India - A Pilot Project For Watershed Development in Rainfed Areas

Dme.I Of The World Bank FOR OMCAL USE ONLY CR. /4YQ4-27A R1st No- P-3674-IN REPORT AND RECOMMATION OF THE PRESIDEINT OF TE IERNATIONAL DEVELOPIENT ASSOCIATION TO TEI EXECTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 29.4 MILLION la INDIA FOR A PILOT PROJECr FOR WATERSHED DEVELOPMENT IN RAIND AREAS November 16, 1983 Thk dudmmt b_ a mickd dkft1W5sm an my be =W by redpimb only In tlk f theibim doom Is u s my mn t mehuiue be dimem lu Wm Book I  -ii- CURRENCY EQUIVALETS (As of Noveaber 8, 1983) US$1.00 - Rs 10.340182 As U.00 - USSO.0967100 Rs 1 milliou US$96.710 The US Dollar/Rupee exchange rate is subject to change- Conversions in the Staff Appraisal Report were, eccept as otherwise noted, made at the rate of US$1 to Rs 9.75, which represents the projected exchange rate over the disbursent period. FISCAL YEAR April 1 - Narch 31 Abbreviations Used in this Report GOt - Government of Tndia ICAR - ITdian Council for Agricultural Research ICRISAT - International Crops Research Institute for Semi-arid Tropics NWDPC - National Watershed Development Policy Committee SAU - State Agricultural University VEE - Village Extension Worker WDC - Watershed Development Council  FOR OFFICIAL USE ONLY -iii- INDIA A PILOT PROJlECT FOR WATERSHED DEVELOPMENT IA RAINFED AREAS CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiaries: The States of Autdhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra. Amount: SDR 29.4 million (US$31 million equivalent). Terms: Standard. On-Lending Terms: From the Govermcent of India (GOI) to the States as part of Central assistance for State development projects on terms and conditions applicable at the time. GOI to bear the exchange risk. Project Description: The pilot project would initiate a program to increase and stabilize crop and forage yields aud production of fuelwood and timber in rainfed farming areas through widespread adoption of improved technology and better farming practices. It would be implemented in eight watersheds totalling (about 250,000 ha) of the four participating States. However, if the project is successful, a series of follow-on projects would be extended to other areas. Major project components include: improved crop and rangeland husbandry practices, soil and water conservation measures, research, training and technical assistance. The project would also strengthen GOI-s and the States- capacities to plan and implement such schemes and invoke peoples participation at various levels. Major project risks include: inadequate experience for widespread application of new techniques in farmers- fields; non-availability of inputs; inability of the local institutions to organize and coordinate a multi-disciplinary program involving numerous agencies and a large number of farmers; and inadequate farmer participation. The risks are expected to be contained within acceptable limits through the effective use of research, technical assistance and training, close monitoring of project implementation built into the project, and farmers- continuous invol- vement in the process of planning and implemen- tation of the project activities. This document has a restricted distrbution and May be used by recipients only in the performance of their oficial dutie. Its contents may not otherwise be disclosed without World Bank authorization.  -iv- Estimated Costs: 1/ US$ Millions Local Foreign Total Conservation Works 11.96 11.96 Forest Plantaticn 6.75 - 6.75 Vehicles andi Eq'uipmeat 1.27 0.53 1.80 Salaries and Allowances 6.77 - 6.77 Operations and Maintenance 1.01 0.06 1.07 Research 1.30 - 1.30 Mid-term Evaluation and Project Preparation 0.12 - 0.12 Technical Assistance and Training 0.08 0.63 0.71 Sub-Total 29.26 1.22 30.48 Physical Contingencies 4.11 0.08 4.19 Price Contingencies 10.59 0.20 10.79 Total Project Costs 43.96 1.50 45.46 . = = = = = _ _ Financing Plan: US$ Millions Local Foreign Total GOI/States 13.7 - 13.7 ODA (UK) 0.1 0.7 0.8 IDA 30.2 0.8 31.0 Total 44.0 1.5 45.5 Estimated Disbursements: US$ Millions FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Annual 0.25 1.95 3.50 5.10 5.20 5.40 4.90 3.20 1.60 Cumulative 0.25 2.10 5.60 10.70 15.90 21.30 26.20 29.40 31.00 Rate of Return: Economic rates of return of the three fully appraised Watersheds range between 26% to 50%. Appraisal Report: No. 4561-IN, dated November 17, 1983. 1/ Including taxes and duties, estimated at about US$700,000.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF TIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR A PILOT PROJECT FOR WATERSHED DEVELOPMENT IN RAINFED AREAS 1. I submit the following report and recolmmendation on a proposed develop- nment credit to India of SDR 29.4 million (US$31 million equivalent) on standard IDA terms to help finance a pilot project f.ic watershed development in rainfed areas in the States of Andhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra. The project would increase and stabilize crop and forage yields and production of fuelwood and timber in rainfed farming areas through improved land and crop management, intercropping and sequence cropping and development of fodder and tree plantations in non-arable areas. The Government of India (GOI) would channel the proceeds of the credit to the State Governments in accordance with its standard terms and arrangements for financing development projects in the States. The exchange risk would be borne by GOI. PART I - THE ECONOMY I, 2. An economic report, Economic Situation o)f I,idta and Resource Mobilization Issues' (4395-IN, dated April 11, 1983), was distributed to the Executive Directors on April 19, 1983. Country data sheets are attached as Annex I_ Background 