India - Cashewnut Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2437-IN INDIA CASHEWNUT PROJECT STAFF APPRAISAL REPORT April 10, 1980 Agriculture D Division South Asia Projects Department 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 EQUIVALENTS US$1.00 = Rs 8.40 1/ WEIGHTS AND MEASURES (Metric System) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AAO - Assistant Agricultural Officer ADA - Assistant Director of Agriculture AP - Andhra Pradesh APFDC - Andhra Pradesh Forest Development Corporation ARDC - Agricultural Refinance and Development Corporation CB - Commercial Bank CCI - Cashew Corporation of India CNSL - Cashewnut Shell Liquid CPCRI - Central Plantation Crops Research Institute FA - Field Assistant GOAP - Government of Andhra Pradesh GOKar - Government of Karnataka GOKer - Government of Kerala GOI - Government of India GOO - Government of Orissa ICAR - Indian Council for Agricultural Research KCDC - Karnataka Cashew Development Corporation KFDC - Karnataka Forest Development Corporation LDB - Land Development Bank PCK - Plantation Corporation of Kerala RBI - Reserve Bank of India SMS - Subject Matter Specialist T&V - Training and Visit Extension System VEW - Village Extension Worker FISCAL YEAR GOI and State Governments - April 1 - March 30 ARDC - July 1 - June 30 1/ Until September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then it has been fixed against a "basket" of currencies. As these currencies are floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in this report are based on the projected exchange rate during the project period.  FOR OFFICIAL USE ONLY INDIA CASHEWNUT PROJECT Table of Contents Page No. I. THE SECTOR ........................................... 1 General ........... ......................... 1 The Indian Cashew Industry ..... ............ 1 Cashew Trees and Products ..... ............. 2 Areas and Production ........... ............ 3 Government Production Programs ............. 3 Cashew Research and Status of Technology ... 4 Raw Nut Procurement. 4 Processing. 5 institutions Serving the Cashew Industry ... 6 lI. PROJECT AREA .. 7 A. Project States. 7 B. Project Area. 8 Location and Topography. 8 Climate and Soils. 8 Agriculture 9 Holding Size and Land Tenure. 9 Infrastructure .10 Inputs .10 Extension .11 Credit .11 III. THE PROJECT .12 Project Genesis .12 Similar Bank Group Operations in India 12 Project Summary ............... . ... 13 Detailed Features .13 Environmental Aspects .17 Project Phasing .18 IV. COST ESTIMATES, FINANCING, PROCUREMENT AND DISBURSEMENTS .18 Cost Estimates .18 Financing .19 This report is based on the findings of an IDA mission which visited India in September/October 1978, consisting of Mr. G. Stern and Ms. J. Stockard (IDA), and Messrs. J.G. Ohler, T.P. Burgess and L.A. Newell (Consultants) and Mr. R. N. Kaul (ARDC) and on results of follow up visits by Messrs. G. Stern and J. G. Ohler in March 1979 and by Messrs. G. Stern, J. C. Goldbrenner and Ms. J. Stockard in September/October 1979. This document his a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed *ithout World fank authorization.  - ii - Table of Contents Page No. Procurement ............... .. ............... 20 Disbursements .............. .. .............. 22 V. ORGANIZATION AND MANAGEMENT ........................... 22 Cashew Development by Corporations ... 22 Extension and Cashew Units for Smallholders 24 Training ...... . 25 Credit Operations .......................... 26 Other Project Components .................. . 27 Project Management and Coordination ........ 28 Reporting Requirements and Evaluation ...... 29 Accounts and Audit ........... .. ............ 29 VI. CASHEWNUT PRODUCTION, MARKET AND PRICES .............. 29 Yields and Production .......... .. .......... 29 World Raw Nut Production ........ .. ......... 30 Cashew Kernel Trade and Prices ............. 30 Kernel Market and Price Prospects .......... 31 Indian Raw Nut Price Projections. 31 VII. FINANCIAL PROJECTIONS ...... .......................... 32 A. Financial Models . .............................. . 32 B. Financial Results ........... .................... 33 VIII. BENEFITS AND ECONOMIC EVALUATION ..................... 35 Benefits ................ .. ................. 35 Economic Evaluation ........... .. .... 36 Project Beneficiaries ............... 37 Project Risks ....... . . ......................... . 38 IX. RECOMNENDATIONS. ...................................... 38  - 111 - Table of Contents Schedule A - Principal Lending Terms and Conditions Annex I - Text Tables Table 1.1 Raw Nut Imports and Kernel Exports Table 1.2 Area and Production of Cashewnuts in India Table 2.1 Selected Data of Project States Table 3.1 Staff and Equipment for Cashew Units Table 3.2 List of Kerala Roads to be Improved Table 6.1 Raw Cashewnut Production in the Main Producing Countries Table 6.2 Exports of Cashewnut Kernels from Processing Countries Table 6.3 Imports of Cashewnut Kernels by Principal Consuming Countries Table 6.4 Cashewnut Kernel Prices Table 6.5 Price Relationship Between Processing Mix of Cashew Kernels and 320 Wholes Table 6.6 Financial Price Projections Annex 2 - Project Costs Table 1 Summary of Project Costs Table 2 Phasing of Project Costs Table 3.1 Kerala - Smallholder Component Cost Estimate Table 3.2 Karnataka - Smallholder Component Cost Estimate Table 3.3 Andhra Pradesh - Smallholder Component Cost Estimate Table 3.4 Orissa - Smallholder Component Cost Estimate Table 4.1 Kerala - State Corporation Component Cost Estimate Table 4.2 Karnataka - State Corporation Component Cost Estimate Table 4.3 Andhra Pradesh - State Corporation Component Cost Estimate Table 4.4 Orissa - State Corporation Component Cost Estimate Table 5.1 Kerala - State Corporation Staffing Pattern Table 5.2 Karnataka - State Corporation Staffing Pattern Table 5.3 Andhra Pradesh - State Corporation Staffing Pattern Table 5.4 Orissa - State Corporation Staffing Pattern Table 6 Training Expenses Table 7 Research Component Cost Estimate Annex 3 - Schedule of Disbursement Annex 4 - Financial Analysis Table 1 Smallholder Component: Projected Farmer Income From New Plantations Table 2 Production Costs: New Plantations Table 3 Smallholder Component: Projected Farmer Income from Improvement of Existing Plantations Table 4 Production Costs: Improvement of Existing Plantations Table 5 Plantation Corporation of Kerala: Cash Flow Projections and Financial Rate of Return  - iv - Table of Contents Table 6 Plantation Corporation of Kerala: Income Statement Projection Table 7 Plantation Corporation of Kerala: Gross Revenues, Production Costs, Deferred Costs Table 8 Andhra Pradesh Forest Development Corporation: Cash Flow Projections and Financial Rate of Return Table 9 Andhra Pradesh Forest Development Corporation: Income Statement Projection Table 10 Andhra Pradesh Forest Development Corporation: Gross Revenues, Production Costs, Deferred Costs Annex 5 - Economic Analysis Table 1 Economic Rate of Return to the Project Table 2 Economic Rate of Return to the Smallholder Component Table 3 Economic Rate of Return to State Corporations Component Table 4 Projected Incremental Production from the Project Table 5 Annual Implementation of Cashew Development Table 6 Price Summary for Economic and Financial Analysis Annex 6 - Related Documents and Data Available in the Project File List of Charts Chart No. WB 19981 - Project Organization Chart Chart No. WB 19982 - Organization of Extension Service and Cashew Units Andhra Pradesh Chart No. WB 19982b - Organization of Extension Service and Cashew Units Kerala Chart No. WB 19983 - Organization of Extension Services and Cashew Units Karnataka and Orissa Chart No. WB 19984 - Model Organization Chart for Cashew Corporations Chart No. WB 21066 - Alternative Model Organization Chart for Cashew Development by Plantation Corporation of Kerala and Andhra Pradesh Forest Corporation Chart No. WE 20066 - Implementation Schedule of Main Project Activities List of Maps IBRD 14193R1 - Cashewnut Project  INDIA CASHEWNUT PROJECT I. THE SECTOR General 1.01 Agriculture is the dominant sector of the Indian economy. It contributes 45% of the GNP, provides about 70% of the country's employment and is the basis for almost 60% of its export earnings. Most of the 160 million ha cultivable land in India is devoted to foodgrains, pulses and oilseeds, but industrial crops such as cotton, jute and tobacco, plantation crops such as tea, coffee, rubber, coconuts and cashewnuts, and a large range of spices and horticultural crops are important in some states and make a sizeable contribution to the Indian economy. 