India - Kerala Agricultural Extension Project

Document ofDnt The World Bank F LL E u r FOR OFFICIAL USE ONLY Report No. P-2797-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KERALA AGRICULTURAL EXTENSION PROJECT May 1, 1980 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.  CURRENCY EQUIVALENT (As of April 24, 1980) iRs 1.00 = Paise 100 :Rs 1.00 = US$0.1256 'US$1.00 = Rs 7.9603 Rs 1 million US$125,623 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were made at US$1 to Rs 8.4, which represents the projected exchange rate over the disbursement period.) FISCAL YEAR April 1 - March 31 ABBREVIATIONS ADA - Additional Director of Agriculture AEO - Agricultural Extension Officer(s) CDD - Community Development Departnment DAO - District Agricultural Officer(s) DOA - Department of Agriculture GDP - Gross Domestic Product GOI - Government of India GOK - Government of Kerala GOWB - Government of West Bengal HYV - High Yielding Variety JAO - Junior Agricultural Officer(s) KAU - Kerala Agricultural University km2 - kilometer km square kilometer(s) mm - millimeter(s) NRR - Net Reproduction Rate PAO, - Principal Agricultural Officer(s) POL - Petroleum, Oil and Lubricants SDAO - Subdivisional Agricultural Officer(s) SMS - Subject Matter Specialist(s) T&V - Training and Visit System of Agricultural Extension VEW - Village Extension Worker(s) VLW - Village Level Worker(s)  INDIA FOR OFFICIAL USE ONLY KERALA AGRICULTURAL EXTENSION PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President (GOI). Beneficiary: The State of Kerala (GOK). Amount: US$10 million. Terms: Standard. Relending Terms: From GOI to GOK: As part of Central assistance for State development projects on terms and con- ditions applicable at the time. Project Description: The project would reorganize and strengthen agricul- tural extension services in Kerala. Two and one half million farmers with limited financial resources but excess labor would be the primary beneficiaries of the project's emphasis on efficient use of existing resources to increase crop production. Estimated Project Cost: /a (US$ Millions) Local Foreign Total Incremental Staff 4.3 - 4.3 Incremental Operating Costs 1.5 0.8 2.3 Civil Works 2.9 - 2.9 Vehicles and Equipment 1.2 0.4 1.6 Training 0.5 0.1 0.6 Subtotal 10.4 1.3 11.7 Price Contingencies 2.5 0.3 2.8 Physical Contingencies 0.7 0.1 0.8 Total Project Cost 13.6 1.7 15.3 /a Including an estimated US$0.9 million in taxes and duties. This document has a restricted distribution and may be used by recipients only in the performance of their offiial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii. - Financing Plan: (US$ Millions) Local Foreign Total IDA 8.3 1.7 10.0 GOI/GOK 5.3 - 5.3 Total 13.6 1.7 15.3 Estimated Disbursement: /a (US Millions) FY81 FY82 FY83 FY84 FY85 FY86 Annual 0.3 0.7 1.4 3.2 3.4 1.0 Cumulative 0.3 1.0 2.4 5.6 9.0 10.0 Rate of Return: At least 50%. Appraisal Report: No. 2863-IN, dated May 1, 1980. /a According to IDA's fiscal year.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE KERALA AGRICULTURAL EXTENSION PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$10 million on standard IDA terms to help finance a project to reorganize and strengthen the agricul- tural extension service in the State of Kerala. The proceeds of this credit would be channelled to the Government of Kerala (GOK) in accordance with the Government of India's standard terms and arrangements for financing of State development projects. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (2431-IN dated April 9, 1979), was distributed to the Executive Directors on April 13, 1979. Country data sheets are attached as Annex I. Background 3. India is a large, low-income country with 652 million people (in mid-1979) whose average income is US$180 per annum. The agricultural sector dominates the economy, employing over two-thirds of the labor force and con- tributing over 40% of value added. Although smallholder agriculture provides a fullsome subsistence to many, the land base is inadequate to provide all families in rural areas with an adequate livelihood under current conditions, and many who are landless or nearly landless have only an insecure grasp on the means of existence. Industrialization in India has not been rapid enough to bring about the economic transformation that has led to higher productivity and rapid urbanization in some other countries. The urban population was 18% of the total in 1960, 20% in 1970 and is 21% now. The share of manufacturing has grown slowly and since the late 1960s has remained roughly constant at 16% of GDP. 4. Economic growth has been slow in the past, with GDP growing at a trend rate of 3.6% per annum from 1950 to 1975. Agricultural output grew at 2.4% per annum over the same period. Slow growth in agriculture acted as a drag on overall growth, not only because of its sheer weight in the total, but also because of the need to use scarce foreign exchange to import food. Growth in industrial output has been higher at 5.2% per annum between 1950 and 1975, but not as high as in many other developing countries nor as high as can be expected. 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Cashewnut Project (Report No. P-2770-IN), dated April 10, 1980.  - 2 - 5. This slow growth has persisted despite a quite creditable domestic saving and investment performance. Domestic saving has grown from 9% of GDP in 1951 to the current high level of 24%. Gross domestic investment has risen from 10% to 24% of GDP ovler the same period. Foreign savings have never financed a large portion of domestic investment and have financed no more than 5% of investment since 1970. Foreign savings have been important in financing imports, and a shortage of foreign exchange has acted as a constraint on the economy for most of the period. External assistance has been low both as a percentage of GDP and in per capita terms. Net external assistance is less than 2% of GDP now, has never risen above 3% and fell to less than 1% in the early 1970s. Exports have grown relatively slowly--5.4% per annum in US dollar terms and 2.8% per annum in volume terms between 1950/51 and 1975/76. So far during the 1970s, exports have grown much more rapidly, by 18% per annum in US dollar terms and 8% in volume terms over the period 1970/71 to 1976/77. During the same period imports grew by 17% per annum in US dollar terms but only by 2% per annum in volume terms, reflecting a 28% fall in India's terms of trade over the period. 6. India has the capacity to grow and develop at a more rapid pace than has been achieved so far. Although the industrial sector is small compared to the size of the total economy, it nevertheless has a highly diversified struc- ture 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 considerable gaps remain. India is rich in human resources and institutional infrastruc- ture, although there is much scope for improvement. India is reasonably well-supplied with natural resources, not only land and water but minerals, including oil, gas and coal. With good economic policies and sufficient access to foreign savings, India should be able to manage these considerable resources to accelerate t]he longer-term growth trend. Recent Trends 7. India has managed faster growth during the recent past. Growth of GDP in 1978/79 is estimated to be between 3% and 4%; this is a strong perform- ance coming on top of the previous year's 7.2% growth in GDP and considering agricultural output grew less than 2%. Even this agricultural growth is highly creditable given the previous years' record harvests in most crops. Industrial output grew by 8-10% in 1978/79. Over the four years, 1975/76 to 1978/79, growth in real GDP, agricultural output and industrial output has averaged 5.3%, 4.4% and 6.9% per annum, respectively. Although these rates represent growth over the depressed base of the early 1970s, they are signi- ficantly higher than the longer-term past trend and comparable to the target growth rates for the medium-term future. Buoyant domestic demand, stagnating output and world inflation have led to significant increases in prices during the first half of the 1979/80 fiscal year. The wholesale price index for September 1979 was 18.4% above that of the previous September. Together, the rise in the prices of food products, crude petroleum and mineral oils accounted for over two-thirds of the increase in the index. However, prices of almost all commodities moved up significantly over this period as reflected in the 9.6% increase in the prices of the residual commodities. Government attempts to regulate the supply and price of commodities like sugar and edible oils, ceilings on credit, adjustment of some interest rates and the seasonal downturn  - 3 - of the fruit and vegetable prices after summer helped the wholesale price index to level off after September. However, if allowance is made for the seasonal factors, prices are still rising at approximately an 18% annual rate. The Indian economy will no doubt continue to face inflationary pressure during the 1980/81 fiscal year. Its intensity will to a large extent depend on the developments in world inflation, especially the rise in oil prices and India's success in alleviating the supply bottlenecks that emerged during 1979. Although the current inflationary pressures need not seriously impair medium- term growth prospects, given available aggregate resources and production capacity, significant improvements are likely to be required in the organ- ization of key sectors if an economic slowdown is to be avoided. 