3. India Is a large and diverse country with a population of about 700 mil- lion (in mid-1982) aad an annual per eaplta income of US$250. The economy is dominated by agriculture which employs more than two-thirds of the labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those with little or no land. Growth of value-added in agriculture - 2.22 since 1950/51 - has been slower than growth of industrial value-added (5.0% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 60% to just under 40%, while the share of industry rose from 15% to around 25%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has beea slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress with per capita income rising by about 1.4Z per year in _ae period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural productioq. Savings and investment have increased 1/ Parts I and II of the report are substantially the same as Parts I and II of the President-s Report for the Orissa Irrigation II Project (No. P-3612-IN), dated June 9, 1983.  -2- markedly since 1950/51: gross national savings more than doubled from 10.8% of GDP (at factor cost) to 22.8% in 1982/83, while gross domestic investment rose from 12.5% of GDP to 24.9% in 1982/83. Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20% was reached during the early 1960s. Surpluses arose for a few years in the late 1970s, and at the present time, foreign savings are about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3% of GDP and averaging below 1% for the past five years. Net foreign savings have never risen above 3% of GDP, and presently stands at 2.1%. 5. Before the 1970s, India placed relatively less e;iphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-1970s, however, India-s terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India-s exports grew on average about 7.3% per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expandiug world markets, particularly in the nearby Middle East, con- tributed to this growth, liberalized access to imported inputs and more effec- tive export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added, substantially exceeded the historical 30-year trends (paragraph 3) averaging 4.9%, 3.9% and 5.6%, respectively. In 1979/80, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks in 1979/80 coincided with the prepara- tion of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substantially recovered with real GDP growing by 7.9% and 5.2%, respectively. While industrial output expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15% and 5.5%, respectively. The availability of power, coal, and rail transport, already improved in 1980/81, was even better in 1981/82, recording growth rates of about 10%, 9.6% and 12.9%, respectively. The easing of constraints on the supply of infrastructure and basic commodities was a determining factor in the improved performance of the industrial sector. This overall improvement in the Indian economy, combined with a more restrictive monetary policy contributed to a sharp decline in the rate of inFlation. Wholesale prices rose by about 9% on an average annual basis in 1981/82 and by only 2.5% in 1982/83, reflecting a strong deceleration from a peak increase of 18% in 1980/81. -  -3- 8. After two years of fairly solid performance, the Indian economy faced a difficult year in 1982/h3 due to the drought in mid-1982 which brought down the GDP growth rate to around 2% and put further strains on the already dif- ficult balance of payments and domestic resource situation. Besides a sig- nificant decline in the range of 4.5X-6.5% in agricultural production, GDP growth was also constrained by a slowdown in industrial growth from 8.6% in 1981/82 to about 4% in 1982/83. Thnis resulted from a combination of several factors, notably the decline in agriculture income, persistent (though lessened) power shortages, a textile strike in Bombay, as well as depressed export markets and increased competition from imports. The Government was able, however, to protect the level of savings to a large extent and keep the momentum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in sup- port of this effort. Similarly, the timely implementation of vacrio's economic policies mitigated the otherwise very distressing effects of a poor monsoon. Continued improvements of the infrastructure sectors, although at a slower pace than in the previous two years, also reduced the negative effects of the drought. 9. Agricultural production in 1982/83 received a serious setback from the drought. Foodgrain production, which had reached a record 133 million tons in 1981/82, declined to 124-127 million tons. Production of most other major crops also declined in 1982/83. Corrected for weather variations, this still represents a creditable performance. In 1979/80, with a broadly comparable monsoon, foodgrain production reached only 109 million tons. The Government was able to mitigate the effects of the 1982 drought through efficient manage- ment of foodgrain procurement and distribution, careful timing of foodgrain imports, and appropriate allocation of power to irrigation pumps. These policies helped to avoid disruptions in basic food supplies and contributed to price stability during the year. While the management of the foodgrain economy after the drought was a significant achievement, the effect of the drought on production re-emphasized the continued importance of the monsoon in India-s agriculture. The performance of the recent past and probable future trends suggest that on average foodgrain supplies will meet demand. The balance remains delicate, and the need for foodgrain imports to maintain con- sumer supplies or adequate buffer stocks could arise from time to time. Thus, programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services performed generally well in 1982/83, although growth of coal, power and rail transport failed to maintain the momen- tum of the marked recovery of 1981/82. Despite lower hydro generation due to the failure of the monsoon, overall power generation recorded an increase of about 7%. This was due largely to an increase in capacity utilization in thermal plants resulting from improved overall management, stabilization of most of the new large units and better availability of coal due to the combina- tion of increased coal production and improved railway performance. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% in 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational efficiency of the railways but rather to slack demand from core sectors like steel, iron ore, coal washeries and fertilizers. Coal production growth (4% in 1982/83), after 10% growth in the two preceding years was creditable. There were no major shortages ana there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily  -4- fron better utilization of existing capacity, but in the future :!.-st improve- laeLt must result from added capacity. it is therefore critically important that India maintain the pace of investment in these key Sectors and mobilize sufficient resources to do so. 11. The Indian economy has reverted from a situation of resource surplus, which had been a temporary phenemenon of the late 1970s, to one of resource scarcity. Investment has again grown quicker than national savings, and the scope for further increases in the latter appears limited. India-s gross national savings rate, which averaged 22.4Z of GDP in the last three years, is high by any standard, particularly considering India-s low income and the large proportion of its population living below the poverty line. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. In 1981/82 there wag a significant increase in public savings due to improved profitability of various public sector enterprises. This trend which was maintained in 1982/83 needs to be accelerated. The gap between gross investment and national savings which rose from 0.42 of GDP in 1979/80 to 1.8%, 2.3% and 2.1%, respectively in the first three years of the 1980s, has been financed by foreign savings. 12. India-s ability to generate resources to meet its development objec- tives has become increasingly linked to the balance of payments. The current account balance which recorded surpluses between 1976/77 and 1978/79, sharply deteriorated to deficits of nearly US$2.9 billion in 1980181 and US$3.8 billion in 1981/82 (1.8% and 2.3% of GDP, respectively). This was partly due to a sharp rise in the oil import bill as a result of both the disruption of oil production in northeast India in 1980 and significant oil price increases, and to a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. The current account deficit in 1982/83 declined to US$3.3 billion or 2.1% of GDP. The improvement would have been greater had not the drought resulted in the need to rebuild food stocks through imports and at the same timne led to a lower level of GDP growth. This improvement in the balance of payments is to a significant degree the result of India-s develop- ment and adjustment efforts over the past three years. It also reflects a reduction in the trade deficit as compared to the levels reached in 1980/81 and 1981/82. The trade deficit declined from US$7.6 billion in 1980/81 to US$6.0 billion in 1982/83 due to continued export volume growth (following the sub- stantial resumption in 1981/82) despite poor world market conditions, coupled with the containment in import growth due to import substitution of petroleum products, metals and fertilizers while allowing substantial growth in 'other' imports through more liberal import policies. Nevertheless, it is expected that the balance of paynents will be under strain for the next several years, for India's adjustment program will continue to require high levels of imports. 13. The high investment rate, about 25% of GDP, envisaged in the Sixth Plan coupled with the limited possibilities of raising domestic savings beyond the present high levels, necessarily implies a need for external resources. Faced with a reduction in the availability of bilateral and multilateral concessional assistance, India has begun to borrow significant amounts on commercial terms from the Euro-dollar market in addition to much greater utilization of suppliers- and export credits. India-s favorable debt service profile has enabled India to tap commercial capital markets at favorable spreads (over relatively high underlying rates). In the period 1980-82 India contracted  -5- commnercial loans totalling over US$2,000 million and suppliers- credits of about US$520 million. The bulk of the loans are linked to specific development projects in the public sector while the credits are linked, by and large, to development projects in the private sector. India also reached an agreement with the International Monetary Fund for the use of the Extended Fund Facility for SDR 5 billion, of which SDR 2.5 billion have already been drawn. The transfer of funds under the EFF has stemmed the use of foreign exchange reser- ves whLch had fallen to less than four months of import coverage in 1981/82. In 1982/83, in addition to continued use of the EFF, financing requirements were met by increased non-concessional borrowing (about US$2,000 million in new committments) and a 10X increase in net aid disbursement. Development Prospects 14. The experience of recent years illustrates that India has 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 manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and nil). With good ecGnomic policies and reasonabli a.cwess to foreign savings, indIa has the capability for managing these considerable resources to accelerate its long-term growth. 