India - Second National Cooperative Development Corporation Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-3048-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SECOND NATIONAL COOPERATIVE DEVELOPMENT CORPORATION PROJECT May 1, 1981 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 16, 1981) Rs 1.00 Paise 100 US$1.00 = Rs 8.302 Rs 1.00 = US$0.1204 Rs 1 million = US$120,400 The U.S. Dollar/Rupee exchange rate is subject to change. Conversions in the Appraisal Report were made at US$1 to Rs 8.0, which represents the projected exchange rate over the disbursement period. FISCAL YEAR April 1 - March 31 ABBREVIATIONS ARDC - Agricultural Refinance and Development Corporation BISCOMAUN - Bihar State Cooperative Marketing Union GOI - Government of India NCDC - National Cooperative Development Corporation PACS - Primary Agricultural Cooperative Society PCS - Primary Cooperative Society (general) RBI - Reserve Bank of India RCMS - Regional Cooperative Marketing Society RCS - Registrar of Cooperative Societies SCB - State Cooperative Bank SCMF - State Cooperative Marketing Federation SLDB - State Land Development Bank  FOR OFFICIAL USE ONLY INDIA SECOND NATIONAL COOPERATIVE DEVELOPMENT CORPORATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President (GOI) Beneficiaries: National Cooperative Development Corporation (NCDC) for onlending to State Cooperative Banks (SCB) in Madhya Pradesh, Andhra Pradesh, Uttar Pradesh, Haryana, Punjab, and Himachal Pradesh; to State Land Development Banks (SLDB) in West Bengal and Maharashtra; and to the State Cooperative Marketing Union in Bihar (BISCOMAUN). Amount: SDR 101.8 million (US$125 million equivalent on April 1, 1981) Terms: Standard Relending Terms: GOI to NCDC: At an interest rate of not more than 6.75% per annum over fifteen years; NCDC to Participating Banks: At an interest rate of not less than 7.25% per annum for rural godowns subprojects, repayable over fifteen years, including three years' grace, and not less than 7.5% per annum for cold-storage subprojects, repayable over fifteen years, including five years' grace; NCDC to State Governments, and Participating Banks to End-Borrowers: At an interest rate of not less than 9.5% per annum, repayable over fifteen years, including three years' grace for rural godowns subprojects, and five years' grace for cold storage subprojects. GOI to carry exchange risk. Project The project would provide credit for cooperative Description: godowns and cold-storage and marketing facilities to assist in meeting the input supply and post-harvest requirements in nine States (West Bengal, Bihar, Madhya Pradesh, Andhra Pradesh, Maharashtra, Uttar Pradesh, Haryana, Punjab and Himachal Pradesh), to promote the development of the cooperative institutions within these States, and to expand the capability for sub-project preparation and appraisal within the cooperative sector. The project will finance the construction of about 7,900 cooperative godowns, providing almost two million tons I 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.  - ii - of storage capacity, in addition to about 127 cold- storage units providing about half a million tons of cold-storage capacity. The project would also provide for technical assistance, training in cooperative marketing techniques and cold-storage operations, and research and development on experimental storage facili- ties and related activities. Under the project, about 3.2 million farm families would benefit from the services provided by primary cooperative society godowns, and about 150,000 families from the services provided by the new cold-storage facilities. Continued shortages of cement could result in delays in the construction program and consequent cost escalation. GOI and parti- cipating State Governments have undertaken to give the highest priority to this project and make adequate supplies of cement available. A further risk is that the cooperative sector institutions have limited experience in potato cold-storage management. Safeguards that have been provided include the recruitment of tech- nically qualified staff and training in cold-storage operations. Technical and marketing support would also be extended to the primary cooperative societies by apex cooperative federations. Estimated Cost: (US$ Millions) Local Foreign Total (a) Godown Component Rural Godowns 83.6 9.3 92.9 Market Godowns 41.2 4.6 45.8 Supporting Investments 0.7 0.1 0.8 125.5 14.0 139.5 (b) Cold-Storage and Marketing Component Cold Stores 68.0 7.6 75.6 Marketing Facilities 0.3 - 0.3 Supporting Investments 0.2 - 0.2 68.5 7.6 76.1  - iii - (US$ Millions) Local Foreign Total (c) Technical Assistance and Development Component Technical Assistance, Training 0.7 0.1 0.8 Research and Development 0.9 0.1 1.0 1.6 0.2 1.8 Total Before Contingencies 195.6 21.8 217.4 Physical Contingencies 10.7 1.2 11.9 Price Contingencies 33.9 3.8 37.7 Total Project Cost 1/ 240.2 26.8 267.0 1/ Including US$18.6 million in taxes and duties. Financing Plan: (US$ Millions) Local Foreign Total IDA 98.2 26.8 125.0 NCDC 75.2 - 75.2 State Governments 53.4 - 53.4 Beneficiary Cooperatives 13.4 - 13.4 240.2 26.8 267.0 Estimated Disbursements: FY82 FY83 FY84 FY85 FY86 FY87 Annual 23.3 29.5 30.1 21.1 17.9 3.1 Cumulative 23.3 52.8 82.9 104.0 121.9 125.0 Rate of Return: 23% Appraisal Report: No. 3300a-IN, dated April 17, 1981   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE SECOND NATIONAL COOPERATIVE DEVELOPMENT CORPORATION PROJECT 1.. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to SDR 101.8 million (US$125 million on April 1, 1981) on standard IDA terms to help finance a Second National Cooperative Development Corporation (NCDC) Project, involving the construction of cooperative godown and cold-storage facilities and the strengthening of cooperative development institutions in nine participating States. The entire credit amount (US$125 million) would be channelled through GOI to NCDC at an interest rate of not more than 6.75% per annum. NCDC would in turn onlend the funds to participating banks at not less than 7.25% per annum for cooperative godowns and not less than 7.5% per annum for cold stores, and to State Governments at not less than 9.5% per annum. Par- ticipating banks would relend their proceeds to beneficiary cooperative societies and marketing federations at not less than 9.5% per annum. State Governments would contribute their proceeds to beneficiary cooperatives as equity. Loans made by NCDC and participating banks would be repayable over 15 years, including three' years grace in the case of cooperative godowns investments and five years' grace in the case of cold-storage investments. The exchange risk would be borne by GOI. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (3401-IN, dated April 15, 1981), was distributed to the Executive Directors on April 16, 1981. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of 672 million (in mid-1980) and an annual per capita income of US$190. Agriculture contin- ues to dominate India's economy, employing over two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to all those engaged in agricultural activities, especially the landless or nearly landless who have only an insecure grasp on the means of existence. The share of agriculture in GDP at factor cost (measured in 1970/71 prices) has declined from 60% in 1950/51 to about 40% in 1978/79. The share of industry has increased over the same period from 15% to 23%. 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Madhya Pradesh Agricultural Extension Project - Phase II (No. P-3012-IN), dated April 6, 1981.  -2- But industrialization has not been rapid enough to absorb the growing labor force, nor to bring about the substantial economic transformation that has led to higher productivity and rapid urbanization in some other developing countries. The urban population was 18% of the total in 1960, and is about 21% now. 4. Economic growth has been slow in the past, averaging about 3.5% per annum over the past 30 years. Slow growth in agriculture -- 2.5% per annum over the same period -- has constrained overall growth, not only because of the high share of agriculture in GDP but also because scarce foreign exchange has often been required to import food. Industrial value-added has grown more rapidly, at 5.4% per annum between 1950/51 and 1978/79, but this growth has not been as high as in many other countries, nor as high as required. Gross domestic savings more than doubled from 10% of GDP in 1950/51 to 24% in 1978/79. Similarly, gross domestic investment as a fraction of GDP rose from 10% in 1950/51 to just over 24% in 1978/79. Foreign savings have never financed a large portion of domestic investment: a peak of about 20% was reached during the early 1960s; by the end of the 1970s, the proportion had returned to much lower levels. External assistance has been low both as a percentage of GDP and in per capita terms. Net external assistance has never risen above 3% of GDP. 5. Except during periods of balance of payments crisis, exports have received relatively little emphasis in India, which has primarily pursued a strategy of import substitution. The volume growth of exports between 1950/51 and 1978/79 averaged only 3.0 per annum. The volume growth of imports over the same period has slightly exceeded that of exports. During the early 1970s, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated drastically. In response, the Government introduced many policy measures designed to stimulate exports. The volume of India's exports grew on average over 10% per annum between 1972 and 1977, demonstrating that sustained rapid growth was possible. While