 166.0 842.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 434.9 547.6 643.9 URBAN POPULATION (PERCENT OF TOTAL) 17.9 19.7 21.7 20.8 39.1 POPULATION PROJECTIONS POFULATION IN YEAR 2000 (MILLIONS) 974. t STATIONARY POPULATION (MILLIONS) 1645.0 YEAR STATIONARY POPULATION IS REACHED 2150 POPULATION DENSITY PER SQ. KM. 132.0 167.0 196.0 193.2 376.1 PER SQ. RM. AGRICULTURAL LAND 247.0 308.0 353.0 409.6 2350.4 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 40.0 42.5 41.4 42.0 40.4 15-64 YRS. 56.5 54.6 55.6 55.0 56.2 65 YRS. AND ABOVE 3.5 2.9 3.0 3.0 3.4 POPULATION GROWTH RATE (Pt.RCENT) TOTAL 1.9 2.5 2.0 2.2 2.4 URBAN 2.5Ld 3.3 3.3 3.,9 4.1 CRUDE BIRTH RATE (PER THOUSAND) 43.0 40.0 35.0 37.4 28.7 CRUDE DEATH RATE (PER THOUSAND) 21.0 17.0 14.0 14.6 7.9 GROSS REPRODUCTION RATE 3.2 2.9 2.4 2.6 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) 64.0 3782.0 4714.0 USERS (PERCENT OF MARRIED WOMEN) .. 12.0 16.9 15.6 39.0 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 98.0 102.0 103.0 101.4 116.9 PER CAPITA SUPPLY OF CALORIES (PERCENT OF gEOUIREMENTS) 93.0 92.0 91.0 92.4 108.9 PROTEINS (GRAMS PER DAY) 52.0 51.0 50.0 49.8 60.3 OF WHICH ANIMAL AND PULSE 17.0 15.0 13.0 12.0 18.8 CHILD (AGES 1-4) MORTALITY RATE 28.0 22.0 18.0 17.9 5.3 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 43.0 48.0 51.0 50.8 63.0 INFANT MORTALITY RATE (PER THOUSAND) .. 134.0 *- .- 52.8 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 17.0 33.0 30.2 42.4 URBAN 60.0 83.0 66.0 62.1 RURAL .. 6.0 20.0 20.0 29.7 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 18.0 20.0 17.7 52.8 URBAN 85.0 87.0 71.3 71.1 RURAL .. 1.0 2.0 .. 42.4 POPULATION PER PHYSICIAN 5800.O/e 4890.0 3617.0 6322.7 4120.1 POPULATION PER NURSING PERSON 9630.0/e 5220.0 5675.0 9459.0 2213.6 POPULATION PER HOSPITAL BED TOTAL 2149.04f 1629.0 1289.0 1758.4 819.4 URBAN .. .. .. 502.9 RURAL .. .. .. 10524.1 ADMISSIONS PER HOSPITAL BED .. .. .. .. 28.8 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.2 .. 5.2 URBAN 5.2 .. 4.8 RURAL 5.2 .. 5.3 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.6 2.8 URBAN .. .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. .. URBAN .. .. RURAL .. ..  ANNEX I Page 2 of 5 INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVE7GES - MOST RECENT ESTIMATE) MOST RECENT LOW INCOME MIDDLE INCOME 1960 /b 1970 lb ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 61.0 72.0 80.0 80.9 98.6 MALE 80.0 87.0 95.0 94.3 99.2 FEMALE 40.0 55.0 64.0 66.7 97.7 SECONDARY: TOTAL 20.0 29.0 28.0 26.6 55.5 MALE 30.0 39.0 38.0 34.8 60.7 FEMALE 10.0 17.0 18.0 18.2 49.9 VOCATIONAL ENROL. (E OF SECONDARY) 8.0 6.0/& .. 9.9 13.7 PUPIL-TEACHER RATIO PRIMARY 29.0 40.0 42.0 41.1 34.6 SECONDARY 16.0 17.0 .. 20.5 28.5 ADULT LITERACY RATE (PERCENT) 28.0 33.0 36.0 40.9 85.8 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 0.7 1.0 1.3 1.8 9.0 RADIO RECEIVERS PER THOUSAND POPULATION 5.0 21.0 24.0 25.8 118.9 TV RECEIVERS PER THOUSAND POPULATION .. 0.1 0.5 2.4 39.4 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 11.0 16.0 16.0 13.4 CINEMA ANNUAL ATTENDANCE PER CAPITA 4.0 6.3 3.8 .. 4.9 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 189761.4 220670.5 252235.8 FEMALE (PERCENT) 31.3 32.6 32.0 29.4 36.8 AGRICULTURE (PERCENT) 74.0 74.0 74.0 70.5 51.9 INDUSTRY (PERCENT) 11.0 11.0 11.0 11.6 21.9 PARTICIPATION RATE (PERCENT) TOTAL 43.0 40.2 39.2 37.9 39.1 HALE 57.1 52.3 51.3 51.3 48.5 FEMALE 27.9 27.1 26.2 23.7 29.6 ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.1 1.2 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 26.7 26.3/h HIGHEST 20 PERCENT OF HOUSEHOLDS 51.7 48.9/h LOWEST 20 PERCENT OF HOUSEHOLDS 4.1 6.f7/h LOWEST 40 PERCENT OF HOUSEHOLDS 13.6 17.2jh POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 88.0 107.8 RURAL .. .. 76.0 86.5 192.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. RURAL .. .. .. .. 182.5 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 40.7 46.2 RURAL *- *- 47.9 51.7 33.2 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c Solid fuel conversion factors revised, /d 1951-60; /e 1962; /f 1958; /g 1967; /h 1964-65. April, 1980  ANNEX I DEFTINl'TONS OF 5OCIAL INDICATORS Page 3 of 5 N-tes: Aithaugh the data are draca from sources geterallv judged the meet authoritative and reliable. it should alto he noted that they nay not be inter- nationally toapereble heceust of the lark of neandardited definitiont end concepns ueta hy diffEcrt countries it collecting th_e dar. The data iae, none- thelest, uneafl to dese-ib oardert of nagnitude, indicate trends, and oharacterlie -eltain maiJo diff erencms het-een contries. The rierence groups err 11) thi sane coantry groap of the -s,iect country and (2l a country group with sone-hat high-er aerage innate thate country group of the subjec tcourney (extept for "Capital Surplus OiIlExporters" g.onu chore "Middle Income forth Itrica and Hiddle Eats" is chosen because of snrotger socia-ca rurl affinities). In the -efe-ene gacep data the averages ate popula-n eerighted arithmetic amass far each icltoatno -nd thoen only char at leutt half of the c-tntries lns groap hat data far thst indicator. oSia the ceverage nf conttrien smg thr indicaIn-s depends on the aI afisbiliny of data end is eat uniform, oatio- aunt bea exrcised in relating averayes of use indcart- n aeoeher. Thee srere are only usc-cl locompeolog thr value at one landicato us a time emnegothreacntryandoreference irrupt. LAD Ath (thousand sq.tAm.) cap per E l.ia2a-?opalamlnc dtnided ny nuener at prantinueg thy- fetal - Tortl surface area cempoiting laud atea aed itleed taters. sicis co quaI.i(ld roe a ardurbl solo'- A-t uneruito lerl. fo icraps, paEstimre, morheesad kitrircn gardens or no lie tahloe 1 977 dat. taile and female graduaie nurses, practical ntusis end assiataDtns eaes. f-I Itop., pI -Ad kit-hb. 9-d.- t i f d.t tocalaIOc-- prr. gsItu9-dcod - ea,..