1,02 During the last decade, Government of India's (GOI) development plans have emphasized agriculture, particularly foodgrain production, by =increasing use of irrigation, fertilizers, plant protection and good seeds, backed by improved extension and research services. Although there have been several record crops and there are comfortable foodgrain reserves in the country at present, overall foodgrain production has only increased by 2.3% per annum over the last 15 years, barely keeping up with population growth. Consequently, GOI is giving even higher priority to agriculture in its Draft Sixth Five-Year Plan than in earlier plans. Main emphasis is again on foodgrain production, but GOI is also according importance to crops such as cashewnuts, which generate export earnings and require high employ- ment levels. The Indian Cashew Industry 1.03 The cashew industry is of considerable importance to the Indian economy as sources of foreign exchange, employment and farmers' income. cashew trees were introduced from Brazil by the Portuguese in the 16th century to prevent soil erosion and are now grown on about 400,000 ha in India, mostly by smallholders. Cashew products which are traded are cashew kernels, mainly consumed as roasted and salted nuts (97% of total traded value) and cashewnut shell liquid (CNSL), a phenol used mainly in manufacture of friction materials (3% of total traded value). Cashew apples and testa (para 1.08) are other by-products. 1.04 International trade in cashews is a recent development. India's kerntel exports grew from 50 tons in 1925 to 20,000 tons in 1941 and reached their peak at 66,000 tons in 1972. The value of cashew exports has averaged US$100 million over the last five years and the crop has ranked third or f -utl in value amonig agricultural commodity exports during the past two ~ .sm-o.he processing industry employs about 150,000 laborers, mostly  - 2 - 1.05 India pioneered cashewnut processing (extraction of kernels and CNSL from raw nuts) and, up to the mid-1960s, virtually monopolized the world cashew trade. At that time, India accounted for 90-95% of the kernel trade (Table 6.2) but only for about 25-30% of raw nut production and Indian proces- sors would import from 70% to 80% of their raw nut requirements (Table 1.1) from East Africa. During the 1960s, East Africans began to develop their own processing facilities and have been supported by two Bank Group projects (Loan No. 1014-TA and Credit No. 801-TA). Partly because of growth of processing abroad and partly because of raw nut procurement problems that have occurred in East Africa, nut imports into India have fallen from an average 160,000 tons per year over the 1965-75 decade (Table 1.1) to only 20,000 tons in 1978. Local cashew production has increased, but not sufficiently to compensate for loss of imports. Consequently, 1978 kernel exports were less than 30,000 tons. Compared to average exports of 55,000 tons kernels over the 1965-75 period, this represents a loss of almost US$100 million in export revenue and about 10 million labor days of employment in the processing industry. 1.06 GOI is determined to restore cashew exports at least to the former level. With further development of processing facilities abroad, raw nut imports would remain small -- below 50,000 tons per year. Consequently, GOI and states with cashew growing areas have decided to boost local production as quickly as possible, to compensate for the loss of imported nuts. The project would make a substantial contribution to achieving those objectives. Cashew Trees and Products 1.07 Cashew trees are hardy and tolerate most conditions except frost and impeded drainage. In India, they grow largely in coastal areas, on laterites, shallow soils and sands where cashews provide better returns than alternative land use, though best yields are obtained on deep sandy loams. Similarly, cashews tolerate drought, but yield best when rainfall exceeds 1,000 mm per year. Dry weather during flowering and harvest are prerequi- sites for good yields. Depending on growing conditions and care given to the plants, cashews start bearing in three to six years and reach full production in ten to twenty years. Trees flower in November/December and nuts are harvested between March and May. Each nut forms at the end of a swollen fruit stalk, the apple, which drops to the ground on maturity. The nuts are detached from apples, sold almost immediately and are then sundried in cement yards for two to three days. At this stage, nuts are known as raw nuts and consist of kernels (25-30%), testa, a thin brown skin covering each kernel (2%), shell (40-50%), and CNSL (20-25%) contained in the honeycomb structure of the shell. When properly dried and stored, raw nuts will keep for 12 to 18 months, but as a rule, processing (para 1.17) which starts with the harvest is completed in 3 to 6 months. 1.08 As already indicated (para 1.03) kernel and CNSL are the traded cashew products. The highly perishable cashew apple is used as fresh fruit in some areas and, in Goa, is used to make "Feni", a locally popular alcoholic beverage. A pilot scheme has been planned for the Kerala Agricultural Devel- opment Project (Credit No. 680-IN) to explore the economics of other possible industrial uses of cashew apples. The testa contains tannin and there is an extracting plant in Kerala. Cashewnut shells serve as fuel in processing  - 3 - factories and surpluses are sold. On the whole, the value of by-products is negligible when compared to that of kernels. Areas and Production 1.09 Cashews grow in most coastal states, from Maharashtra on the west coast to West Bengal on the east coast (see map). It is a minor crop except in North Kerala, which accounts for at least half of India's production. There are a few plantations, mostly owned by state government departments, and most cashews are grown by smallholders in small clumps or in hedgerows or as backyard trees. Assessment of cashew areas and yields are, therefore, difficult and estimates (Table 1.2) are subject to wide margins of error. Production data is more readily assessable. Calculations based on raw nut imports and kernel exports (both accurately recorded), indicate that local raw nut supplies to processors have increased over the last ten years from 50,000 tons (5 years moving average) to 100,000 tons (Table 1.1). Commercial and government sources estimate domestic consumption at about 40,000 tons and total raw nut production at 140,000 tons. Production fluctuates with weather conditions, severity of pest attack, and cashew prices. High price levels of the last three years have induced more thorough harvesting and, therefore, higher production. Pest attack, particularly by Tea Mosquito (Helopeltis antonii) is reported to reduce production by at least 30% in an average year and by more, when infestation is severe. Control measures exist but are applied only on a small scale. This project would help to introduce large scale pest control measures. Government Production Programs 1.10 GOI and state government support of the industry was initially confined to research and credit programs to expand cashew areas. In 1966, GOI established the Cashew Council and Cashew Directorate (para 1.21) to prepare plans for GOI finance to help the cashew industry. Since then, OI has provided about Rs 800 million, mainly to expand production. The first programs explored and demonstrated improved practices, particularly pest control. More recent programs included Rs 200 million GOI equity for establishing cashew plantation corporations and Rs 600 million to provide Rs 300/ha subsidy for planting cashews by smallholders and Rs 500/ha for planting by corporations. 