expanding world markets, particularly in the nearby Middle East, contributed to this process, liberalized access to imported inputs, and improvements in incen- tives designed to increase the profitability of exports played a major role. Recent Trends 6. Over the period 1975/76 to 1978/79, growth in real GDP (at factor cost), agricultural value-added and industrial value-added averaged 4.7%, 2.8% and 7.3% per annum, respectively. These trends represent a marginally better growth performance than the long-term trends from 1950./51 to 1975/76. However, GDP declined by about 4.5% in 1979/80 as a result of the drought- induced decrease in agricultural production and input constraints in other sectors, bringing recent trends back in line with the long-term picture. Industrial production stagnated in 1979/80, largely due to shortfalls in the production of major inputs such as coal, steel and cement, as well as infras- tructural constraints, notably in power and transportation. As a consequence  -3- of these developments, the remarkable price stability that characterized the Indian economy after 1975 came to an abrupt end at the close of fiscal year 1978/79. During the spring and summer of 1980 the price index continued to rise sharply, so that by September it stood at 19.1% above that of the previ- ous September. Foodgrain prices rose over the summer and fall of 1980 but more slowly than the drop in 1979/80 production would have suggested so that in most markets grain prices remained close to the Goverment's ration prices. Low income groups in urban areas were assured adequate supplies of grain at stable prices through the public distribution system. The substantial stocks of foodgrains also provided resources for a large-scale drought relief employment program for low income groups in rural areas. In 1980/81, the economy recovered, aided by a normal monsoon, so that real GDP growth for the year should be about 7 to 8%. During the summer of 1980, GOI raised prices of petroleum products and fertilizers, reflecting the growing cost of imports of these items and the GOI efforts to encourage efficiency in their use. Recently the growth in prices has slowed so that by January 1981 the whole- sale price index was 15% above its level a year earlier. 7. In agriculture the positive results of large investments and appropriate policies in the past years are becoming increasingly apparent. The rate of expansion of irrigation has increased significantly from 1.3 mil- lion ha per year in the early 1970s to about 2.3 million ha in 1978/79. Fer- tilizer use reached 5.2 million tons of nutrients in 1979/80, more than dou- ble 1974/75 levels. Over the decade before 1979/80, foodgrain production grew at about 2.75% per annum -- sufficient to meet consumer demand, to elim- inate imports (which had averaged nearly 5 million tons per year for the 15 years preceding 1976), and to lower real foodgrain prices for consumers. At the same time, India was able to build up substantial foodgrain buffer stocks which made it possible to weather the effects of 1979/80 drought with com- parative ease, and to export about half a million tons of grain in 1980. While the management of the foodgrain economy after the drought was a signi- ficant achievement, the effect of the drought on production re-emphasized the continued importance of the monsoon in India's agriculture. The need to expand irrigation, strengthen extension and encourage the efficient use of other inputs continues. 8. As the new decade begins, the Indian economy is shifting from a situation of resource surplus, which had been a temporary phenomenon of the late 1970s, to one of resource scarcity. Investment has again overtaken domestic savings, and the scope for further increases in the latter appears limited. Marginal savings rates have recently been well above 30% in the household sector. Future increases in savings will depend largely on enhanced profitability of public sector enterprises. Impending resource scarcity is even more apparent in the foreign sector. Between 1975/76 and 1978/79 India's current account deficit had remained comfortably small in relation both to GDP and to a growing pipeline of aid commitments. This was primarily due to favorable terms of trade movements and rapidly growing net invisibles which masked adverse underlying trends in the volume of exports,  -4- the growth of which has slowed since 1977. One area of concern is the apparent decline in the growth rate of manufactured exports which had contri- buted much to the export growth of the first half of the decade. A combina- tion of strong domestic and slack international demand, exacerbated by severe infrastructural and supply constraints and apparent lessened interest in export promotion during the resource surplus period were the major causal factors. Recently, signs of improvement in the availability of power, the main constraint facing exporters, and the adoption of several new export pol- icy measures have improved the prospects for accelerating export growth, though continued attention to both these areas will be required. 9. In contrast, imports have grown rapidly in volume terms and there have been important changes in composition. As a result of the accumulation and maintenance of foodgrain stocks, foodgrain imports -- which had tradi- tionally been a large item in the balance of payments -- have been eliminated since 1978 and, for the past few years, India has been a marginal net exporter of grain. The rise in other imports, however, has more than offset this development. Reflecting the impact of the liberalized import policy adopted by the Government, non-foodgrain imports increased sharply, so that their level in 1978/79 was over 80% higher than in 1975/76. In large part, the liberalization in import policy and increase in imports were limited to raw materials, basic commodities and intermediate goods; most consumer goods remained banned and capital goods imports were permitted only on a selective basis. Strong new pressures on the balance of payments have developed during 1980/81. The terms of trade again deteriorated markedly as a consequence of unexpectedly large increases in petroleum prices, which caused the oil import bill to increase by over 75% in 1980/81 after doubling the year before. India's foreign resource deficit as a proportion of GDP reached the unpre- cedentedly high level of 3.0% in 1980/81. India was able to finance this gap through a substantial draft drawing on IMF resources (the Trust Fund and Com- pensatory Financing Facility), and through an increase in aid and a drawdown in reserves, both of modest proportions. Petroleum imports as a proportion of merchandise exports now exceed 75%. Development Prospects 10. The experience of recent years illustrates that India does have the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufac- turing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, the power grid, roads and ports -- is extensive compared to many countries, although there is considerable scope for expansion as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and fer- rous ores, but also gas and oil). With good economic policies and sufficient  -5- access to foreign savings, India has the capability for managing these con- siderable resources to accelerate its long-term growth. 11. The new Indian Government elected in January 1980 formulated a new Sixth Five-Year Plan for the period 1980-85. The Plan was approved in Febru- ary 1981. The new Plan continues to assign priority to agriculture and power. Furthermore, the Plan reflects recent developments in India and in the world economy which have brought to the surface the need for urgent action in several areas. These include: (i) expansion of exports and an investment program directed toward containing the growth of imports in the face of a deteriorating balance of payments situation; (ii) an investment program and policy framework for more efficient use and development of energy sources; (iii) removal of bottlenecks in infrastructure and related con- straints on production of basic industrial inputs, and (iv) continuing emphasis on the development of agriculture. 12. The higher capital formation rates of the past few years augur well for future income growth. However, there are signs that, relative to exist- ing demands, the past programs and policies have led to disproportionally low growth in certain crucial sectors, namely power, coal, transport services, steel and cement. Potential output growth in sectors which have benefitted from large investments in the recent past may not materialize unless these input bottlenecks are alleviated. In the case of coal, steel and cement, domestic production appears to be clearly justified on grounds of comparative advantage, indicating an a priori case for policies to promote further investment. All these are tradeable commodities. Although in 1980/81 they were not imported in sufficient amounts to eliminate the shortages, increased short-term reliance on imports may be necessary to alleviate slowdowns and dislocation in using industries. In the case of sectors in which there is no option to import the final product --power and transportation-- the planning of capacity expansion becomes even more crucial. Although there is scope for improvement in the shortrun performance of these sectors, major investments in balancing and modernization programs as well as in new capacity are essen- tial for adequate and growth in the medium term. The presence of infrastruc- tural constraints and shortages of basic industrial inputs demonstrates that the expansion of industrial output leads to competing claims on scarce resources with significant implications for public versus private and short versus long-term investments. 