8. The 1978/79 foodgrain crop exceeded the 1977/78 record crop of 126 million tons, and many non-food crops did well. The 1978 monsoon rains were timely and adequate, although severe flooding in some areas destroyed both lives and property and ruined some crops. The basic inputs into agricul- tural production continued their rapid growth of the recent past. Additions to area under irrigation have doubled from 1.3 million hectares a year during the five-year period ending 1973/74 to 2.6 million hectares a year during 1977/78 and 1978/79. Fertilizer consumption in 1978/79 reached 5 million nutrient tons, an increase of 18% over 1977/78. This growth has been impres- sive, particularly since it followed two successive years of very high growth-- 18% in 1976/77 and 26% in 1977/78--so that fertilizer consumption in 1978/79 was 75% higher than in 1975/76. However, prospects for agricultural produc- tion in 1979/80 are not good. India experienced a severe drought in 1979. The monsoon was delayed and subsequent rainfall was deficient throughout the country. Consequent damage to the kharif crop has been substantial. Tenta- tive estimates indicate a shortfall of 10-12 million tons in kharif crop from last year's level of 78.7 million tons. Delayed sowing, lack of soil moisture, low levels of water in tanks and wells as well as power cutbacks and recent shortages in diesel fuel for irrigation pumps are adversely affecting the rabi crop. Depending on the performance of the rabi crop, total shortfall in grain crop is expected to be 10-12 million tons below the 1978/79 level. 9. The growth of industrial output in 1978/79 came from a sharp rise in the output of food industries, particularly sugar, a modest increase in textiles, important increases in the hitherto depressed engineering sector and-the revival of demand for consumer durables. Production would have been still higher but for recurring shortages of steel, coal, railway wagons and electric power and capacity constraints in fertilizer, cement, vegetable oils and petroleum products. Labor unrest also constrained output in some indus- tries, particularly in textiles, steel and mining; man-days lost in 1978 ex- ceeded the high level of 1977 and only in 1974 were the number of days lost higher. Power production increased by 12% but continuing shortages in many States necessitated power cuts and curbs on new demand. During the first half of 1979/80 supply bottlenecks in basic industrial inputs began to retard overall industrial production. In addition to coal and steel, cement, sugar, cotton textile and cotton yarn output fell below last year's levels. Strong demand has continued to sustain other important industries such as fertilizers and chemicals, but it appears increasingly unlikely that these can counter- balance the constrained sectors.  -4- 10. The trade deficit grew and both the current account surplus and the balance of payments surplus of recent years shrank in 1978/79. The import bill is expected to reach US$8.4 billion, which brings the average rate of increase in US dollar terms to 19% per annum since 1976/77. Non-foodgrain imports rose even more dramatically by 28% per annum over the past two years. The growth of imports and the liberalization of import control policies represents a desirable adjustment to enhanced foreign resources. Although exports grew much faster during the 11970s through 1976/77 than earlier, export growth in 1977/78 and 1978/79 has slowed somewhat. After rising by 12% in 1975/76 and 23% in 1976/77 in US dollar terms (virtually aLl growth in export volume), export earnings rose by only 9% in 1977/78 (with little or no volume growth) and an estimated 8% in 1978/79 (with 5-8% volume growth). Although part of the decline is attributable to unfavorable conditions in foreign markets, export profitability has been allowed to deteriorate somewhat. With net invisible receipts in 1978/79 estimated the same as in 1977/78--US$2 billion-- the widened trade deficit resulted in a significantly reduced current account surplus, from US$1 billion in 1977/78 to US$400 million in 1978/79. Despite some increase in net aid disbursements from their low level in 1977/78, the increase in reserves declined from about US$2 billion in 1977/78 to about US$1.5 billion in 1978/79 to reach US$7.4 billion. Exports during the first three months of this fiscal year are 32% higher than the same quarter of last year. Imports in the first quarter of 1979/80 are around 7% higher than the same period of the previous year. However, the impact of recent increases in petroleum prices are only partially reflected in this figure. India's total POL import bill for 1979/80 is likely to reach $3.2 billion, $800 million higher than earlier estimates. As a result, there should be a sharp deceleration in the rate of growth of reserves sufficient to significantly reduce the number of months of imports covered by reserves during 1980. Development Prospects 11. The faster growth of the recent past has been made possible by the much-increased inward flow of foreign exchange from increased exports, workers' remittances and external assistance; greatly improved agricultural performance; the impressive saving effort; the liberalization of import controls; and ex- panded public expenditure on development programs. Although sustaining the high growth rates of the recent past in the medium-term is by no means assured, especially if there is a repeated drought in 1980, India has a level of re- sources with which to manage the economy that had not existed before. The comfortable foreign exchange position, and the large foodgrain stocks have greatly eased the pressures to deal with short-term crises and freed India's economic managers to continue planning a more ambitious course for the economy. The policy improvements needed to achieve the better performance now possible have begun in some important areas but in others have yet to be initiated. 12. The Draft Plan, which was released in March 1978 and is expected to be finalized and approved by the National Development Council later this year, sets out India's development strategy for the five years 1978/79 to 1982/83. The principal objectives of the Draft Plan are to achieve within a period of ten years: (i) the removal of unemploynent and significant  underemployment, (ii) an appreciable rise in the standard of living of the poorest sections of the population, and (iii) provision by the Government of some of the basic needs of the people in these low-income groups. While the Plan recognizes the importance of achieving more rapid expansion of the economy than in the past to meet the employment and welfare objectives, the targeted rate of growth at 4.7% per annum is lower than projected in most earlier Plans. According to the planners, this reflects in part the increased emphasis given to the distribution rather than the level of income generation, and in part the need for greater realism in the macro-economic assumptions underlying the Plan. While the trade-off between growth and distribution is not immediately obvious from the Plan model, the adoption of a more realistic growth target is in itself well justified -- even at 4.7% per annum, the targeted growth rate is higher than actually achieved during any of the previous Plan periods, and is substantially above the longer-term trend growth rate. 13. In agriculture, despite the 1979 drought, economic policies, dev- elopment programs and secular trends all seem favorable for resuming a period of sustained high growth after 1979/80. Fertilizer prices have been reduced progressively from their very high level in early 1975 and despite some fall in market foodgrain prices, the fertilizer: foodgrain price ratio has fallen to a clearly profitable range. Good harvests and higher farm incomes provide the money to finance higher fertilizer purchases, creating something of a virtuous circle. Pricing policies for many crops--rice, wheat, sugarcane, pulses and others--have concentrated recently on supporting prices to maintain incentives to farmers rather than trying to administratively control prices to contain inflation. The ambitious irrigation and rural electrification investment program in the new Five-Year Plan, if fully funded, will help pro- vide the water control needed to increase yields directly and to induce further productivity-increasing investments. The effective reorganization of the agricultural extension service will raise yields as it takes hold gradually across India. Finally, there are several heartening trends in foodgrain pro- duction: one is the steady growth of area planted to high-yielding varieties of rice; another is the growing adoption of summer rice cultivation in the traditional wheat-producing areas (Punjab and Haryana). These two trends along with the other favorable developments have caused rice production to rise impressively in the last two years. Another good omen for foodgrain production is the rapid growth of winter wheat cropping in traditional rice areas (West Bengal, Assam and Orissa). 