1.11 The subsidy program has succeeded in getting cashew trees into the ground, particularly in Kerala where planting of 35,000 ha by small- holders over the last three years has been reported. The steep rise of nut price also helped to persuade farmers to plant cashews, but the subsidy played an important part and would need to continue to encourage further large-scale planting. However, the subsidy program by itself has not led to adoption of improved cultivation practices, which would require a Rs 2,800-3,600/ha invest- ment, and the impact of recent planting on production would be relatively small. The project, therefore, would aim to combine cashew area expansion with use of improved technology.  - 4 - 1.12 As a result of GOI offer of equity, a cashew development corpora- tion has been established in Karnataka (para 5.03) which would become one of the project implementing agencies. Other GOI programs included encourage- ment of vegetative propagation, which has been moderately successful in Orissa where several hundred gardeners have undergone successful training in side grafting, and establishment of progeny seed orchards. All these programs have laid the foundations for this project. As a result of recent changes in financing arrangements of many GOI schemes, GOI no longer contributes to the equity of state corporations. However, financing for the other schemes is scheduled to continue during the Sixth Five-Year Plan (1978-83), but with participating states meeting half the cost of the schemes. Cashew Research and Status of Technology 1.13 Until recently in India and elsewhere, cashews have been treated more or less as wild trees. There was little research on which to base cultural recommendations and the only cultural treatment was slashing of weeds to facilitate harvest. The Indian Council for Agricultural Research (ICAR) initiated cashew research in 1951, which now forms part of the All India Coordinated Spices and Cashew Improvement Project that also caters for research of seven other commodities. Cashew work is carried out on two sub- stations of the Central Plantation Crops Research Institute (CPCRI) and at five other substations operated by universities in different states (see map). Because of the increasing importance of the crop, ICAR is planning to inten- sify cashew research efforts and to elevate cashew research to a separate project. 1.14 Main emphasis of research has been on identification of high yield- ing plant types, pest control, fertilizer use and vegetative propagation. Some work has also been done on cashew breeding and introduction of germ plasm from abroad. As a result, there is now a package of practices includ- ing fertilizer recommendations, control of major pests and use of seed from selected mother trees. The package, allied to reasonable care of plantations by way of careful planting, soil conservation and weed control, should in- crease yields from two to fourfold. There is also evidence that the package would double yields of young and reasonably well cared for existing planta- tions. More research is needed on plant spacing, identifying vegetative propagation methods suitable for widescale field use, identifying suitable clonal material for vegetative propagation, fertilizer recommendations for different soil types, and, in the longer run, on breeding of high kernel content nuts. The project would strengthen and expand research facilities to allow execution of a suitable research program (para 3.14). Raw Nut Procurement 1.15 Until 1970, each processor procured his own raw nut supply, both imported and local. In that year, GOI established the Cashew Corporation of India (CCI) as sole importer of raw nuts. Distribution to processors is based on export performance in the years preceding CCI establishment. The procedure works smoothly, but it has frozen the structure of the pro- cessing industry in its 1970 form and has discriminated against processors in new cashew areas. Until 1976, local nuts in all states were procured  - 5 - by processors' agents through a series of middlemen. Farmers either sold directly to traders or to preharvest contractors. Raw nut prices were set by processors, based on forward New York kernel prices, and have risen steeply from about Rs 2.50 per kg in 1975 to Rs 6 per kg in 1978. 1.16 This type of marketing appears to work smoothly, and continues in all states except Kerala. There, the Government of Kerala (GOKer) became concerned by the large outflow of nuts to neighboring states where wage rates and processing costs are lower. To ensure that Kerala nuts are processed in Kerala, as well as to ensure that growers receive a fair price, GOKer intro- duced, in 1976, state monopoly procurement of raw nuts. Since then, nuts have been purchased by the Kerala State Cooperative Marketing Federation, which employs marketing cooperatives and primary cooperatives as buying agencies. Distribution to processors is based on the CCI model, according to previous factory performance. Initially the operation was reasonably successful. However, in 1978, GOKer set too high a procurement price for raw nuts based on a temporary kernel price peak. The high price benefitted growers and encouraged new planting, but caused financial loss to GOKer and problems in the processing industry (para 1.19). Consequently, in 1979, GOKer used a lower procurement price, with the result that a considerable proportion of the crop bypassed the State purchasing organization. Future procurement policy in Kerala is uncertain at this time and a study of the cashew industry to be financed by the project (para 3.16) would examine most suitable raw nut procurement policies. Processing 1.17 There is considerable excess processing capacity in India. About 260 factories employing 150,000 people and having 450,000 tons raw nuts capacity per annum are in Kerala alone, mostly in Quilon. There are also factories wherever cashews are grown -- some of them little more than cottage industries. On the whole, the Kerala industry is the most efficient in India and handles 80-90% of kernel exports. In the factories, nuts are roasted and cracked. Then kernels are separated from shells, peeled, dried and graded and finally packed into tins containing 25 pounds of kernels. Tins are filled with carbon dioxide gas, sealed and placed into cartons for ship- ment. Capital investment is small and all operations are manual. Processing results are good. Outturn of high value whole nuts averages 80% (Table 1.1) compared to 40-60% of mechanized processing abroad. 1.18 Some factories extract CNSL, but the process causes some kernel breakage and scorching and lowers kernel value. Consequently, there is a trade-off, depending on relative CNSL and kernel prices. CNSL extraction reached a peak in 1964/65 at 15,000 tons and declined to 3,000 tons in 1977. Since then, CNSL price has strengthened and processors may again step up CNSL production. 