13. Despite the relatively large investment programs for the development of domestic energy resources such as coal and hydroelectricity, and the recent development of offshore petroleum resources, India has not been able to narrow the gap between its total energy demand and domestic production. During the past year, India continued to face power and coal shortages. Growing demand for petroleum products, disrupted production from the Assam oilfields, and recent oil price increases, have boosted India's oil import bill to US$7 billion, equivalent to about 78% of total exports of goods. India is entering the Sixth Plan period with an ambitious energy production  -6- program backed by substantial financial commitment. In the oil sector, GOI is now accelerating its oil exploration capabilities and is opening up pros- pective areas for exploration by foreign firms. India is now committed to an expanded power program that emphasizes exploitation of its large hydro poten- tial and development of the transmission and distribution system. In the coal sector, a policy decision in favor of mechanization has been made in order to achieve more rapid growth of coal production. 14. Despite the 1979 drought, agricultural policies, development programs and secular trends all seem favorable for sustaining the past growth rate during the 1980s. India ended 1980 with grain stocks of about 12 million tons, without having imported foodgrains during the year. This is partly due to the bumper crop of 1978/79 and good management of the foodgrain stocks following the 1979 drought, but also reflects the trends of the last decade which point to an improvement in foodgrain availability in the economy. In view of the acceleration in the use of agricultural inputs and the projected fall in the population growth rate, the long-run prospects for foodgrain sup- ply and demand balances look favorable. If the efforts to develop agricul- ture over the past decade are sustained and intensified, as suggested in the new Plan, persistent shortage seems unlikely, and it is probable that a wide range of policy options will become much more practical. These options include a slowly falling real price of foodgrains to increase the affordabil- ity of foodgrains to low-income families, further rationalization of domestic markets and prices, foodgrain exports and diversification to the production of other, higher value crops. 15. Foreign exchange reserves still provide some cushion that can help the Government of India in short-term supply management, but this situation is likely to be short-lived. Rising import prices and uncertaintie.- in the prospects for exports and invisible receipts have led to a serious and rapid deterioration in India's balance of payments prospects. Reserves were only marginally higher in March 1980 than the level of a year earlier and, in terms of import coverage, fell below the 8-month level for the first time since 1977. A very sharp decline in the reserve level would have occurred in 1980/81 had IMF Trust Fund and Compensatory Financing Facilities amounting to over US$1 billion not been available to India. At best, India's reserves may provide a cushion for two more years, and even that depends on improved export performance, on the maintenance of aid flows and workers' remittances and on moderation in oil price rises. 16. India's medium-term development prospects are mixed. Considerable progress continues to be made, particularly in agriculture, but the economy faces a period of difficult adjustments in the coming years. Investments required to relieve short-term supply constraints must compete with longer- term programs to accelerate growth and to develop India's considerable physi- cal and human resources. The balancing of these objectives will place a dif- ficult burden on those implementing India's Sixth Five-Year Plan. The pri- mary focus must be on the implementation of appropriate domestic adjustment  -7- policies, although the aid community can and should play an important role in ensuring that India's efforts do not fail due to inadequate foreign resources. 17. The annual population growth rate declined from 2.3% in the late 1960s to about 2% at present and is expected to continue falling to around 1.8% by the first half of the 1990s. Despite the declining trend in the rate of population increase, a net reproduction rate of one (replacement level) will be achieved only around the year 2020. At that time, the population of India is estimated to reach 1.2 billion persons, an increase of about 79% over the mid-1980 level of 672 million. Family planning has played an impor- tant role in achieving the fertility decline in the past decade, and the extent of a further decline will be greatly influenced by the continuation of a successful official family planning program. The family planning perfor- mance data for 1978/79 and 1979/80 clearly indicate a comeback from the sharp decline observed in virtually all major contraceptive methods during 1977/78. Except for male sterilizations, the number of acceptors for all contraceptive methods surpassed the 1974/75 levels in 1978/79. While the increase in the total acceptors of IUD and conventional contraceptives was modest, female sterilizations increased by about 40% between 1977/78 and 1978/79. Recent data confirm a secular upward trend in overall performance. For the past several years the family planning program has emphasized measures that would yield relatively modest but sustainable results with increased emphasis on reversible methods. 18. Beyond the effects of overall economic growth and constrained popula- tion growth, the reduction of poverty in India requires special attention to ways of raising the income and productivity of low-income groups. More than one-third of the world's poor live in India, and more than 80% of the Indian poor belong to the rural households of landless laborers and small farmers. In addition to having inadequate physical assets, the poor are ill-endowed with human resources, being disproportionately represented among the illi- terate, the hungry and the sick. Improvements in the living standards of the poor will depend to a large extent on the overall growth of the economy, mainly on increases in agricultural production and employment, in non-farm rural employment, and also in employment opportunities in urban areas. These developments will have to stem largely from market forces which, however, can be reinforced by appropriate government policies and investment priorities. The declining trend in real foodgrain prices between 1970 and 1979 reflects such developments. There is also a role for direct government action in fas- ter implementation of land reform (though the scope for significant reduction in poverty through redistribution is quite limited in India), in increasing the supply of credit available to small farmers and rural artisans and finally in broadening the provision of those services which enhance the human capital of the poor and improve living standards. Many of the latter are elements of the Minimum Needs Program which has been an integral part of Indian planning for the past decade. Progress has been slow but steady in the expansion of primary education, the extension of rural health facilities  -8- and the provision of secure village water supplies. Innovations such as the community health volunteer program and the national adult literacy campaign, provide encouraging evidence that well-targetted, relatively low-cost pro- grams can lead to enhanced prospects for India's poor. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 61 loans and 134 development credits to India totalling US$2,833 million and US$8,672 million (both net of cancellation), respectively. Of these amounts, US$1,139 million had been repaid, and US$4,551 million was still undisbursed as of February 28, 1981. Bank Group disbursements to India in the current fiscal year through Febru- ary 28, 1981, totalled US$454 million, representing an increase of about 24% over the same period last year. Annex II contains a summary statement of disbursements as of February 28, 1981, and notes on the execution of ongoing projects. 20. Since 1959, IFC has made 19 commitments in India totalling US$110.6 million, of which US$20.8 million has been repaid, US$27.6 million sold and US$7.5 million cancelled. Of the balance of US$54.7 million, US$46.2 million represents loans and US$8.5 million equity. A summary statement of IFC operations as of March 31, 1981, is also included in Annex II (page 5). 21. In recent years, Bank Group lending has emphasized agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on-farm investments through agricultural credit operations and in pro- viding direct support to major and medium irrigation. Marketing, seed development, agricultural extension, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and, through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and components for selected prior- ity sectors has been instrumental in facilitating better capacity utilization in industry. The Bank Group has also been active in supporting infrastruc- ture development for power, telecommunications, and railways. Family plan- ning, water supply development, urban investments and the development of oil and natural gas 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 Goverment's priorities. The emphasis of the program on agriculture, power, water supply and other infrastructure sectors remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs, particularly water and credit for on-farm investments, will continue to receive emphasis. Improved water management and intensification and streamlining of extension systems form an important institution-building aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects  -9- benefitting small farmers. The Bank Group's continuing role in the fertil- izer sector also assists India in the more efficient provision of another key input in the agricultural growth process. Projects supporting water supply, sewerage, urban development and investments in the petroleum sector also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on those subsectors which have recently emerged as key constraints on India's overall growth, primarily power and transportation. 23. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, there is now a need for increased foreign assistance to adjust to an even greater deterioration in balance of payments anticipated during the 1980s by augmenting domestic resources and stimulating investment. As in the past, Bank Group assistance for projects in India should aim to include the financ- ing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, and water supply. 24. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reason- ably be allocated to India remains small in relation to India's needs for external support. Therefore, India should be eligible and 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 28, 1981, outstanding loans to India held by the Bank totalled US$1,762 million, of which US$951 million remain to be disbursed, leaving a net amount outstanding of US$1,811 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 46%, 37% and 48%, respectively, in 1979/80. On March 31, 1980, India's outstanding and disbursed external pub- lic debt was US$15.6 billion, of which the Bank Group's share was US$5.2 bil- lion or 34% (IDA's US$4.5 billion and IBRD's US$0.7 billion). Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1979/80, about 18.0% of India's total debt service payments were to the Bank Group.  - 10 - PART III - AGRICULTURE AND COOPERATIVES IN INDIA General 26. Agriculture is the most important sector in India; it employs 70% of the labor force, has recently contributed about 40% of GNP and accounts for a major share (about 60%) of exports. Consequently, investments in agri- culture have been given high priority by GOI and the State Governments, espe- cially since the mid-1960s, and deserve continued emphasis in the future. 27. GOI's recently published Five-Year Plan (1980/81-1984/85) continues to give high priority to developing the agricultural sector. GOI recognizes that faster agricultural growth is necessary not only to increase output but to increase employment as well. GOI's policies aim at increasing the rate of irrigation development and making more readily available to farmers a complete range of agricultural inputs, including fertilizer and credit, appropriately supported by improved extension services and research. 28. A key element in this strategy is the development of the village cooperative society which in much of rural India is the only institution at the village level situated to provide credit and other inputs and post-harvest facilities. The proposed project focuses on strengthening the institutions dealing with village cooperatives and on helping to provide the cooperatives and their marketing federations with basic facilities required to carry out their input supply and post-harvest storage functions. The Cooperative Situation in India 29. The cooperative movement in India started in 1906 with a program to organize farmers credit societies. Through various promotional programs and support from Central and State governments since that time, cooperatives have spread throughout India. GOI's approach to cooperative development has changed over time. Cooperatives at one time held a monopoly on GOI agricul- tural credit and input distribution programs. In the 1960s, GOI policy began to be more oriented towards achieving productivity gains, and other public and private agencies, as well as cooperatives, began to be employed in these programs. This resulted in competition from other agencies and a need for cooperatives to enhance their management and operational efficiency. GOI is carrying out a program to strengthen village level cooperatives, and to make them more efficient and responsive to farmers' needs. The National Cooperative Development Corporation (NCDC) (see para 35) is an important instrument in carrying out the program. 30. In general, the cooperative system is organized under a three-tier system in each State. In the villages, the Primary Agricultural Cooperative Society (PACS), using deposits from members and institutional borrowings, provides short and medium-term credit, distributes farm inputs and consumer goods, and provides primary marketing services. The PACS are the most important source of institutional short-term credit for farmers. In 1976/77, PACS provided some Rs 16 billion of credit to members. This is estimated to have covered about one-third of short-term credit requirements of farmers; the remaining requirements were mostly met through traditional non-institutional  - 11 - sources. PACS in each district are members in a District Cooperative Bank that provides funds for credit, and also in a block level Regional Cooperative Marketing Society (RCMS) which provides wholesale marketing services to PACS. District Cooperative Banks are in turn members of the State Cooperative Bank (SCB) and depend on it for refinance and other banking services. Wholesale marketing services required by the RCMS are provided by the State Cooperative Marketing Federation (SCMF). Procurement, storage and distribution of fer- tilizers, foodgrains and consumer goods make up most of the business volume of the RCMS and SCMF. 31. Long-term cooperative credit in India is provided mainly through a two-tiered cooperative credit structure made up of State Land Development Banks (SLDB) at State level and primary land development banks, or State Land Development Bank branches, at village level. These long-term cooperative credit institutions, together with commercial banks, are the channel for almost all of the IDA resources which have been provided under past and ongoing agricultural credit operations in India. The Agricultural Refinance and Development Corporation (ARDC) is the intermediary institution through which IDA funds have flowed for long-term farmer credit programs, which have emphasized minor irrigation development. Performance of the long-term insti- tutions, particularly of ARDC, has by and large been satisfactory, and ARDC has developed to the point where it has taken over subproject preparation, appraisal and monitoring functions from IDA. ARDC's refinancing operations in 1979/80 amounted to some Rs 1.6 billion for State Land Development Banks and Rs 2.4 billion for commercial banks. 32. Timely loan recovery has been a persistent problem of agricultural credit in India - affecting short and long-term cooperatives and commercial banks. The problem is more acute in some areas of the country than others and most severe where adverse weather conditions and local political inter- ference have undermined credit discipline objectives. Average overdues as a percentage of demand 1/ for primary cooperatives societies, for example, ranged from about 65% in some States to 30% in others as of June 30, 1977. GOI and the Reserve Bank of India (RBI) are concerned about maintenance of credit discipline, and have imposed minimum recoveries criteria on cooperative banks participating in IDA-supported agricultural credit projects. Commercial bank lending for agricultural development has grown rapidly in recent years and there is now a need to improve recoveries for these institutions as well. This is a subject being explored in the context of the appraisal of the pro- posed Fourth ARDC Credit project, planned for FY82. 33. Credit is only one aspect of the services provided by cooperatives, particularly the PACS. These societies, and their non-credit activities, are the thrust of the proposed project which seeks to strengthen their multi- purpose character and enhance their ability to provide a range of services to farmers. One of the main problems of primary cooperative societies is that many are small in terms of number of members, financial resources and volume of business. Consequently, they are unable to pay for competent and full-time management, to make investments in storage facilities and input supplies or to 1/ Demand is defined as the total repayments falling due during the year plus overdues from the previous year.  - 12 - provide other services which farmers need. Concern of governments over poor performance by cooperatives has thus led to several policy changes, recommended as a result of studies made by the Reserve Bank of India in collaboration with State governments. The thrust of the policy changes is to reduce the number of societies by merging them into larger and more viable units and strengthen- ing their ability to provide a range of services to farmers. The late seventies have thus seen a deliberate decrease in the number of primary societies -- from about 175,000 in 1973 to 130,000 in 1978. Along with these mergers, the aim has also been to change the character of the primary societies from mere credit institutions into multi-purpose cooperatives providing input supplies, storage of output and other services for farmers. 