15. The medium-term framework for advancing India's development objectives is the Sixth Five-Year Plan (1980/81-1984/85), which is now in its fourth year. The Plan assigns priority to agriculture, energy development, the growth of exports and domestic import substitutes where appropriate, and the removal of infrastructural bottlenecks. Overall performance has so far been encouraging, although bottlenecks in key sectors such as power and transport are likely to persist. Moreover, fulfillment of the Plan targets will require additional resource mobilization. The efforts of the Central Government to raise resour- ces have so far been impressive and are likely to be broadly sufficient to meet the financing requirements of the Central Government-s share in plan investment, even if some increase in inflation is experienced above current low levels. However, a shortfall in public savings is likely to occur in some States unless further measures are introduced. There will be a need also for continuous efforts to maintain the current level of private savings. Recent increases in interest rates and tax concessions on time deposits and the con- tinued dampening of inflationary expectations should stimulate such savings. 16. The higher capital formation rates of the past few years augur well for future income growth. However, returns to investment have so far been relatively low. Much of this phenomenon relates toi IndLa's stage of development, in which a large and growing proportion of investment has been needed to build up basic infrastructure. These services, such as power, tran- sport and irrigation, have inherently high capital-output ratios. However, there is scope to improve the sectoral capital-output ratios through greater efficiency and better management. Bottlenecks in basic infrastructural sectors clearly can prejudice growth in other sectors where large investments have been  -6- made. As demonstrated in the last three years, performance in the basic serv- ice sectors can be improved through better planning and management, thus lead- iLg to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the casu of tradeable commodities like coal, steel and cement, this ia justified on the grounds of comparative advantage. For sectors such as irrigation, power and transportation, expansion of planned capacity in accordance with the require- ments of the rest of the economy will be vital to overall medium- and long-term development prospects. In the short term, however, achieving an adequate balance between supply and demand in these sectors will remain a difficult objective. 17. Under the Sixth Plan, India has an ambitious oil production program backed by substantial financial commitment. While the gap between domestic consumption of petroleum and production remains large, the prospects for progressive substitution of domestic petroleum for imports are quite bright. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. India's dependence on oil imports dropped from 63% in 1979/80 to about 45% now and a scheduled expansion in production is expected to decrease oil imports (in crude equivalent terms) to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake fro.a known fields, offers much encouragement for India-s longer-term energy prospects. 18. Despite an expected continued decline in its current account deficits from the current 2.1% to about 1.7% of GDP by the late 1980s, India wlll require growing access to world financial markets to complement concessional assistance. These commercial sources of funds will be tmportant in the future since India-s current account deficits, though not large relative to the size of the economy, will nevertheless be large in absolute terms and will neces- sitate external borrowing beyond levels expected to be available from normal concessional sources. Given the favorable structure of India's external debt, which reflects the past reliance on concessional sources, India should remain creditworthy for a substantial growth in external borrowing. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. In the longer term, income growth represents the best strategy for achieving these needed adjustments, both by generating higher savings for further investment, and by fostering the development of export and import-substituting industry to improve the balance of payments. In the short term, a relatively large external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance. Although India is currently in a position to increase borrowing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. The Government's effort to maintain an adequate rate of growth while adjusting the structure of the Indian economy to a more open and efEticent environment requires foreign resources in addition to the level of commercial borrowing available to India. In:lia s still a very poor country with a large rural sector and enormous  -7- investment requirements for human development and basic infrastructure. The fact that India has been able over the past seven years to maintain a rate of growth above the long term trend, despite the poor monsoons of 1979/80 and 1982/83, lends substance to the hope that a more open Lrade policy and con- certed efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of savings both Eoreign and domnestic, can sustain a rate of growth closer to 5.0% per annum than the long-run trend of 3.6% per annum. Combined with a reduction in the rate of population increase to below 2.0% per annum, a 5.0% growth rate