14. In industry, despite some uncertainty in industrial policy and the lack of strong policy stimulus to improve efficiency in the industrial structure, recently strengthened demand forces, increase in planned invest- ment along with adroit input supply management should allow the industrial sector to continue to grow at the improved rate of the recent past, at least for the near- and medium-term future. Over the longer term, growth of indus- trial production at or above the rate experienced in the recent past--e.g., 7% per annum during the last four years--will require some changes in policy to induce a more efficient industrial structure. Recent industrial policies have sent mixed signals to private manufacturers and investors. Some, such as reserving certain lines of production for small-scale enterprises or prohibit- ing the location of new firms in municipal areas, have been restrictive. Others have been stimulative, such as the raising of the exemption limit of industrial licensing for capital investment or favorable adjustments in the  -6- pricing and production controls in several major industries, including cement, steel, and textiles. In addition the liberalization of import controls is of considerable benefit to increasing industrial production. However, there are some worrisome supply shortages that are currently threatening continued rapid industrial growth. Many can be handled through imports, if needed, as long as India maintains a healthy foreign exchange position. However, two supply constraints likely to persist in the future -- namely, rail transport and power -- cannot be eased through imports. The new Plan contains a major power investment program to increase capacity rapidly. The railway investment pro- gram is more modest. Another crucial input into both of these sectors, and into most other major sectors, is coal, whose supply needs careful management. 15. The main reason for expecting sustained growth in industrial pro- duction is improvement in demand prospects for each of the four major sources of industrial demand. The first is market demand for manufactured consumption goods, which is expected to pick up in response to the increase in disposable income due in particular to improvement in agriculltural output. Although its effect has been delayed somewhat, this broad-based demand is finally making itself felt and is expected to continue into the future unless the growth in agricultural output is constrained by repeated droughts. Another source of demand is public expenditure on development projects, which has grown in a major way in the last few years and is scheduled to continue to grow under the new Five-Year Plan. A third source of growth is export demand for indus- trial goods. There has been a sustained growth in the export of manufactures such as engineering goods, garments, gems, finished leather and some chemical products. This export growth should continue in the future with proper policy support. A final source of growing demand is private investment by both the household and corporate sectors. There are as yet only a few signs of this growth, such as increased disbursement by term lending institutions and in- creased use of inputs; investments should become stronger as growth in the other sources of demand continues and as capacity limitations begin to con- strain production in more industries. The net result of increasing demand should be continued high growth in industrial production in the near and medium term within existing policies. 16. Import policy is an area where there has been significant improve- ment in the recent past; but some improvement in export policy is required to raise incentives to export. India has liberalized import control policy significantly in the past two years and imports have responded. Future growth in imports, and in the benefits of price stability, enhanced production and increased efficiency which imports bring, will depend to a great extent on how the now liberalized policy is administered. A delicate touch is required to yield the benefits without bringing about undesirable damage to vulnerable industries. India has the foreign resources to allow imports to grow at the rapid rates of the past two years for a few more years and continue to relax the very severe restraints imposed on the economy during the early 1970s by suppression of imports. But, given the import liberalization undertaken so far and the expected growth of imports, by the end of the Plan period (1982/ 83), foreign exchange reserves will have fallen to six months of imports, or less, and some adjustment in the balance of payments will be required. Part of the adjustment will very likely be a reduction in the growth rate of imports; the import bill need not grow 15% in volume terms indefinitely to  sustain the target growth in GDP. Part of the adjustment must come from the achievement of a growth rate of exports in the vicinity of 7-8% or higher in volume terms. Faster export growth is needed not only to provide the foreign exchange to sustain the rapid growth in imports but also to allow foreign demand and competition to improve the efficiency of Indian industry. Finally, part of the adjustment should come from an increased net transfer of external assistance. 17. India's population policy continues to aim at reducing the birth rate to 30 births per thousand people by 1983 through completely voluntary acceptance of fertility control methods supplied by a family welfare system integrated with the supply of basic health, maternal and child health and nutrition services. Since 1977, the family planning achievements in terms of number of acceptors have been below that needed to achieve the 1983 goal or even to keep the birth rate from rising above its current level. The low performance is primarily the result of the reaction to the harsh birth control policies introduced during 1976. Since then family planning performance has been gradually returning to the rising trend which was discernible before it was disrupted by the intensive drive of 1976/77. Given continued support for the program of family welfare, Bank estimates indicate that India's rate of population increase should remain below 2% per annum and fall to 1.5% by about the year 2000. Despite the declining trend in the rate of population increase, a net reproduction rate (NRR) equal to one (replacement level) would only be achieved around the year 2020. At this time, the total population is estimated to reach 1.2 billion persons, an increase of about 84% over the mid-1979 level of 652 million. 18. In addition to stimulating overall economic growth and constraining population growth, 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. The prospects for alleviating their poverty by providing these families with more land are not good because of the virtual absence of uncultivated arable land, the slow progress in implementing land reform and the limited amount of land that would be available if land reform were carried out. Estimates of the amount of land that would be available if land reform were carried out vary greatly. One estimate is that there would be about 9 million hectares avail- able for distribution. This compares to roughly 45 million families in the two poorest groups in rural India: landless families and families owning less than one hectare of land, whose average holding is 0.31 hectares. An approach to the amelioration of poverty more promising than land reform is the creation of more employment opportunities for the landless and small farmers in rural areas. Although the basic thrust must come from the market by a more rapidly increasing agricultural output, there will be a role for employment-intensive rural works programs. The new Plan provides for increased rural employment both through direct employment schemes and through ambitious programs of investment in rural infrastructure in addition to the more general rural development programs.  - 8 - PART II -- BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 57 loans and 118 development credits to India totalling US$2,529 million and US';7,255 million (both net of cancellation), respectively. Of these amounts, US$1,051 million had been repaid, and US$3,377 million was still undisbursed as of February 29, 1980. Bank Group disbursements to India in the current fiscal year through February 29, 1980, totalled US$366 million, representing an increase of about 32% over the same period last year. Annex II contains a summary statement of disbursements as of February 29, 1980, and notes on the execution of ongoing projects. 20. Since 1959, IFC has made 18 commitments in India totalling US$72.6 million, of which US$17.4 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$40.7 million, US$31.6 mil- lion represents loans and US$9.1 million equity. A summary statement of IFC operations as of February 29, 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 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 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, 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, improved water management and intensification and stream- lining of extension systems, form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to proj- ects 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 infra- structure and industrial investments will focus on agriculture-, export- and energy-related projects. 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 large part to the response of the aid community, India has success- fully adjusted to the changed world price situation. However, the basic need  - 9 - for foreign assistance, to augment domestic resources, stimulate investment and accelerate economic growth, remains. As in the past, Bank Group assist- ance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Con- sequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, rural water supply and medium- and small-scale industry. 24. 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 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 February 29, 1980, outstanding loans to India held by the Bank totaled US$1,519 million, of which US$579 million remained to be disbursed, leaving a net amount outstanding of US$940 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. PART III - AGRICULTURE IN INDIA AND KERALA 26. Agriculture is the dominant sector in the Indian economy. It con- tributes about 45% of India's domestic product, engages nearly 70% of the labor force, and provides the base for approximately 60% of India's exports. For all its importance to the economy, however, agricultural production in India has grown relatively slowly, the annual rate of growth not exceeding 3% per annum for any extended period over the past several decades. Further, although India's average per capita income has increased to US$180, there has been little change in the living standards of most of India's rural poor, estimated at nearly 270 million people with incomes below the absolute poverty level of US$73 per capita per year. 27. Forty-nine percent of India's land area of 3.27 million square kilometers (km is cultivable and about 11% is irrigated. Given India's objective of national self-sufficiency in food production and the existing pattern of relatively slow growth and low incomes in the agricultural sector,  - 10 - the Government of India's (GOI) recent development plans have placed a heavy emphasis on spurring agricultural growth, primarily by raising foodgrain production through the increased use of irrigation,, fertilizers, plant pro- tection chemicals, and seeds of improved varieties. In support of its aims, GOI has modernized and expanded its agricultural credit institutions and accelerated the development of India's irrigation network. More recently, it has given increased attention to the establishment of improved extension services and the upgrading of research capabilities needed to support this extension effort. 28. Despite these endeavors and the impressive results of the Green Revolution in some areas, primarily in the wheat-growing northwestern States, annual growth in total foodgrain production over the last 15 years has been only about 2.3%, or approximately equal to the population growth. Per capita production of a number of other important crops, including cotton and oilseeds, has fallen during the period. Furthermore, India's agriculture has been par- ticularly susceptible to the vagaries of weather, aind foodgrain production has varied as much as 20% in successive years. Although expansion of irrigation facilities has had some effect and remains a priority, GOI recognizes that the bulk of India's cropped area and over half of its farmers cannot, in the foreseeable future, benefit from the water-intensive agricultural technologies emphasized since the 196Cs. Moreover, although much appropriate research is available, yields under rainfed conditions have shown little or no improvement over this period--a fact which prompts this project's emphasis on rainfed as well as irrigated farming. Traditional Agricultural Extension and Its Weaknesses 29. Responsibility for agricultural extension in India rests with the State Government Departments of Agriculture. While the organization varies from State to State, the Department of Agriculture (DOA) generally has officers at the State, zone, district, subdivision, and block levels. While technical guidance for these local officers comes from the Department of Agriculture, at the district level, where they are called District Agricultural Officers, they are typically under the administrative control of tlhe District Collector, a generalist responsible for law and order and the coordination of all other governmental activities in the district. Below the district level, where they are-called Agricultural Extension Officers (AEO), they are responsible to the Block Development Officer, an official of the State Community Development Department (CDD). Actual extension work with farmers is done by Village Level Workers (VLW). These are multi-purpose workers empLoyed by the States' Community Development Departments and supervised by the Block Development Officer, but intended to spend 75-80% of their time on agricultural extension under the direction of the AEO. 30. While fairly widespread and relatively well-staffed, India's tra- ditional extension service system suffers from a numrber of weaknesses. Chief among them are the following. (a) The lack of a single, direct line of both technical support and administrative control from the Department of Agriculture to extension workers in the field, combined with the multi- purpose role of the field-level extension worker, results in  - 11 - an extension service less concentrated on agricultural support than intended. VLW typically spend less than 20% of their time on agricultural extension. Moreover, given the tenuous link between the VLW and the Department of Agriculture, what agri- cultural work is done is generally neither planned systemat- ically nor supervised adequately. (b) The VLW is typically responsible for providing service to too many farm families, sometimes as many as 2,000, often spread over a large area. This large area of jurisdiction combines with a shortage of vehicles and appropriately located housing for VLW to make close, regular contact between the extension workers and the farmers very difficult. (c) Training of extension workers is generally confined to pre- service training, much of which is quickly forgotten and soon out of date in any case. In addition, training programs are typically theoretical and provide little opportunity for practical application of what has been learned. (d) The link between the extension services and research activities is weak. Therefore, extension messages lack continued updating while agricultural research tends toward academic questions only remotely related to farmers' problems. (e) The effectiveness of the extension service having been hampered by the factors described above, the extension workers suffer from low status, low pay and low morale. (f) Finally, in an effort to bypass or supplement unsatisfactory extension services, special extension schemes focusing on specific crops, areas or techniques have been introduced. This has proven expensive, and often duplicates services extension workers are supposed to provide, thus causing resent- ment on the part of the VLW and confusion on the part of the farmers. Bank Group Activities in Agricultural Extension 31. The Bank Group has actively assisted India's effort to reorganize and strengthen