1.19 The processing industry, built up by the private sector, must have been reasonably profitable to have developed its large excess capacity. There is no industry organization other than several local processors' associations, mainly for wage rate bargaining, and there has been no attempt to regulate  - 6 - processing capacity. While most of the industry consists of well-established and reputable business houses, there were also speculators who have opened factories and then abandoned them, causing instability, particularly among the labor force. Therefore, GOKer established in 1969 the Kerala State Cashew Development Corporation which has taken over 34 "sick" factories, employs 34,000 people and is the largest processor in India. The Corporation has become a pacesetter for enlightened labor policies. In 1978, private processors did not buy local raw nuts because the price was too high for pro- fitable factory operation. Consequently, the Corporation operated 99 factories temporarily lent to it by the owners, in addition to its own factories, and was the sole processor in Kerala. Quality of its product has always been satisfactory and despite higher operating costs than the private sector, the Corporation had, up to 1978, shown a small overall profit. However, its 1978 operations, carried out on instructions by GOKer, caused heavy losses which may take several years to recoup. 1.20 State government involvement in marketing and processing has benefitted growers and factory labor in the short term. However, it has led to strained relations between GOKer and the private processing sector, dis- ruption of processing and exports, and financial losses by government market- ing and processing agencies. The industry study (para 3.16) would examine the role of various institutions, including state governments, to determine the degree of involvement that would most help the industry. Institutions Serving the Cashew Industry 1.21 Cashew crop development is the responsibility of central and state ministries of agriculture, while processing and trading is handled by commerce or commerce and industries ministries. Agencies that deal with cashew produc- tion as part of their portfolio include central and state agricultural depart- ments for crop development and ICAR and universities for research. Apart from Kerala state marketing and processing organizations, agencies which serve the cashew industry specifically include: (a) Indian Cashew Development Council was established in 1966 under the GOI Ministry of Agriculture, and has representation from all sectors of the industry and cashew growing states. It meets about once a year to discuss the industry's prob- lems, advise GOI on cashew policy and review proposals for cashew development programs to be financed by GOI; (b) Directorate of Cashew Development was established at the same time as the Council. Its small staff of three senior and ten junior technical officers provides the Council's Secretariat, prepares and monitors GOI cashew development schemes, collects cashew statistics, does some publicity work and provides some linkage between cashew states and cashew institutions; (c) CCI was established in 1970 under the GOI Ministry of Com- merce as a subsidiary of the State Trading Corporation, to  import raw cashews. It has recently entered kernel exports on a small scale and is providing part of its Rs 60 million accumulated profits for cashew development schemes; and (d) Cashew Export Promotion Council also operates under the GOI Ministry of Commerce, is partly financed by it and partly by an export cess (annual budget about Rs 600,000 (US$70,000)) and has 24 members partly nominated by GOI and state governments and partly elected by processors. Activities include attendance at overseas fairs, collec- tion and dissemination of trade statistics, publication of a quarterly journal and mediation in case of complaints by overseas customers. 1.22 While the numerous institutions dealing with cashews may have been adequate in the past, amalgamation into a single organization such as a com- modity board may be advisable. Such boards already exist for tea, coffee, rubber and other plantation crops and deal with all aspects of the commodi- ties including research and extension. On the whole, such boards have served large-scale plantations well, but have been less successful in serving small- holders. The proposed industry study to be financed by the project would examine the need for possible institutional reorganization of the industry, with particular emphasis on improving efficiency and competitiveness of the industry, i,nterstate coordination of both production and processing, meeting the needs of the predominantly smallholder plantation sector, and cashew trade promotion. II. PROJECT AREA A. Project States 2.01 Of the four participating states, Kerala and Karnataka are situated in southwest India and Andhra Pradesh (AP) and Orissa are on the east coast. They vary in size, with AP (276,814 sq km) ranking fifth in India while Kerala (38,864 sq km) is one of the smallest states. Per capita income is low in all four states. In AP (Rs 1,003 per year 1974/75 current prices), income just exceeds the India average (Rs 989), while in the other three states, average income is below that level. Orissa per capita income (Rs 707) ranks 19 out of the 23 states in India. Kerala is remarkable in several respects; it has the highest population density in India (549 per sq km), the highest literacy rate (60%) and is the only state in which tropical tree crops play a dominant part in the economy. In all four states, the population is mostly rural, ranging from 92% in Orissa to 76% in Karnataka, and suffers from pervasive unemployment. 2.02 Agriculture dominates the economies of the four states, accounting for from 50% to 66% of total income and from about 50% to 85% of employment. Foodgrains constitute the most important crop group in all states, occupying from 76% of the sown area in AP to 30% in Kerala, where cassava, often grown  -8- in association with tree crops, takes the place of coarse grains of rainfed areas in other states. Pulses and oilseeds rank next in importance in three states. Other prominent crops are cotton and sugarcane in Karnataka and cotton, castor and tobacco in drier, non-irrigated parts of Andhra Pradesh. In Kerala, coconut plantations occupy almost the same land area as paddy, and other important perennial crops include rubber, pepper, coffee, tea and cashewnuts. In fact, Kerala is the only state in India in which cashewnuts play a significant part in the economy. In Karnataka and AP, cf.shews are important locally, in parts of the proposed project areas. A summary of selected data about the four states is shown in Table 2.1. B. Project Area Location and Topography 2.03 The project would cover four districts of North Kerala 1/, the adjoining South Kannara district of Karnataka, ten districts of East AP 2/ and seven districts of East Orissa 3/ (see map). In Kerala and Karnataka, the project area is situated in the undulating midlands, with elevation from sea level to about 200 m, lying between the flat coastal strip and the "Western Ghat" highlands. Land slopes are between 30 and 150 in areas to be planted by private farmers but corporation land is mostly on steep hillsides with slopes up to 30 . In AP and Orissa, the project area covers the coastal plains and adjoining inland areas. Topography is flat at the coast, undula- ting with slopes of 2 to 10 inland and includes some isolated steep hills which form part of the land to be developed by state corporations. Climate and Soils 2.04 Rainfall patterns in all project areas are suitable for cashews, with adequate rains to support the crop and with dry weather during flowering and harvest. In the two western states, average rainfall is high -- from 3,000 to 3,800 mm per annum in the various project districts, falling mostly between May and November. Heavy rains, particularly during the June-September period, cause erosion problems on sloping fields. In project districts of eastern states, rainfall is much lower, ranging between 1,000 and 1,350 mm per annum, falling from June through October. There is little rainfall in any of the areas between December and April. 