34. GOI's program to develop and strengthen multi-purpose primary coop- erative societies and their cooperative marketing federations is being carried out by several institutions. The most important at the central level is the National Cooperative Development Corporation, described more fully below. At the State level, the Registrar of Cooperative Societies (RCS) is responsible for promoting cooperatives, supervising their operations and conducting an annual audit of their financial activities. State Cooperative Banks also play a role in the development of cooperatives by providing refinancing for primary society credit activities and financing for direct cooperative society investments, such as the godowns and cold stores under the proposed project. National Cooperative Development Corporation (NCDC) 35. The National Cooperative Development Corporation is an all-India public institution established by GOI under the National Cooperative Develop- ment Act of 1962 to plan, promote, develop and finance agricultural and agro- based industrial cooperative enterprises. NCDC participates in development schemes of cooperatives engaged in production, processing, storage, marketing, export and import of agricultural inputs and output. Under the Act (as amended), NCDC is authorized to advance loans, provide grants and subsidies, and participate in the share capital of cooperative enterprises either directly or through State Governments and State Cooperative Banks. Within these broad limits of authority, NCDC has helped finance cooperatives in a variety of activities including-storage, sugar factories, spinning mills, stocking and distribution o fertilizers, and distribution of consumer goods in rural areas. NCDC has also provided technical and financial assistance for pre-investment surveys, mark ting studies, feasibility studies, and training. 36. NCDC\ is governed by a General Council of 51 members and a 12-member Board of Manage nt. The Council is responsible for NCDC's policy whereas general management is vested in the Board. The Managing Director, who is also a member of the BoaEd, is the chief executive. He is supported by a financial advisor and six directors in charge of marketing, processing, fertilizer storage, rural consumer goods, textiles, and research and evaluation depart- ments. NCDC has a staff of about 450 including more than 100 executives specialized in cooperative and administrative management and technical aspects of agri-business. NCDC has seven Regional Offices and three smaller Project Offices.  - 13 - 37. A major source of NCDC's funds in the past has been GOI, which makes funds available in the form of annual budgetary allocations. The NCDC Act does not provide for share capital but NCDC is authorized to borrow from the market by sale of bonds and debentures. The total of bonds now outstanding is Rs 569 million. Retained earnings are credited to a capital account, the NCDC Fund Account, which had a cumulative balance of Rs 500 million on March 31, 1980. Borrowings from GOI on that date amounted to Rs 1,007 million. 38. In the past, NCDC has channelled loans and subsidies to client cooperatives mostly through the State Governments (about 90%), and sometimes through State Cooperative Banks. It also lends directly to cooperative federations and cooperatives with interstate business operations. NCDC's loan participation in individual investments has ranged from 50% to 75% of total costs, the balance being met by the borrowing cooperatives, by State Govern- ments as loans and share capital or by State Cooperative Banks as loans. 39. From its inception up to March 1980, NCDC has provided Rs 3,345 mil- lion (US$418 million) for various cooperative development schemes. Of this, Rs 2,957 million (US$370 million) was provided as loans, about Rs 307 million (US$38 million) as grants and subsidies and Rs 81 million (US$10.0 million) as direct participation in share capital. 40. Loans outstanding at March 31, 1980, totalled Rs 1,928 million (US$240 million). About 87% of this was owed by State Governments, 11% by State Cooperative Banks and 2% by other cooperatives, roughly the same as the disbursement pattern. All loans to State Cooperative Banks and State Cooperative Marketing Federations are guaranteed by the States concerned. NCDC's loan recovery record has been excellent. 41. NCDC's income has steadily increased over the past four years. Excess income over expenditure at the close of 1979/80 was equivalent to about 16% of gross income for the year although this ratio has declined from higher levels reached in preceding years. Major liabilities are Rs 1,007 million owed to GOI and Rs 569 million in market borrowings. NCDC's debt equity ratio is 2.8:1. NCDC is a financially viable institution and is expected to remain so. 42. The Bank Group's first involvement with cooperatives in the field of post-harvest activities was in 1979 with the First NCDC Project. This project was designed to construct and rehabilitate about 8,600 godowns in the States of Uttar Pradesh, Orissa, and Haryana, and to transform NCDC from essentially an onlending channel for GOI funds to a promotional development finance insti- tution for the cooperative sector. IDA is financing 47% of this US$63 million project and NCDC is contributing 28% from its own funds. NCDC and participat- ing banks are following IDA guidelines in subproject preparation and appraisal, and the project is progressing satisfactorily. About 350 godowns are completed and 1,100 are under construction. Bank Group review missions have determined that the godowns have maintained the potential for financial viability envis- aged during project appraisal.  - 14 - PART IV - THE PROJECT 43. The project was appraised in October 1980, and a Staff Appraisal Report is being circulated separately to the Executive Directors. Negotia- tions were held in Washington in April 1981. The Government of India was represented by a delegation with Mr. Ranga Rao as coordinator. A Supple- mentary Project Data Sheet is attached as Annex III. 44. The proposed project represents an extension into several additional States of the cooperative development and institution-building activities successfully undertaken as part of the First NCDC Project. The project's primary objectives are: (i) to provide cooperative godowns and cold-storage and marketing facilities to assist in meeting the input supply and post-harvest requirements of nine participating States 1/; (ii) to promote the development and expansion of the cooperative institutions within these States; and (iii) to expand the capability for cooperative subproject preparation and appraisal within the cooperative sector. 45. The project will be implemented over five years and will comprise two major components -- cooperative godowns, and cooperative cold-storage and marketing -- together with a small technical assistance and development component. In physical terms, the project will provide credit for the con- struction of additional cooperative godown storage and cold-storage facilities at village, regional and central levels in selected participating States. The cooperative godown storage facilities, which will be constructed in five States 2/, will supplement those already provided in the States of Uttar Pradesh, Orissa, and Haryana under the First NCDC Project, and in Madhya Pradesh and Rajasthan under an ongoing EEC credit. This component will consist of about 7,900 units with a total storage capacity of just less than two million tons. The cold-storage and marketing component will involve the construction in six States 3/ of about 127 units providing about 0.5 million tons of cold-storage capacity. 46. Of the total of 7,900 new godowns to be constructed, about 7,000 will be small godowns of 50, 100, or 200 tons capacity for primary agricul- tural cooperative societies (PACS) in Maharashtra, Punjab, Andhra Pradesh and Himachal Pradesh. These godowns will be used for purchasing, receiving, warehousing, selling and delivering farm inputs, primarily fertilizers. They will also be used to handle seed, weedicides, pesticides, farm produce, non-perishable food and other commodities and farm implements, and to provide farmer credit and consumer goods such as soap and kerosene. The godowns will serve as rural service centers and will be focal points for expanded economic activity at the village level. About 750 large marketing and storage godowns 1/ West Bengal, Bihar, Madhya Pradesh, Andhra Pradesh, Maharashtra, Uttar Pradesh, Haryana, Punjab and Himachal Pradesh. 2/ Bihar, Andhra Pradesh, Maharashtra, Punjab and Himachal Pradesh. 3/ West Bengal, Bihar, Madhya Pradesh, Uttar Pradesh, Haryana and Punjab.  - 15 - of 500 - 10,000 tons capacity each will also be constructed in these States by the State Cooperative Marketing Federations (SCMF) and Regional Cooperative Marketing Societies (RCMS) to support the farm input supply and produce pur- chase activities of the primary societies. In Bihar, about 150 marketing godowns will be constructed by the State Cooperative Marketing Union (BISCOMAUN). These will provide cooperative services directly to farmers in the interior of the State to supplement those services provided by some of the weaker primary societies. 