its agricultural extension system since 1974, when extension components pioneering the Training and Visit (T&V) System in India were in- cluded in the Bank Group-assisted Rajasthan Canal Command Area Development Project (Cr. 502-IN, July 31, 1974) and the Chambal (Rajasthan) Command Area Development Project (Ln. 1011-IN, June 19, 1974). The T&V System is based on frequent and regular farm visits by full-time, adequately trained personnel, generally VLW who have transferred from CDD to DOA to work exclusively on agricultural extension. It provides for close cooperation between the exten- sion service and agricultural research institutions and for the merger of all special crop schemes into one unified extension system. Extension components were also included in three subsequent irrigation projects--the Chambal (Madhya Pradesh) Command Area Development Project (Cr. 562-IN, June 20, 1975), the Andhra Pradesh Irrigation and Command Area Development Composite Project  - 12 - (Ln. 1251-T, June 10, 19,76), and the Periyar Vaigai Irrigation Project (Cr. 720-IN, June 30, 1977)--as well in the areas targeted for minor irrigation works under the West Bengal Agricultural Development Project (Cr. 541-IN, April 28, 1975). The system covered both irrigated and rainfed farms in the administrative areas served under these projects. Building on the experience gained with the T&V System under these irrigation projects, the Bank Group, in 1977 and 1978, lent its assistance to six State-level agricultural projects which were largely focused on the introduction of the T&V System of extension: the Orissa Agricultural Development Project (Cr. 682-IN, April 1, 1977); the Assam Agricultural Development Project (Cr. 728-IN, June 30, 1977); the West Bengal Agricultural Extension and Research Project (Cr. 690-IN, June 1, 1977); the Madhya Pradesh Agricultural Extension and Research Project (Cr. 712-IN, June 1, 1977); the Rajasthan Agricultural Extensicn and Research Project (Cr. 737-IN, November 14, 1977); and the Bihar Agricultural Extension and Research Project (Cr. 761-IN, January 6, 1978). Under the. Composite Agricultural Extension Project (Cr. 862-IN, February 16, 1979), the Bank Group extended its assistance to the States of Gujarat, Haryana and Karnataka to strengthen their agricultural extension services, and to the Central Government's Directorate of Agricultural Extension to increase its ability to support State agricultural extension programs. 32. While the results obtained thus far under the T&V System are impres- sive and the system offers considerable promise for the future, it is not implemented without difficulty. Central to the system is the transfer of a large number of multi-purpose workers from the Community Development Department to the Department of Agriculture. This is a major reorganizational effort which requires sustained political and administrative commitment. In some of the States currently implementing the T&V System, the speed and effectiveness of implementation has been hampered by the government's initial hesitation to sanction the required reorganization. A second difficulty that has been encountered in attempts to implement the T&V System is the insecurity extension workers may feel during the transition period. Experience has shown that as an important adjunct to the inter-departmental transfer of personnel, extension workers must be assured that the transfer will not adversely affect their pay, allowances and benefits, or opportunities for promotion. Proper phasing of the transfer of existing VLWs, the recruitment of new extension workers (generally called Village Extension Workers (VEW) under the T&V System), and the training for both groups has also proven a difficult task, at least initially, for State Departments of Agriculture. Finally, implementation of the new system can be hindered by delays in obtaining budgetary sanctions for the additional staff positions, vehicles, and equipment State Departments of Agriculture require to introduce the system. 33. Despite these real and potential difficulties, the on-going extension projects are progressing very well in Rajasthan, Orissa, and Assam, where farmers have responded favorably to the system and review missions have witnes- sed widespread adoption of recommended practices. Similarly, in Karnataka, Haryana, and Gujarat, where the T&V activities are in the very early stages, a sound beginning has beer made in project implementation. While Madhya Pradesh initially showed good progress in introducing the system, frequent changes of key project personnel brought a temporary slowdown in project implementation. This problem has apparently been corrected, and the project is expected to  - 13 - regain its earlier momentum. In West Bengal, while the project got off to a promising start, a change in government brought project implementation to a virtual standstill while the new government reviewed its predecessors' decision to reorganize the extension system. In October 1979, however, the State Government reaffirmed the original decision and project execution has been resumed. Finally, in Bihar, vacancies in key posts have severely hampered project implementation. GOI has undertaken to intervene with the Government of Bihar to discuss the steps the State Government proposes to take to reverse past delays in project execution. Agriculture in Kerala 34. Kerala, located in southwest India, is a narrow coastal strip, bounded on the east and south by Tamil Nadu, on the northeast by Karnataka and on the west by the Arabian Sea. The State is about 580 km long and not more than 120 km wide. It can be divided into three parallel topographical zones running north-south: (a) the sparsely populated highlands on the eastern border with tea, coffee, cardamom and rubber as the main crops; (b) the low-lying, very densely populated coastal belt on the west, where rice and coconut are the main crops; and (c) the midlands, with varied terrain, fairly high population density and a wide variety of crops, including rice, tapioca, banana, ginger, pepper, arecanut, cashew, coconut and rubber. 35. Kerala's temperatures are not extreme, with the mean minimum ranging from 19-260C and the maximum from 27-37 C. The area receives a very high annual rainfall (3,000 mm) from two monsoons: the southwest monsoon from June to August and the northeast monsoon from October to December. The rainfall is more evenly distributed throughout the year than in most of India and its year-to-year variation is less than average. The climate allows the cultivation of high-value perennial crops and also permits relatively high cropping intensity (137%) in spite of the low proportion of area irrigated (11.5%). 36. The State is divided into pl administrative districts. The total geographical area is about 39,000 km and the population in 1971 way about 21.3 million, giving an average population density of nearly 550/km , the highest of any Indian State and about three times the all-India average. Per capita income in 1974/75 was about Rs. 883 with agriculture providing some 60% of total State income. The high population density has led to a farm size which is very small even by Indian standards. Many of these very small farms are really garden plots and house sites whose owners hold other jobs and cultivate them only part time. The number of families for which farming is a primary occupation is estimated at 2.5 million.  - 14 - 37. The varied terrain and high rainfall permit a varied cropping pattern and a mix of perennial and field crops unique in India. Still, nearly 70% of the cropped area is devoted to the three major crops of paddy, coconut, and tapioca. Kerala is the major Indian producer of several important agri- cultural commodities, notably pepper (94% of India's production), rubber (94%), cashewnut (80%), coconut (66%), cardamom (62%), and ginger (53%). The variety of Kerala's cropping pattern is reflected on most farms, with farmers usually growing several crops. While the land and climate are conducive to producing high-value crops, yields of most major crops over the past decade have been stagnant or falling. Experiments in farmers' fields indicate that there is substantial scope for improving productivity by means of fertilizer application, pest management, intercropping and use of high-yielding varieties (HYV) of seed. GOK is convinced that an effective, reliable extension service is essential to achieving such increases in productivity. Agricultural Services in Kerala 38. Extension Services. At present, most field level extension work in Kerala is carried out through several special crop schemes under the Department of Agriculture. The schemes generally focus on establishing a crop "unit" of about 200 to 500 hectares with an office staffed by two Agricultural Demon- strators under one Junior Agricultural Officer (JAO). 