2.05 There is little variation in temperatures on the east coast, with maximum temperatures between 27 0C and 33 0C and minimum temperatures between 1/ Cannanore, Kozhikode, Mallapuram, Palghat. 2/ Srikakulam, Vizianagaram, Visakhapatnam, East Godavari, West Godavari, Khamman, Khrishna, Prakasam, Nellore, Chittoor. 3/ Mayurbhanj, Keonjhar, Balasore, Dhenkanal, Cuttack, Puri, Ganjam.  -9 - 210C and 26 0C. The warmest weather is from March to May and the coolest period occurs during the height of the rains in July. In the west, seasonal and diurnal variations are higher. Maximum temperatures range from 370C in June to 28 0C in January and February, and minimum temperatures from 29 0C in June to 170 C in January and February. Temperatures in all areas are suit- able for cashews. 2.06 There are ample suitable soils in all project areas consisting of a range of lateritic soils on the west coast and sands, sandy loams and red soils in the east. Careful selection of soils, including subsoil testing, would be needed, particularly in laterite areas, to exclude lateritic rock, eroded laterites or laterites with a clay matrix or with less than 30% soil between gravel. Subsoil testing would also be needed to exclude compacted subsoils and to ensure sufficient soil depth, particularly on steep hills. 2.07 Cashew yields depend largely on soil moisture available to trees. It is fortunate, therefore, that shallower and more gravelly soils are situated in western project states, where high and well distributed rainfall compensates for low soil moisture holding capacity. Most project soils vary from neutral to slightly acid, which suits cashews. Soil nutrient status is generally low, but trials in India and elsewhere have shown that deficiencies can be corrected by fertilizer application. Agriculture 2.08 The agricultural pattern of project areas closely resembles that of project states (para 2.02). Cultivation of the land area varies from about 60% in Kerala through 45% to 50% in eastern states to 30% in Karnataka. There, about 30% is covered by forests, partly degraded, and some of the forest land would be available for cashew cultivation. In all areas, paddy is the single most important crop, comprising from 30% of cultivated area of project dis- tricts in Kerala to about 60% in AP and Orissa. In Kerala and to a lesser extent Karnataka, a range of tree crops covers about half the cultivated area. Of these, coconut is the most important, but at least 80% of the states' cashew production comes from the project area. In the two eastern states, major irrigation schemes with emphasis on rice production dominate coastal areas. Dryland crops are oilseeds, millets and pulses, and in specific areas include kenaf, tobacco, chillies and a range of vegetable crops. In Orissa, upland paddy, some very low yielding (4 quintals/ha), comprises much of the rice pro- duction. Most of the existing cashew plantations of the two states, small- holder owned in AP and departmentally owned in Orissa, are in the project area and show that conditions are suitable for the crop. Much of the projected cashew plantation area, even in densely cultivated Kerala, is at present covered by coarse grass and shrubs, partly as a result of past land ownership (para 2.10) and partly because the land is not well suited for crops other than cashews. Holding Size and Land Tenure 2.09 Farms are small throughout the project area, particularly in the intensively farmed coastal strip of the two west coast states and on irriga- ted paddyland at the east coast. There, most holdings are less than 0.5 ha.  - 10 - Farms are bigger on the less productive laterite and rainfed areas, which would be used for cashews. An indication of farm size distribution in project districts is shown below: Percentage of Farmers Owning Less Than: Project Area One ha Two ha Five ha Kerala 77 90 98 Karnataka 47 75 95 Andhra Pradesh 62 80 96 Orissa 51 84 97 2.10 Most farmland is owner operated. One feature of the project area is the recent distribution of state land to landless people or marginal farmers, resulting from land reform activities. The project would help many of the new farmers towards establishing a satisfactory means of livelihood. Other participating farmers would include a range of income groups. The minority would be reasonably well-established farmers wishing to intensify farming on part of their land. Mostly, however, participants would be sub- sistence farmers, perhaps with a small tree grove and paddy patch on the west coast, or with a small and low productivity upland holding in eastern states, who need to supplement farm income and presently do so with off-farm employment. Infrastructure 2.11 The road network in the project area is satisfactory in most localities except for parts of Kerala where the feeder road system requires improvement in the project area. The project districts are linked to major cities by the Trivandrum to Bombay national highway and main railway line in the west and the Madras to Calcutta highway and railway line in the east. The density of road development ranges from 2 to 3 sq km land area per km of roads. The standard of roads differs, with about half of the roads on the west coast bitumenized, compared to about 25-30% surfaced on the east coast. However, the difference in standards would not affect the project, since main transport requirements would be during the harvest, which falls during the dry season when non-bitumer,ized roads would be adequate. Inputs 2.12 Supply of fertilizer and pesticides inputs is satisfactory in all areas. In all project districts, distribution is handled by village primary cooperative societies as well as by private distributors. The number of cooperative sales points ranges from 100 to 500 per district. In Kerala and Orissa, the cooperatives have recently been reorganized and strengthened to improve their commercial activities, including fertilizer and pesticides distribution. In AP, the primary village cooperatives to date have not entirely met farmers' input requirements, and the private trade seems to be concentrated in larger marketing centers. Consequently, the Department of Agriculture has an inputs distribution organization with about 100 distribu- tion points in the project area, which handles about one-third of the trade. Back-up storage depots by main distributors are also satisfactory and timely and adequate inputs supply to project farmers is reasonably assured.  Extension 2.13 Because cashews are a minor crop in most areas, comparatively little attention has so far been devoted to it by extension services, except in the Kerala project cistricts. Even there, most of the efforts of the limited manpower that could be spared had to be used for supervising the cashew demon- stration and planting subsidy programs (para 1.10). The agricultural depart- ments of Kerala and AP and the Horticultural Department of Karnataka have been handling smallholder cashew development. In Orissa, the Soil Conservation Directorate of the Department of Agriculture has been managing departmental plantations. While not set up as an extension agency, its technical staff has supervised quite successfully the first state sponsored smallholder planting programs. 