47. Of the 127 cold-storage units to be constructed under the project, 69 will be in Uttar Pradesh, where 50% of India's potato crop is grown. Approx- imately half of these will be owned and operated by the SCIF, and the rest by primary cooperative societies (PCS) and RCMS. Seventeen cold stores in Bihar and 22 in West Bengal will be owned by the PCS and RCMS, while the remaining 19 cold stores (four in Madhya Pradesh, eight in Punjab, and seven in Haryana) will belong to the SCMF. Cold store units will have a capacity of 4,000 tons each, and only in exceptional cases will smaller units be constructed. The cold stores will support the cooperative system in catering to its cold storage and marketing needs. The availability of these stores will help to improve storage methods as well as the efficiency of marketing practices for potatoes and other semi-perishable produce by enabling farmers to market their produce at a commercially advantageous time of year. Cooperative involvement in potato marketing under the project will be developed initially by the SCMF, who will organize their own marketing mechanism, establish offices and recruit specialized staff for this purpose. The marketing cells established by the SCMF will provide expert assistance to the PCS to enable them to undertake and develop their own marketing activities at the primary level. The National Agricultural Cooperative Marketing Federation, as the principal exporter of potatoes in the cooperative sector, will develop marketing intelligence serv- ices for the SCMF and carry out research and experimentation in potato market- ing systems and in storage of potatoes and other semi-perishable produce (see para 49). 48. All godown and cold-storage buildings will be based on standard designs, for which design drawings were agreed during appraisal. Facilities provided for the PACS will include storage space for fertilizer, farm produce, and consumer goods. Facilities will also include a sales floor, society office, drinking water supply, toilet facilities, verandah, patio for meet- ings, and parking yard. Building designs, specifications and construction standards for project godowns and cold stores will be acceptable to IDA (Section 2.12 of the Project Agreement). 49. With regard to the technical assistance and development component, consultant services totalling about 264 man-months will be engaged to help strengthen the special loans departments and to set up organization and methods departments in most of the participating banks (SCB/SLDB), 1/ speed up rehab- ilitation programs for the SCB in Bihar, Himachal Pradesh and West Bengal, 1/ Technical assistance for these purposes has already been provided to Uttar Pradesh and Haryana under the First NCDC Project, and to Madhya Pradesh under the EEC project.  - 16 - and establish marketing divisions in the SCMF for the six States involved in cold-storage operations under the project. Consultants will also be engaged to develop procedural and operational manuals for godowns and cold stores, and to provide training to cold store operational staff and to other trainers in godown operations. Research and development activities will focus primarily on determining the most suitable storage facilities and marketing methods, not only for potatoes, but also for other semi-perishable commodities such as onions and pulses. 50. A small amount of funds (US$1.0 million) has been provided under the project to support project implementation. These supporting investments include surveying equipment and equipment for design, construction, supervision and payment certification of godowns and cold stores, together with vehicles and bicycles for the executive and technical field staff of NCDC, participat- ing banks and cooperatives. Eighty-one motor vehicles for field executives of NCDC and participating banks, 354 motor-scooters for project development officers, engineering supervisors and cold store managers, and 3,500 bicycles for godown managers, will be provided. Project Implementation 51. As in the First NCDC Project, NCDC will be the primary agency for coordinating project implementation activities in the nine participating States. State Governments will provide overall policy guidance to participating coop- eratives in each State. The godowns and cold stores will be owned and operated by either the SCMF, the RCMS, or the PACS. Each godown and cold store con- structed under the project will represent an independent subproject loan for which a financing proposal will be prepared and submitted to the appropriate participating bank (SCB/SLDB) for appraisal and financing. The Registrar of Cooperatives in each State will carry primary responsibility for subproject promotion and identification, and his staff will assist the regional and primary cooperative societies in preparing the subprojects and the associated loan applications. NCDC headquarters, regional and project office staff will also provide assistance in project promotion and subproject work. SCB and SLDB in each State will function as NCDC's onlending channels and implementing agencies, except in Bihar where NCDC will lend through its own branch office direct to the Bihar State Cooperative Marketing Union. To ensure consistent recoveries performance among various IDA-supported credit projects in India, NCDC will require that the participating banks attain a loan recovery rate 1/ meeting a level previously agreed by GOI and IDA in order to remain eligible for NCDC refinancing under the project (Section 2.08 of the Project Agreement). Recovery-rate levels would generally follow those applied (or to be applied) in IDA-assisted ARDC lending. At present, participating banks will be required to attain a recovery rate of at least 50% to remain eligible for NCDC refinan- cing; they are also expected to take the necessary steps to improve recovery rates during project implementation with the objective of attaining and main- taining a recovery rate of at least 65% by the end of the project period. All participating banks, with the exception of those in Maharashtra and Himachal Pradesh, currently have loan recovery rates of 65% or more; the SLDB in 1/ Loan recovery rate is measured as the percentage of annual demand received in repayments (including interest) during the year, where annual demand is the total repayments falling due during the year plus overdues from the previous year.  - 17 - Maharashtra has a recovery rate of 54%. In the case of Himachal Pradesh, which is regarded as a cooperatively backward State, the present loan recovery rate of about 20% for the participating SCB is not adequate to meet this criterion. However, the State Government has prepared a rehabilitation plan for the SCB which was provided to IDA for review during project negotiations, and which details actions for the strengthening of the SCB's finances and for the col- lection of overdues. In view of this, and of the difficult conditions prevail- ing within the State, IDA has agreed to apply less stringent loan recovery criteria in the initial years of project implementation. To be eligible for NCDC refinancing, the SCB in Himachal Pradesh will be required to attain a recovery rate of 35% by June 30, 1981, 45% by June 30, 1982, and 55% by June 30, 1983. 52. Each cooperative society participating in the project will employ a full-time manager. NCDC will organize the necessary training to enable him to prepare subprojects and manage the society's new business effectively and profitably. Those PCS in Bihar, West Bengal and Uttar Pradesh that plan to own cold stores (as opposed to leasing them from the SCMF in the other States) will employ managerial, technical and other staff adequate to carry on their business in an efficient manner. SCMF and participating banks will provide engineering advice and support to these societies during subproject implementation, and technical and marketing support during subsequent opera- tions. The SCMF are adequately staffed at the management level to accommodate the increased business resulting from the additional godown storage capacity to be provided under the project. However, additional staffing and preparatory work will be required to equip these organizations to handle the project's cold storage component. Only the Haryana and Bihar SCMF have had experience in cold store operations, and potato marketing has been undertaken only on a very small scale. All SCMF will strengthen their engineering divisions to include refrigeration skills and will establish separate divisions to deal with potato procurement and marketing. Since it would be uneconomical to provide specialized refrigeration staff for each cold store, such staff will be centralized at the SCMF level and will provide support services not only to the SCMF-owned cold stores but also to the primary marketing societies. In some States, the refrigeration services offered by the SCMF will supplement those available from established refrigeration firms who undertake cold store maintenance and operation under contractual arrangements. 53. The SCB and SLDB will establish special loans departments to be responsible for implementing the project. Staffing of the participating SCB/ SLDB will be strengthened to enable appraisal and monitoring of godown and cold store subprojects to be carried out. In seven of the nine project States, the participating banks will also set up engineering divisions to handle the technical aspects of the subprojects. However, in Punjab and Himachal Pradesh, where it may be difficult to attract high-caliber engineering staff, the SCB will utilize the specialized engineering facilities of the SCMF. Adequate numbers of engineering staff in any case will be employed in these banks to undertake technical appraisal, monitoring and certification of progress pay- ments to construction contractors. In all States, engineers and development officers from the participating banks will spend most of their time in the field assisting client cooperatives to prepare subprojects and related loan applications, appraise and monitor subprojects, review construction progress, and follow up godown and cold store operations after commissioning. The  - 18 - participating banks and SCMF will strengthen their staffing during the first project year according to a program discussed and agreed upon during negotia- tions (Section 2.09(d) of the Project Agreement). 