1/ Although this approach has made an impact in the limited areas of its operation, some problems have emerged: (a) the coverage per unit is limited; thus, given the available staff, only a relatively small proportion of the State's farmers (about 10%) are reached; (b) frequent, regular training is not a feature of the system; (c) separate staff for different crops has led to duplication of efforts and high operating costs; (d) farmers, who normally grow a variety of crops, have to consult several different sources for advice; (e) the number of "units" in a district (over 60 on average) has grown too large to be effectively supervised by district staff; (f) extension staff at the units lack mobility, are office- bound due to growing paper work and have become input supply agents, rather than agents of technological change; and 1/ The Agricultural Demonstrator is the basic field level worker whose pay and training is roughly equivalent to that of the VLW/VEW. The JAO is a more senior officer who usually has a B.Sc. (Agriculture) and is roughly comparable to the Agricultural Extension Officer (AEO) in other States.  - 15 - (g) there is no regular systematic contact between the extension staff and the farmers. Village Level Workers also occasionally carry out some agricultural extension work, but owing to their many responsibilities cannot do this work regularly and are often diverted to other tasks. To overcome these problems, GOK wishes to reorganize its extension system along the lines of the T&V System adopted in many other States in India, but with suitable modifications to suit Kerala's unique situation. 39. Training. The Kerala Agricultural University (KAU), established in 1971, is the primary agricultural training institution in the State. KAU has an Institute of Agricultural Technology which offers a diploma course and can offer practical pre-service and in-service residential training in agriculture to about 60-75 trainees. KAU's Extension Wing can provide pre-service training to another 50-75 trainees. The Department of Agriculture is represented on a Joint Training Committee chaired by the Vice Chancellor of KAU which meets to develop training programs as required. There are also three Extension Training Centers currently operating in the State, each with the capacity for training about 150 students. At present these centers are used primarily to train multi-purpose VLW. 40. Research. Responsibility for agricultural research in Kerala rests primarily with KAU and is conducted at its 23 research stations located throughout the State, although limited work is also done on nearby farms. The main areas of work are in paddy, coconut, pepper, cardamom, cashew, pineapple and sugarcane crops. In addition, there are Indian Council of Agricultural Research institutions concentrating on such areas as plantation and tuber crops. DOA and KAU staff meet twice a year in a workshop to develop the main extension recommendations for the upcoming season. DOA is also repre- sented on KAU's research advisory committee. These formal relationships are supplemented by numerous informal contacts and the working relationships between DOA and KAU appear to be good and productive. 41. Credit. The apex institution for short and medium-term agricultural credit is the Kerala State Cooperative Bank which works through eleven District Central Cooperative Banks and about 1,550 primary agricultural cooperative socie- ties located at the district and village levels, respectively. The number of members, share capital, deposits and loans per society are all substantially higher than the all-India averages and are growing. Long-term credit is pro- vided by the Kerala Central Land Mortgage Bank through 33 Primary Land Mortgage Banks. Commercial banks also provide a growing volume of credit to agriculture. 42. Input Supplies. Kerala, with its small size and good transportation network, is relatively well-served by its input supply system. There are over 6,000 selling points for fertilizer, about evenly divided between public sector cooperatives and private dealers. Few farmers have to travel more than 3 kilo- meters for their fertilizer supplies. Plant protection chemicals are sold from about 3,400 outlets. DOA is directly involved in the production of seeds and the production and distribution of seedlings. HYV paddy foundation seed is multiplied on DOA farms, nucleus seed being supplied by KAU. Registered growers, concentrated in four districts, multiply foundation seed to produce certified seed. DOA staff carry out field inspections and quality control  - 16 - tests while the Kerala Agro-Industries Corporation is responsible for seed procurement and distribution. Seedlings of coconut, cashew, and cocoa, and pepper cuttings are produced and distributed by DOA. Private dealers also are engaged in seedling production and distribution. 43. Marketing. Marketing channels for most crops are well established. Traditional channels are village fairs, village merchants, brokers and agents, wholesalers, processors, exporters and related industry. There are more than 2,000 market fairs, thousands of established private traders and about 100 cooperative primary marketing societies. Bank Group Operations in Kerala 44. The Bank Group is currently assisting GOK through the Kerala Agri- cultural Development Project (Credit No. 680-IN, April 1, 1977). Its primary objective is to increase coconut and pepper production, with a small cashewnut production component. In addition, a Cashewnut Project, covering four dis- tricts of North Kerala (Cannanore, Kozhikode, Mallapuram, Palaghat), designed to accelerate cashew production, was approved by the Board on April 29, 1980. PART IV - THE PROJECT 45. The project was prepared by the Government of Kerala with the assis- tance of Bank Group staff. It was appraised in August 1979. The Appraisal Report (No. 2863-IN, dated May 1, 1980) is being distributed separately to the Executive Directors. Negotiations were held in Washington in April 1980. The negotiating delegation for India and Kerala was coordinated by Mr. B.S. Lamba, Deputy Secretary, Department of Economic Affairs, GOI. Project Description 46. The project seekcs to achieve early and sustained increases in agricultural production throughout Kerala's eleven dlistricts through the reorganization and strengthening of the extension service of DOA. The project would support this reorganization over a five-year period by: (a) establishing a single line of command between full-time village extension workers (VEW) and extension headquarters; tb) consolidating staff from the special crop schemes into a single unified service; (c) incorporating regular in-service training as an integral part of extension activities; (d) introducing a systematic fixed schedule for regular and frequent visits by VEW to farmers' fields; (e) improving the working linkages between extension operations and agricultural research activities;  - 17 - (f) developing regular monitoring and evaluation procedures; and (g) providing additional staff, operating expenses, equipment, vehicles, training, and rural housing required to implement these reforms. 47. Under the project, Kerala's agricultural extension service would be reorganized and intensified throughout the State, following the T&V pattern A adopted in other Indian States over the past 2-3 years. The project would systematically and regularly provide farmers with up-to-date advice on farming practices best suited to their specific conditions, emphasizing proven prac- tices which have an immediate impact on income. Extension field staff (in- cluding an estimated 1,950 VEW) would visit farmers regularly and receive systematic training and technical support from DOA and from research insti- tutions. Each VEW would be assigned to work with a number of farm families. The number would vary widely depending on local conditions, population density, cropping intensity and accessibility. The combination of good roads and greater literacy in Kerala should permit a higher-than-normal farm family:VEW ratio. It is anticipated that initially, one VEW would cover about 1,200-1,300 farm families on average, with the actual number varying from about 600 in the sparsely-populated mountains to about 1,500 in a few densely-settled coastal areas where coconut is virtually the only crop and communication is very good. The project would have a contingency to provide for up to 250 additional VEW if they are needed. No later than May 31, 1982, GOK and IDA would review project implementation to determine if the number of VEW should be increased (Section 2.12, Project Agreement). 