2.14 In Orissa and Karnataka, Training and Visit (T&V) 1/ extension services established with the help of two IDA projects, Orissa Agricultural Development Project (Credit No. 682-IN) and Composite Agricultural Extension Project (Credit No. 826-IN), would provide extension support for cashew devel- opment. The Orissa Soil Conservation Service and Karnataka Horticultural Department would provide additional services beyond the scope of extension staff, such as soil selection, orchard layout work and support for credit operations (para 5.09). Both GOKer and the Government of Andhra Pradesh (GOAP) have reasonably well staffed extension services oriented mostly on a scheme basis, e.g., high yielding rice scheme, coconut improvement scheme, cotton scheme, etc. The staff consists of about 800 graduates and 4,000 diploma trained demonstrators in Kerala and of about 2,900 graduates and 3,600 sub or field assistants in Andhra Pradesh. Both states are actively consider- ing GOI or IDA assistance for improving and strengthening their services. While a project for that purpose has recently been appraised in Kerala, which should lead to early introduction of T&V extension there, legal and financial problems in AP make the prospect for early change of extension systems there more doubtful. Credit 2.15 The four types of institutional banking systems are well represented in project districts. They comprise credit cooperatives for short and medium term credit, cooperative land development banks (LDB) for long-term credit and rural banks and commercial banks (CB) for all types of loans. All of them, but LDB and CB in particular, have been involved in IDA supported lending through participation in Agricultural Refinance and Development Corporation (ARDC) schemes. All LDB and most of the leading CB have established technical cells and have employed agricultural graduates to support their rural lending programs. LDB and CB would be the project credit institutions. 2.16 The strengths and weaknesses of the institutions vary from state to state. Thus, LDB is particularly strong in AP, reasonably so in Kerala and Orissa, but suffers from poor loan recovery in the Karnataka project area. 1/ Described in "Agricultural Extension," Daniel Benor and James Q. Harrison, World Bank, May 1977.  - 12 - GOKar is taking measures to improve recoveries. Commercial banks are most numerous in Karnataka (350 branches in the project district) and least numer- ous in Orissa (only 10 branches in some project districts) where the Reserve Bank of India (RBI) is licensing considerable branch extension. In addition, agricultural credit facilities in Orissa are being strengthened under a bank- ing plan designed by ARDC as part of the Orissa Agricultural Development Project (Credit No. 682-IN). 2.17 There were 11 ARDC refinanced cashew schemes in four states under implementation at project appraisal, covering about 12,000 ha, for which Rs 35 million loan finance had been approved by LDB and CB. These schemes are partly financed by the Second ARDC Project (Credit No. 715-IN) and will continue to be supported by the Third ARDC project (Credit No. 947-IN). Some of the schemes are new, but for those under implementation for some time, farmers' response has been disappointing. At September 30, 1978, only Rs 1.2 million had been disbursed by banks out of the Rs 13.9 million target. Reasons for slow progress are insufficient promotion of the new (and to farmers unfamiliar) type of lending; inadequate inducement by way of subsidies for farmers to undertake this type of long-term lending; insufficient exten- sion service support; long distance of many farmers from long-term credit agencies; and burdensome loan application procedures. The project would include measures to overcome these difficulties (para 5.14). III. THE PROJECT Project Genesis 3.01 Decline of cashew exports and of employment in the cashew industry has worried both GOI and GOKer for some time. GOI, therefore, considered that a project approach with Bank group assistance would be needed to supple- ment ongoing programs (para 1.10), and to accelerate local cashew production. Preliminary discussions between GOI officials and Bank Group staff took place in May 1977 and project preparation started in the fall of 1977. The project was prepared by the four participating states with guidance from GOI Ministry of Agriculture Project Preparation and Monitoring Cell and from staff of the World Bank New Delhi Office, and is based on reports from each of the four states completed in October 1978. Similar Bank Group Operations in India 3.02 This would be the fourth Bank Group project in India which would deal with tree crops. Two of the ongoing projects, Himachal Pradesh Apple Processing and Marketing (Credit No. 456-IN) and Jammu-Kashmir Horticulture (Credit No. 806-IN) deal with processing and marketing. The Kerala Agricul- tural Development Project (Credit No. 680-IN) is a tree crop production project and, therefore, is similar to the proposed cashew project. Its objectives are mainly to increase coconut and pepper production, but it also includes a small cashewnut production component. The project got off to a slow start, but has since made satisfactory progress.  - 13 - Project Summary 3.03 The project would help to finance over five years a cashew produc- tion program in Kerala, Karnataka, AP and Orissa, together with necessary supporting facilities and services. The production program would be financed mainly by institutional credit channeled through ARDC, while other components would be financed directly through state governments and GOI. The following are project components: (a) a 61,275 ha cashew planting and improvement program, of which 35,000 ha would be developed by private farmers and 26,275 ha would be implemented by state cashew, forest development or plantation corporations; (b) staff, buildings, roads, vehicles, equipment for the corporations; (c) staff, vehicles, equipment and operating costs of sup- porting services for the private farmers program and funds for training departmental and corporation staff; (d) a 500 ha pilot scheme to determine appropriate cashew planting practices on coastal dune land in Orissa; (e) strengthening cashew research by improving and expanding the central cashew research station and three regional sub- stations, and by establishing one new regional substation; (f) a program to improve about 200 km feeder roads in Kerala; and (g) a study for improving the organizational structure of the industry. Detailed Features 3.04 The Production Program. The distribution of the proposed five year planting program between smallholders and corporations and among the four states is shown below (ha): Corporations Program Smallholders Program Total Program New Improve- New Improve- New Improve- State Planting ment Total Planting ment Total Planting ments Total Kerala 2,275 - 2,275 10,000 - 10,000 12,275 - 12,275 Karnataka 2,500 500 3,000 7,500 2,500 10,000 10,000 3,000 13,000 Andhra Pradesh 8,000 - 8,000 8,000 2,000 10,000 16,000 2,000 18,000 Orissa 10,500 2,500 13,000 5,000 - 5,000 15,500 2,500 18,000 Total 23,275 3,000 26,275 30,500 4,500 35,000 53,775 7,500 61,275  - 14 - 3.05 New Planting. The project would finance distribution of plants, fertilizers, pesticides and cash for labor needed for land preparation, soil conservation, planting and maintaining plants for five years after planting until returns exceed maintenance costs. Most plantings would be with seed- lings derived from selected mother trees mostly situated in progeny orchards, except in Orissa where there has been some success in vegetative propagation (para 1.12). There, about half the planted area would be improved by in situ side grafting from selected clonal material. In other project states field scale vegetative propagation has not been successful to date, but recently more determined efforts than before have been initiated to apply the Orissa experience or to develop alternatives suitable for local conditions. With ICAR coordinated research services also stepping up work on vegetative pro- pagation (para 3.14) and with project training programs for the subject, the chances are good that vegetative propagation would be more widely adopted during the project period. Because identification of mother trees is fairly recent and there has not been enough time for progeny field testing, part of every field, even in Orissa, would still be planted with improved seedlings to avoid possible poor performance by some clones. An added precaution would be use of several clones in any field. 