54. Once a subproject has been prepared, a loan application will be sub- mitted to the participating bank for appraisal. The bank will appraise the subproject loan application using appraisal criteria agreed by NCDC and IDA (Section 2.09(a) of the Project Agreement). The criteria will ensure a thorough review of technical and financial feasibility, and will include a review of the cooperative's credit activities and recoveries performance. Project implementation progress will be supervised and monitored by the parti- cipating bank through periodic visits by the bank's engineering staff. The vehicles provided under the project will enable the field staff to carry out these supervisions more frequently and effectively. Loan disbursements by the participating bank will be based on work certification by the engineering staff. 55. The participating banks will maintain detailed memorandum records, and ledger and control accounts relating to all subproject loans. These records, together with subproject reports and related loan documentation and supervision summaries, will provide a complete record of each subproject cycle and its progress, including project appraisal, loan approval, disburse- ments, contribution by the State Government, interest charges, installments due, collections, overdues and follow-up action. These records will be audited by commercial auditors employed by NCDC for this purpose and will be reviewed periodically by IDA supervision missions (Section 2.09(c) of the Project Agreement). Summarized information on these will be incorporated in NCDC's quarterly progress reports. Copies of NCDC's annual work programs and related cost estimates will be made available to IDA before the start of each financial year (Section 2.13(a) of the Project Agreement.) 56. Project monitoring and evaluation will be the overall responsibility of NCDC. At the State level, monitoring will be the responsibility of the participating banks. Project evaluation will be carried out by the Evaluation Unit within NCDC, which was established initially under the first NCDC project, and which reports directly to the managing director. This Unit will follow up project implementation, identify problem areas, assess effectiveness of participating institutions, and measure subproject impact on the participating cooperatives and their members and on the farming community served by the cooperatives. The Unit will also compare costs and benefits realized with appraisal projections. The head of the Unit will be an economist, supported by a statistician and a cooperative specialist. The Evaluation Unit will be independent of all other departments of NCDC and work in close collaboration with its Management Audit (internal audit) Department. In addition to provid- ing quarterly monitoring reports and annual evaluation reports to IDA, the Unit will also be responsible for the preparation of a project completion report (Sections 2.13(b) and 2.05(c) of the Project Agreement). 57. Manning of each godown and cold store by technically qualified and experienced staff will be essential to the success of the project. During the project implementation period, about 7,900 godown managers and 1,700 cold store administrative and operational staff will be trained. One or two Project  - 19 - Manpower and Training Coordinators will be appointed in NCDC to be responsible overall for providing the necessary job-related training, and for securing the availability of qualified manpower for the project units. State-level units will be responsible for project training. Training for godown managers will be provided at Cooperative Training Centers in Andhra Pradesh, Bihar, Himachal Pradesh, Maharashtra and Punjab, while training for cold store staff will be provided at four training colleges in Haryana/Punjab, Uttar Pradesh, West Bengal and Bihar. The effective utilization of project godowns and cold stores will be contingent upon the services of a professional and compenent staff, and on the interest of members. To achieve this, training will be accorded a high priority in project implementation and will be carefully planned. Manpower and training plans prepared by NCDC were provided to IDA for review during project negotiations and are satisfactory. Project Costs and Financing 58. The total project cost, including contingencies, is estimated at US$267 million, including about US$18.6 million in taxes and duties. The proposed credit of US$125 million will finance all of the foreign exchange costs of US$26.8 million and about US$98.2 million of the local costs, and will cover about 50% of project costs net of taxes and duties. The remaining costs will be financed by NCDC (about 28%), State Governments (20%), and beneficiary cooperatives (5%). Physical contingencies of about US$12 million are based on a rate of 5% of base costs, except for the State of Himachal Pradesh where a rate of 10% has been used to take into account the difficult topographical conditions. Price contingencies amounting to about US$38 mil- lion are based on a projected price escalation of about 7% to 9% per annum, for both local and foreign cost components, over the project period. 59. GOI will onlend the credit proceeds to NCDC under a financial agree- ment to be entered into by GOI and NCDC. Execution of the financial agreement will be a condition of effectiveness for the credit (Section 5.01(b) of the Development Credit Agreement). These funds will be channelled through GOI to NCDC at an interest rate of not more than 6.75% per annum, repayable over 15 years. NCDC will make these funds, together with its own, available to participating banks under lending terms of not less than 7.25% per annum for refinancing cooperative godown subprojects, and not less than 7.5% per annum for cold-storage subprojects; repayment would be over 15 years, with three years' grace for godown subprojects and five years' grace for cold-storage subprojects. Participating banks will in turn relend the funds to cooperative societies for godown and cold store construction at not less than 9.5% per annum, with the same repayment period terms (Sections 2.09(b) and 2.11 of the Project Agreement). NCDC will also provide some of its own funds, on these same terms, to State Governments. The States will pass these funds, together with funds from the State's own resources, to the benefitting cooperatives as equity contributions. Cooperative societies are expected to be able to pay dividends on the equity capital at a rate of 5% from the first year of the project. All NCDC loans to participating banks will be guaranteed by the respective State Government, as is required under the NCDC Act. 60. Loans made by participating banks to cooperatives for godown con- struction will cover 50% of the godown investment cost. The remaining 50% would come from the borrowing cooperative (5%) and the State Government as  - 20 - equity (45%). In the more backward and hilly areas in Himachal Pradesh the State Government contributions to PACS for godown investments will be partially in the form of capital grants of up to Rs 20,000 (US$2,500). About 44% of the total State Government contributions will come from the States' own resources, although the greater part (56%) will be obtained through loans from NCDC. Such loans to State Governments will be made out of NCDC's own (non-IDA) resources. NCDC will refinance the full amount of the loans made by participating banks to cooperatives for godown construction. 61. Similarly, in the case of cold store construction, loans made by participating banks for this purpose will cover 60% of the cold store invest- ment cost, and NCDC will refinance the full amount of these loans. The remain- ing 40% will come from the cooperative (5%) and the State Government, as equity (35%). State Government contributions to cold store investments will be made as equity or partially as grants, as for godown investments. The major part of State Government contributions (57%) for this type of investment will come from the State budget, while the remaining 43% will be obtained through loans from NCDC's own resources. 62. The margins proposed for the godown component will be the same as those adopted in the First NCDC Project, that is, 0.5% for NCDC and 2.25% for participating banks. The NCDC margin of 0.75% proposed for the cold store component is considered justified on the basis of the requirement that NCDC undertake not only the detailed appraisal of cold store subprojects, but also a greater measure of project monitoring. In the case of the godown subproj- ects, the appraisal and monitoring is undertaken almost entirely by the parti- cipating banks. The 2% margin for participating banks in the case of cold store subprojects is considered adequate compensation for their role, and will provide a satisfactory profit. The onlending rate of 9.5% is comparable to the rates charged to farmers, cooperatives and other borrowers under IDA- supported agricultural projects in India, through the Indian Dairy Corporation and the Agricultural Refinance and Development Corporation (ARDC), for example. The ARDC rates, which are about one percentage point higher, reflect the higher cost of the type of lending in question; ARDC-refinanced loans are typically smaller, amounting to about Rs 4,000 for a farmer's shallow tubewell invest- ment compared to about Rs 80,000 for a typical godown investment under the proposed project. Inflation in India over the past five years has averaged less than 8% per annum. The average annual inflation rate over the next five years is not expected to exceed 8%. The proposed onlending rate of 9.5% to the ultimate borrowers, the cooperatives, would therefore be positive in real terms. Procurement 63. The project will involve relatively small expenditures by indivi- dual cooperatives spread over time and throughout the nine project States. Contracts for godown and cold store construction will not therefore attract or warrant international competitive bidding (ICB). Consequently these contracts will be let on the basis of local competitive bidding (LCB) in accordance with procedures satisfactory to IDA. Contracts for cold store construction would generally be let in three parts -- structural civil works, electrical equipment and installation, and refrigeration equipment and instal- lation. There are many well-established electrical equipment and refrigeration  - 21 - machinery manufacturers in India, as well as several local representatives of foreign manufacturers who will have the opportunity to bid for such procure- ment. Since competition among suppliers thus will be assured, and since the electrical equipment installed in each project cold store will have a maximum value of US$40,000 and the refrigeration equipment a value of US$70,000, con- tracts for the supply and installation of electrical and refrigeration equip- ment will be through local competitive bidding. 