48. To reach his farmers systematically, the VEW would divide them into eight smaller groups. He would visit each group regularly on a fixed day of the week in a two-week cycle. During his visit, the VEW would concentrate his efforts on about 10 contact farmers selected from each group, on a few strategically-selected recommendations relevant for a particular phase in the crop cycle, and, at least initially, on low cost improvements which the major- ity of farmers could afford. The VEW would be supervised and assisted in his work by a Junior Agricultural Officer (JAO), with one JAO supervising five to eight VEW. Once in each two-week period VEW would receive a full day of intensive training. Thus, every two weeks the VEW would spend eight days in visiting his eight groups and one day in training. The remaining days in the two week cycle would be devoted to field trials, making up missed visits and occasional but limited office work. 49. To provide regular training, continuous technical guidance and supervision of field work, three or four agricultural subdivisions would be established in each district under the charge of a Subdivisional Agricultural Officer (SDAO), who would have full time responsibility for supervising 8-10 JAO in his area and ensuring effective extension operations. He would have a technical staff of four Subject Matter Specialists (SMS) (one each in agronomy of field crops, agronomy of tree crops, plant protection, and training/commun- ications). SMS would spend one-third of their time in training groups of VEW once each fortnight, one-third of their time in field visits providing tech- nical support and guidance to VEW, and one-third of their time in building their own stock of knowledge through a regular dialogue with research workers,  - 18 - carrying out simple field trials in farmers' fields, and attending short train- ing courses. At the district level, a team of three SMS would be established to provide greater depth of support to SMS teams at the subdivisional level and/or to cover specializations not covered by those at the subdivision. The Principal Agricultural Officer (PAO) 1/ in charge of the district would have direct responsibility for extension operations throughout his district. To free the PAO for the frequent field visits so necessary to review extension operations effectively, one Assistant Deputy Director of Agriculture in each district would take over responsibility for a variety of administrative functions. He would be assisted by staff in about 10-12 circle offices located strategically throughout the district, thereby freeing extension staff to concentrate all their efforts on extension. Staff at DOA headquarters would also be reorganized and strengthened to provide more effective support to field operations. 50. Incremental Staff Requirements. Staff requirements to implement this reform would be met by redeploying staff already with DOA, transferring staff from CDD and hiring new staff. GOK would ensure that the assignment of staff would take place in accordance with a schedule acceptable to IDA, that all VEW positions would be used exclusively for extension work and remain under the jurisdiction of DOA throughout the project period, and that the emoluments, benefits and promotional prospects of extension staff would not be adversely affected as a result of the reorganization (Section 2.09, Project Agreement). 51. Training. The project would support a variety of in-service and pre-service training programs for extension staff. Central to the entire extension approach is the fortnightly training sess:Lon during which VEW would be trained in groups of about 30 by subdivisional SMS, assisted by the JAO and drawing on the district SMS as well as specialists from nearby research sta- tions. Training would be practical and concentrate only on the few specific recommendations relevant t:o farming operations in the coming fortnight. Other in-service training courses for VEW would include a pre-season workshop/ training session for each major season and a yearly technical short course. 52. Newly-recruited VEW would receive an intensive six month pre-service training course. For this purpose, one of the three Extension Training Centers, currently under the CDD, would be made available to KAU (on whose campus it is now located) to train at least 150 newly-recruited VEW at a time, or 300 each year. This would be sufficient to fill new posts created during the project as well as vacancies arising from retirement, transfer, etc. By September 30, 1980, GOK would prepare and furnish to IDA for its approval proposed training curricula, schedules and staffing arrangments for this pre-service training center (Section 2.11 Project Agreement). 53. Higher level staff would require a range of training programs as well. Each month SDAO would meet with SMS and JAO for a one-day training and planning session during which the main points of emphasis and schedule of activities for the coming two fortnights would be determined. Before pre- season training of VEW, similar sessions would be heLd at the district level 1/ The Kerala title for a District Agricultural Officer.  - 19 - for JAO. Also, before each season there would be a workshop at the zonal research station attended by PAO, SDAO and SMS. 54. Improved training for SMS would be provided by a monthly workshop. Special, short-term practical courses in production technology and extension methods would be organized for SMS both at KAU and at all-India institutions. A limited number of scholarships at KAU would be provided for DOA staff. 55. Housing. Under the reorganized extension service, extension workers would be required to make regular and frequent visits to their farmers groups. Consequently, it is necessary for them to live in or near their areas of work. GOK would ensure that VEW and JAO would live in or near the areas assigned to them and to this end would provide these workers with housing or rent allow- ances (Section 2.10, Project Agreement). Since housing is difficult to find in some areas of Kerala, the project would provide housing for about 25% of VEW and JAO. GOK would furnish to IDA, at regular intervals, information on progress in locating sites for housing to be financed under the credit (Section 2.13, Project Agreement). 56. Transport. Effective extension requires a high degree of mobility. To facilitate this, the project would provide loans on attractive terms to VEW, JAO, and SMS for the purchase of bicycles, scooters and motorcycles. GOK has provided an assurance that loan terms and conditions and travelling or mileage allowances would be sufficient to ensure the purchase and use of these vehicles (Section 2.14, Project Agreement). The project would also provide four-wheel drive vehicles at subdivisional, district and headquarters levels. 57. Equipment. The project would provide simple, low-cost audio-visual equipment to support the training sessions and to enhance field operations, e.g., flipcharts which extension staff can design themselves and modify to fit local conditions. Furniture and office equipment would also be provided as necessary. 58. Monitoring and Evaluation. The project would provide for the establishment and operation of a monitoring and evaluation system specifically designed to provide project management with current information on the effec- tiveness of the extension system. GOK would establish monitoring and evalu- ation procedures acceptable to IDA and reports would be furnished to IDA annually (Section 2.08, Project Agreement). Project Implementation 59. The project would introduce fundamental improvements in the organ- ization and management of extension operations in Kerala. By establishing a single line of control from extension headquarters to VEW, field-level staff would become directly accountable to their supervisors both technically and administratively. The DOA headquarters organization would be streamlined to provide effective management to the extension service as a whole. Although overall responsibility for general agricultural development in Kerala would remain with the Agricultural Production Commissioner and the Director of  - 20 - Agriculture, the extension service would be directed in its day-to-day oper- ation by an Additional Director of Agriculture (ADA) specifically and exclus- ively assigned to supervise extension work. There would be two other ADA, one responsible for input supply and logistics, and one! for planning, monitoring and evaluation. A Project Coordination Committee would be established to ensure coordination at the State level between extension, research and allied agencies. The Committee would meet for the first time no later than December 31, 1980 (Section 2.03, F'roject Agreement), and at least twice annually thereafter. KAU would bet responsible for the development of new technology and DOA for the transfer of that technology to farmers. By January 31, 1981, GOK would review and, where appropriate, strengthen arrangements for close cooperation between DOA and KAU (Section 2.15, Project Agreement). District Technical Committees, including representatives of DOA, KAU, and beneficiary farmers, would be established to formulate extension recommendations and identify research needs. Their recommendations, as well as on-going university research programs, would be reviewed by a State Technical Committee, chaired by the Director of Agriculture. These Committees would meet initially no later than January 31, 1981, and at least twice annually thereafter (Section 2.04, Project Agreement). Project Costs and Financing 60. The estimated cost of the proposed project is about US$15.3 million including about US$0.9 million of duties and taxes. The principal components, net of contingencies, are: incremental staff (US$4.3 million); civil works (US$2.9 million); incremental operating costs (US$2.3 million); vehicles and equipment (US$1.6 million); and staff training (US$0.6 million). Physical contingencies average about 5% for all items and total US$0.8 million. Price contingencies of 10% for 1980, 7% for 1981-83, and 5% for 1984 have been applied and total 18% of total project cost (US$2.8 million). 