3.06 Improvement of Existing Plantations would involve similar invest- ments to new planting, except that new plants would be needed only for filling gaps in existing plantations. Plantations to be improved should be carefully selected to avoid fields that would not respond adequately to treatment. Assurances'were obtained that participating state governments and ARDC would work out suitable selection criteria. The following are guidelines: planta- tions should not be more than 10 years old with reasonably healthy (minimal borer and gumnosis damage) trees, not too closely spaced (about 150 per ha on laterites and about 100 per ha on deeper soils), so that tree canopies would not touch each other. Soil must be suitable and solid laterite; compacted subsoil or eroded soils should be avoided. There are however large areas of departmentally owned cashew plantations in Karnataka and Orissa which do not conform to the above criteria, and which the two State Governments are keen to improve. Some of these plantations have been handed over to the cashew corporations already, but the economics of investments in crop improvement practices on such areas have not been established. In addition, the planta- tions are mostly in small, scattered blocks (less than 100 ha each), on which crop pilferage is difficult to control. The project would provide funds to the two cashew corporations concerned for improving 1000 ha (500 ha in each of the two states) to explore the management and economic feasibility of improving this type of cashew plantation. The two implementing corporations would maintain accurate records of costs and returns of the trial, which would provide data on which decisions for future management of similar cashew areas could be based. 3.07 Intercropping is not common in cashew fields. Soils are generally so poor that yields of intercrops are too low to give reasonable returns. Nevertheless, a certain amount of subsistence cropping by small scale growers is expected to take place. Corporations have not planned any intercropping, which would require considerable supervision, does not seem financially attract;ve and would distract attention from the main crop.  - 15 - 3.08 Pest Control particularly tea mosquito control, would give 30% yield increase and would be handled by corporations and smallholders them- selves. Corporations guided by their technical specialists and cashew a ory services would be able to use mechanized spraying equipment and would also explore the feasibility of aerial spraying. Smallholders would be guided by extension and special cashew services (para 3.09) and would use manual tree sprayers. About 9,000 such sprayers would be sold to farmers on credit on the assumption that one sprayer would serve the owner and at least three other farmers on a hire or custom basis. 3.09 Smallholder Supporting Services. To supplement extension services, special cashew units, described in para 5.09, would be established in each state. For these units, the project would finance cost of staff, vehicles, operating costs, visual aids and other equipment as shown in Table 3.1. The project would provide motor vehicles for headquarters, district and subject matter specialist (SMS) staff, motorcycles for assistant agricultural officers (AAO) and bicycles for field assistants (FA). Staff would be provided loans by state governments to purchase motorcycles and bicycles and would receive travel allowances. In addition, each special unit would have mechanical sprayers, for emergency and demonstration use. 3.10 Subsidies. To ensure satisfactory participation of farmers in the project, the smallholder program would require a combination of intensive pro- motion, skilled advisory and support services (para 3.09), improved lending procedures'(para 5.14) and adequate inducements to participate. The latter would be particularly important to overcome unsatisfactory response to ongoing credit schemes for cashew development. Consequently, participating small- holders would receive a 25% subsidy of the cost of new planting or Rs 900/ha, whichever is less, that would be channeled through banks and would be payable in three installments. For cashew improvement, participating smallholders would receive a 25% subsidy of the cost, estimated to range from Rs 230/ha to Rs 315/ha, and paid in two installments. Subsidies would total about Rs 25 million for the project. However, this would be offset by state revenues obtained from raw nut purchase tax estimated at approximately Rs 15 million annually from incremental production at full project development. Assurances were obtained from state governments that adequate funds would be provided for the subsidies, phased to coincide with planned project development. Similar subsidies, some much higher, are available to tea, rubber and coffee growers in India and are not uncommon in Bank Group assisted smallholder plantation projects in other countries. Despite attractive financial returns from tree crops, subsidies are often necessary to ensure large scale participation of smallholders in such projects, as an inducement to compensate for the slow maturity of the investment. In the case of cashews, there is further justi- fication of subsidies, because of need to ensure additional raw material supplies to the processing industry, to maintain jobs and export revenue. 3.11 Corporation Staff and Infrastructure. The project would finance incremental corporation management, supervisory and supporting staff, neces- sary infrastructure, vehicles and equipment, and incremental operating and maintenance costs. Infrastructure would include housing for most of the staff except in Orissa where housing would be provided for one-third of the staff; plantation offices and stores; essential plantation roads (roughly 1 km per  - 16 - 35 ha); and basic utilities. Motor vehicles would be purchased for head- quarters staff and for plantation managers, and motorcycles for assistant plantation managers. Each plantation (about 2,000 ha) would be supplied with a truck, or, in AP and Kerala, tractors and trailers would be used. Details are listed in Annex 2, Tables 4.1 to 5.4. 3.12 Corporation Land. To facilitate effective management and to prevent crop pilferage which is a serious problem for cashew plantations, the minimum size block of land to be developed or improved by corporations would be 200 ha and at least two or three such blocks would be situated within a radius of 15 km from each other. Land transfer procedures, even from one government department to another, can be time consuming. To prevent delays to project implementation, at least half the land to be developed was transferred to par- ticipating corporations before negotiations and, at negotiations, a timetable was agreed for transfer of the remaining land. 3.13 Orissa Pilot Scheme. There is a 1 km strip of shifting sand dune land which runs at least 150 km along the Orissa coast -- an area of 15,000 ha. At present, the land is useless and dunes encroach on adjoining farm lands. Trials conducted by the Soil Conservation Service show that cashews, once established, stabilize the land and thrive on it. Further work is needed to identify the best method of cashew establishment. The project would finance a 500 ha pilot scheme to be executed by the Soil Conservation Service, by providing funds for planting and maintaining cashews and windbreaks during the project period. Several different methods of establishing cashews would be tried, to find methods for converting these presently useless dune areas into commercially or economically viable cashew plantations. GOO would pre- pare plans for implementing and for monitoring the scheme and assurances were obtained that the plans would be furnished to IDA by December 31, 1980. 