64. Technical assistance services (US$800,000) will be primarily procured locally in accordance with procedures agreed with IDA (Section 2.02 of the Project Agreement). Supervisory and marketing vehicles (US$1.1 million) and surveying equipment (US$40,000) will be procured by prudent shopping by borrower cooperatives. Selling prices of locally manufactured vehicles are so well established that competitive bidding procedures are not expected to result in any worthwhile cost saving. Furthermore, local procurement of vehicles is necessary to ensure adequate maintenance and spare parts availability. Pro- curement procedures presently in use are satisfactory to IDA. 65. The SCMF will handle their own procurement and provide assistance to the RCMS and PCS which are not equipped to handle capital works of this nature. The participating banks will manage the godown construction contracts for PACS and RCMS in all participating States except Punjab and Himachal Pradesh. In these States, the State Governments and participating banks have decided to utilize the engineering cells in their SCMF, which are considered better equipped to handle the technical aspects of godown construction. Disbursements 66. The IDA disbursements for godown and cold stores construction will be made against NCDC's certified statements of loans made by participating banks and refinanced by NCDC. For ease of administration, IDA will disburse 85% of the total amount of the loans made by NCDC to the participating banks. Documents in support of these will be audited by independent auditors appointed by NCDC for this task and be made available to IDA for inspection during project supervision (Section 4.02 of the Project Agreement). Other disbursements under the credit will cover: (i) 100% of technical assistance services; (ii) 100% of research and development expenditures; and (iii) 100% of foreign expendi- tures for imported items (see paras 49, 50). Disbursements against these three categories will be fully documented. With a view to expediting project implementation, NCDC and the nine State Governments have initiated project preparation activities for this project in conformity with criteria set forth during appraisal. In support of these efforts, IDA financing has been pro- posed for expenditures for godown and cold stores construction, vehicles, technical assistance, and engineering instruments incurred on the project after October 1, 1980, but prior to credit signing, up to a total limit of US$4.0 million (para 4 of Schedule 1 to the Development Credit Agreement). Project Benefits and Risks 67. The godown component of the project will help ensure timely delivery of fertilizer and other farm inputs to large numbers of farmers. The primary economic benefits will accrue from the reduction of losses of farm produce and fertilizer as a result of the improved storage created under the project, and  - 22 - the savings in transport costs. For the cold store component, benefits will be obtained from reduced potato spoilage (estimated at about 20% of cold stor- age throughput), increased value of the potato crop through deferred marketing, and reduced seed transport costs through local production and storage of seed potatoes. In the economic analysis of the project, labor costs have been shadow-priced at 60% of the market wage rate for unskilled labor and 80% for skilled labor, to take into account the high levels of unemployment and under- employment in project States. Salaries of skilled technical and administrative personnel have been costed at market rates. A conversion factor of 0.8 has been applied to domestic expenses and non-traded goods and services. On this basis, the project economic rate of return will be about 23%, or about 16% for the godown component and 34% for the cold-storage and marketing component. The godown component is relatively insensitive to variations in the cost and benefit streams: a 10% variation in any of the streams or their combinations would result in a change of only two percentage points in the economic rate of return. A one-year lag in attaining the projected benefits would result in a reduction of the rate of return from 16% to 13%. In the case of the cold-storage and marketing component, a 10% reduction in benefits would lower the rate of return from 34% to 29%; a one-year lag in attaining the projected benefits would lower it to 27%. 68. The project is expected to assist some 3.2 million farm families (about 17 million people) through the services of the primary cooperative society godowns, and about 150,000 potato farm families (0.8 million people) through the use of the cold store facilities. Over 65% of these families belong to the categories of landless, marginal and small farmers (farmers having less than 5 ha of unirrigated land, or 2.5 ha of irrigated land). 69. The project will have a substantial employment impact. Godown and cold store construction will provide about 62,500 man-years of employment during the five-year implementation period. Once construction is complete, 7,900 managers, 7,500 storekeepers and 8,800 watchmen will be needed by the partici- pating cooperatives. The cold stores will provide employment for about 1,000 people, and will benefit women in particular through the creation of jobs in the cold stores for potato sorters and graders. Through its indirect impact on farm production, the project is also expected to generate substantial additional farm employment. 70. Institutional and social benefits of the project will also be con- siderable. NCDC will be strengthened as a development finance institution for the cooperative sector not only for rural storage but also for other agricultural processing, industrial and marketing activities. Other partici- pating institutions such as cooperative societies and banks will also be assisted in strengthening their capacities and procedures. Thus the project will greatly assist in institution building at the village level, which is in accordance with GOI's policy of creating village growth centers for expanded economic activity. The cold storage and marketing component will reduce the risk associated with potato growing and will greatly assist the small farmers whose needs have been hitherto neglected by private cold store owners. It will also provide the first opportunity for many cooperative federations and the primary cooperative societies to gain valuable experience in the cold- storage and marketing process. Only a few apex cooperatives have had exper- ience in cold store operations, and then only on a relatively small scale.  - 23 - 71. The technical aspects of godown construction are relatively simple, and many local contractors with experience in the construction of cold stores are available. One possible risk is the uncertainty of cement availability, which could result in delays in the construction program and consequent cost escalation. GOI and participating State Governments have offered to give the highest priority to this project among other projects under implementation within the States and make adequate supplies of cement available. A further risk is that the cooperative sector institutions have limited experience in potato cold storage management. Safeguards have been provided basically through recruiting technically qualified staff and providing them with the necessary training in cold storage operations. Technical and marketing support will also be provided to the primary cooperative societies by apex cooperative federations. The risks are no greater than can normally be expected with operations of this type in India and are acceptable in view of the benefits which will accrue to the cooperative sector and large numbers of small farmers. PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the Association and the NCDC, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 73. Special conditions of the Project are listed in Section III of Annex III. The execution of a Financial Agreement between GOI and NCDC has been made an additional condition of credit effectiveness (Section 5.01(b) of the Development Credit Agreement). 74. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 75. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President May 1, 1981   ANNEX I Page 1 of 5 INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AV5