61. The proposed IDA credit of US$10 million would finance just under 70% of the project costs net of taxes and duties. The credit would cover all foreign exchange costs (approximately US$1.7 million) and US$8.3 million of local costs. The remaining local financing would come from State Government sources and GOI. GOK has made adequate budgetary provision for the first year of project implementation. Procurement and Disbursement 62. Contracts for civil works (US$2.9 million 1/) would be small and dispersed, both geographically and over time, and would, therefore, not be suitable for international competitive bidding. Contracts would be awarded on the basis of local competitive bidding in accordance with the State's normal procedures, which are satisfactory to the Association. One hundred sixteen motor vehicles (US$0.9 million) of various ctypes would be required under the project. They would be purchased in smalL quantities over five years and would be widely dispersed in rural areas. In the interest of ensuring adequate maintenance and spare parts supply, they would be procured 1/ All figures in this paragraph are net of contingencies.  - 21 - by local competitive bidding under existing government procedures. Motor- cycles and bicycles (US$0.4 million) would be purchased by individual staff from loan funds provided by GOK. Orders for purchase of minor equipment and furniture (US$0.3 million) would be bulked wherever possible and pur- chased according to established local bidding procedures, except where valued at less than US$50,000, when they would be purchased by prudent shopping through normal trade channels. The balance of project base cost (US$7.2 million) would consist of incremental staff salaries and allowances A (US$4.3 million), training costs (US$0.6 million), and incremental operating costs (US$2.3 million) and would not involve procurement. 63. Disbursement under the credit would extend over five years and would be made against 80% of the cost of civil works, equipment, furniture and vehicles; 100% of the cost of training; and 45% of eligible staff costs. Disbursements against staff costs, training, payments for locally-procured vehicles, furniture and equipment not exceeding Rs 150,000, and civil works payments not exceeding Rs 300,000 would be on the basis of certificates of expenditure, documentation for which would be retained by GOK and available for inspection by IDA during project review missions. Certificates of expend- iture would be audited at least once every six months and a report submitted to IDA promptly thereafter. Disbursement against all other items would be fully documented. Benefits and Risks 64. The principal project benefit would be an increase in crop produc- tion and thus farm incomes as a result of providing improved extension services to farm families. Approximately 2.5 million farm families would be served by the new extension service. Total project costs over the five-year development period amount to US$11.7 million, excluding contingencies, which is about US$4.7 per farm family served. Incremental costs after the project develop- ment period, to be met from State budget sources, would be approximately US$1.9 million per annum or about US$0.8 per farm family. Incremental costs would be partly recovered through levies on agricultural produce entering commercial markets. Stimulation of demand for agricultural inputs would also increase State revenues from sales taxes on these items. 65. Attributing a precise level of benefits to this type of project is difficult since it is not possible to determine what proportion of bene- fits is due to extension alone and what is due to additional purchased inputs and other factors. It is also difficult to estimate acceptance rates of recommended practices. In practice, it is the combination of a number of factors, with extension playing the role of catalyst, that brings the desired benefits. However, since the project relies primarily on reorganization and strengthening of an existing extension structure, the incremental cost is low per hectare and per farm family. Hence, even very small and slow production increases in the project area generate a high rate of return. This project would be able to generate a 50% rate of return if by 1987 yields of foodgrains increase by only 12 kg/ha and per hectare yields of coconut and tapioca increase by only 10%. In areas where the extension system has operated effec- tively for a few years, yield increases have far exceeded this level. More- over, the practices initially stressed by the extension service focus on improving cultural practices (timely operations, good land preparation, proper  - 22 - seed rates, line sowing and weeding) which usually involve additional labor but little incremental cash outlay and are thus particularly well-suited to the needs of small farmers. 66. Project Risks. The transfer of multi-purpose field workers and the establishment of a single, unified professional extension service mark a major departure from past practice in India. The fact that such a reform is under- way in many parts of the country reflects a willingness to develop an exten- sion system capable of serving all farmers well. Nevertheless, it is diffi- cult for governments to make and maintain such decisions. The main risk, therefore, is that the State Government would find it difficult to maintain a single line of command from extension headquarters to the VEW who work exclu- sively on agriculture. In this project, this risk is low because only a small proportion of the field staff is to be transferred from another department. 67. Experience has shown other risks to be minimal. Farmers' responsive- ness to recommendations has been generally excellent wherever visits are made systematically. In addition, VEW have gained confidence in their own profes- sional ability to introduce innovations. The ability of the service to develop and disseminate recommendations leading to yield increases well above the level needed for a 50% return has been demonstrated adequately. The availability of suitable technology for different conditions has not generally been a constraint as there is a backlog of research findings as yet not widely adopted. To reduce the risk that technological constraints would lower anticipated project benefits, the project would support field testing of research results. A separate project, the National Agricultural Research Project (Credit 855-IN), is directed at strengthening research facilities at the State Agricultural Universities to ensure a continuous flow of recommend- ations adapted to specific regional problems. PART V - LEGAL INSTRUMENTS AND AUTHORITY 68. The draft Development Credit Agreement between India and the Asso- ciation, the draft Project Agreement between the Association and the State of Kerala, and the Recommendations of the Committee provided for in Article V, Section l(d) of the ArticLes of Association are being distributed to the Executive Directors separately. 69. Special conditions of the Project are listed in Section III of Annex III. 70. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association.  - 23 - PART VI - RECOMMENDATION 71. I recommend that the Executive Directors approve the proposed credit. A Robert S. McNamara President May 1, 1980 By Ernest Stern  I I  ANNEX I INDIA - SOC5 L INDICATORS DATA S Page 1 of 5 LAIM AREA (TEOUSAND SQ. EN.) DOIA -CE GTGP G(SUSTED A ES - ImT 8Z ENTlT)I TOTAL 3287.6 SAME SAME MITr HIGHER AGUCULTURAL 1818.3 IMST RECENT GgGBRAPIC INCOME IcNCz 1960