3.14 Research. ICAR has drawn up a cashew research program along lines discussed with the appraisal mission in November 1978. Initial suggestions that the program could be implemented as part of the IDA supported National Agricultural Research Project (Credit No. 855-IN) or alternatively be financed from ICAR'S own budget resources proved impracticable and GOI, in October 1979, requested inclusion of a research component in this project. While part of the proposed program has long term objectives, its emphasis on developing vegetative propagation methods and identification of suitable clonal material for widespread use, as well as support to staff training programs, would be important for the success of the project. The program comprises expansion of existing CPCRI stations at Vittal and Shantigodu into a main cashew research center, strengthening of existing regional substations in three states, and establishment of a new regional substation in Karnataka. Financing would be provided for incremental scientific and support staff and other incremental recurrent costs; construction of laboratories, staff housing, training hostel and farm sheds; purchase of vehicles, laboratory and field equipment; staff training programs; and development and maintenance of a small area of cashew plantations (Annex 2, Table 7). Research proposals costing about US$1 million (before price contingencies) were discussed at negotiations. Assurances were obtained that by September 30, 1980, GOI would furnish to IDA a detailed proposal for carrying out the research. Implementation of the component would begin only after agreement on such proposal.  - 17 - 3.15 Kerala Feeder Roads. In the Kerala smallholder project area the poor condition of feeder roads is a constraint to cashew development. There- fore, a US$2 million road improvement program would be financed for the most important feeder roads in the project area. Thirty-two roads, having a total length of about 250 km have been selected jointly by GOKer staff and an IDA engineer for the program out of which about 200 km would be improved (Table 3.2). The condition of these roads and therefore the work needed to improve them varies from section to section. Some have stretches in good condition which require little work, but their use may be constrained by lack of a causeway or bridge or by a short impassable section. Thus the works would be planned after detailed examination of each road and would vary from section to section. Proposed works would include road shaping and widening, gravel surfacing, improving side drains, construction of culverts, bridges and causeways and in some cases short stretches of asphalt surfacing. In the latter case necessary road shaping would be done in one season and asphalt surfacing in the next. Assurances were obtained that a project road con- struction program would be prepared each year by Government of Kerala road engineers and furnished to IDA by June 30 each year, based on detailed study of roads to be improved. 3.16 Cashew Industry Study. Policy and institutional changes may be needed to keep the Indian cashew industry competitive with increasing compe- tition from abroad, and to deal with such problems as raw nut procurement, interstate coordination of production and processing, and most suitable institutions and policies for providing adequate research, advisory services and product promotion for the industry. The study would be supervised by a policy advisory committee set up by GOI Ministry of Agriculture and would be conducted by suitably qualified local consultants, including universities or other institutes. Guideline terms of reference were agreed with GOI at negotiations and assurances were obtained that the study would commence by September 30, 1980. The consultants would review the status of the industry, examine cashew institutes and policies, establish costs and returns of raw nut production, processing, kernel exports or local sales and would propose changes of policy or institutional arrangements if necessary. The proposed study would require about five work-years of consulting time and should be completed by mid 1981. Assurances were obtained that the final report would be made available to IDA. Environmental Aspects 3.17 The project would have beneficial impact on the environment by converting rough scrubland, some of it eroding as a result of uncontrolled grazing, into tree plantations. Erosion control is an important part of the project and funds for bunding and other measures would form part of farm budgets for credit extension. The Orissa pilot scheme is an attempt to stabilize shifting dunes causing damage to adjoining agricultural land by conversion into cashew plantation.  - 18 - Project Phasing 3.18 Implementation would start early in 1980 and all planting would be completed by September 1984. The first year of the project would be needed both by corporations and smallholders supporting services to appoint and train staff. The following are planting/improvement projections: Project Phasing 1980 1981 1982 1983 1984 Total Hectares 3,000 12,000 18,500 18,500 9,275 61,275 % of Total 5 20 30 30 15 100 No. of Smallholders Projected to Participate 1,500 7,000 10,500 10,500 5,000 35,000 Supporting staff build up and procurement of vehicles and equipment for depart- mental cashew units and for cashew research services would be completed during the first three years of the project, and for Corporations over the project period, phased to coincide with the planting program. Building and road con- struction for corporations and Kerala feeder road construction would also be phased to match the planting program, while the research station construction program would be completed over three years. The cashew industry study would be initiated during 1980 and should be completed by mid 1981. The 500 ha Orissa pilot scheme would be implemented in 100 ha units annually. IV. COST ESTIMATES, FINANCING, PROCUREMENT AND DISBURSEMENTS Cost Estimates 4.01 Total costs are estimated at US$45.7 million equivalent of which US$3.3 million or 8% would be foreign exchange costs and US$1.8 million would be duties and taxes. Estimates are based on October 1979 prices. A 10% physical contingency has been allowed for civil works and 5% for vehicles, equipment and incremental operating costs. Price contingencies have been applied at 10% for 1980, 7% annually from 1981 to 1983, and 5% for 1984. Total contingencies amount to US$10.4 million or 23% of total cost. Detailed costs are given in Annex 2 and are summarized below:  - 19 - Summary Cost Estimates -- Rs Million ----- ---- US$ Million ---- Foreign Category Local Foreign Total Local Foreign Total Exchange Smallholder Cashew Planting/Improvement 86.1 9.6 95.7 10.2 1.1 11.3 10 Cashew Support Units Staff Salaries 15.6 - 15.6 1.9 0.1 1.9 Vehicles/Equipment 4.5 0.3 4.8 0.5 - 0.6 Operating Expenses 5.2 0.3 5.5 0.6 0.1 0.7 Subtotal 25.3 0.6 25.9 3.0 0.2 3.2 6 State Corporations Planting/Improvement 61.8 6.9 68.7 7.4 0.8 8.2 Staff Salaries 19.3 - 19.3 2.3 - 2.3 Civil Works 34.6 1.8 36.4 4.1 0.2 4.3 Vehicles/Equipment 8.2 0.4 8.6 1.0 - 1.0 Operating Expenses 12.3 0.6 12.9 1.5 0.1 1.6 Subtotal 136.2 9.7 145.9 16.3 1.1 17.4 6 Training 0.5 - 0.5 0.1 - 0.1 - Orissa Pilot Scheme 1.4 0.2 1.6 0.2 - 0.2 10 Kerala Feeder Roads 16.3 0.9 17.2 1.9 0.1 2.0 5 Research 7.6 0.8 8.4 0.9 0.1 1.0 10 Cashew Industry Study 1.0 - 1.0 0.1 - 0.1 - Base Cost Estimate 274.4 21.8 296.2 32.7 2.6 35.3 7 Physical Contingencies 7.0 0.2 7.2 0.9 - 0.9 Price Contingencies 74.4 5.8 80.2 8.8 0.7 9.5 Total Project Cost 355.8 27.8 383.6 42.4 3.3 45.7 7 Financing 4.02 The proposed IDA credit of US;22 million would be made to GOI on standard terms and would meet about 50% of project costs net of duties and taxes and 48% of total project costs. The balance would be met by GOI, participating state governments, ARDC, participating growers and participat- ing banks as shown on the following project financing plan:  - 20 - Financing Plan /a IDA % of Total GOI/GOS- ARDC Banks Growers Amount Total