would mean a doubling of the trend rate of growth of per capita income of less than 1.4% per annum. Success in these efforts would inake a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census placed India's popula- tion at 683.8 million, or about 12 million higher than official projections. The fact thaL there was no decline in inter-census rates of population growth, equivalent to about 2.2% per annum, is a cause for concern. While further analysis of the Census may suggest this rate of growth to be slightly overestimated, the expectation of a measurable decline in the population growth rate has not materialized. Until the results of the Census are fully analyzed, firm judgements about the reasons for this outcome are not possible. However, the results re-emphasize the need for continuing efforts to strengthen the health and family planning program in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from 'ts estimated 1979/80 level of about 23% to over 35% by 1984/85. 21. Reduction of poverty remains the central goal of Indian economic growth. 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. About 51% of the rural population and 40% of the urban popula- tion subsist below the poverty line. Improvements in the living standards of the poor will depend to a large extent on the overall growth of the economy, particularly on increases in agricultural production and employment, and in nonr-farm rural employment. These developments will have to stem in large part from market forces which can be encouraged and reinforced by appropriate Government policies and the strengthening of basic services and infrastructure. The declining trend in real foodgrain prices between 1970 and 1981, resulting from India's sustained effort to raise agricultural production, reflects such developments. There is also a role foc direct Government action in faster implementation of land reform (though the scope for significant reduction in poverty through land 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 enhaiice the huaan 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 edutcation, the extension of rural health facilities and the provision of secure village water supplies. Operations such as the community hiealth volunteer program and the national adult literacy campaign provide encouraging evidence that well-targetted, relatively low-cost programs can lead to enhanced prospects for India's poor.  -8- PART II - BANK GROUP OPERATIONS IN INIJI 22. Since 1949, the Bank Group has made 76 loans and 160 dIevcilopment credits to India totalling US$',183 million and US$11,851 r:IIIEii (otAh net of cancellation), respectively. Of these amounts, US$1,387 aiiillion has been repaid, and US$6,224 million was still undisbursed as of SepLtmber 30, 1983. Bank Group disbursements to India in the current fiscal year through September 30, 1983 totalled US$286 million, representing a decreai:- of about 2 percent over the same period last year. Annex II contains a tiIzmmA.ry State- ment of disbursements as of September 30, 1983. 23. Since 1959, IFC has made 29 commltments in India totaliLng u1S$224 million, of which US$30 million has been repaid, US$56 million sold and US$18 million cancelled. Of the balance of US$120 million, US$113 million represents loans and US$8 million equity. A summary statement of IFC disbursements as of September 30, 1983, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and atr-farm development designed to increase agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecommunications projects. The Bank Group has also provided financing for a broad range of mediumr and small-scale industrial enterprises, primarily in the private sector, through its support of develop- 'nent finance institutions. Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan. The continued aUt[ve involvement of the Bank Group in agriculture, energy and infrastructure development will appropriately contribute to India's adjustment and growth prospects. Irrigation will need continuing support, with emphasis on improved efficiency in water conveyance systems to ensure reliable delivery to farmers' fields. In addition, major investments to develop the large Narmada River basin will be vital to India's efforts to increase agricultural production. Important complements to these efforts, such as fertilizer production and distribution, agricultural credit and extension, will continue to receive support. A continued program of investments .ed at rapidly increasing the *lomestic supply of energy will clearly be necessary if India is to curb the cost of oil imports and alleviate the critical power shortages which constrain output in both the agricultural and industrial sectors. Exploitation of oil and gas resources is a central element of this program, which should be supple- mented by investments in hydro and thermal power generation, and in the expan- sion of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have been in short supply and which India has a comparative advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transpor-  -9- and gas resources is a central element of this program, which should be supple- mented by investments in hydro and thermal power generation, and in the expanr sion of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have bten in short supply and which tndia has a comparative advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transpor- tatioa infrastructure would mitigate a key -.onstraint to achieving higher levels of economic growth so that fur th.r support of the railways and for ports development will be particularly appropriate. 26. The need for a substantial net transfer of external resources in support of the development of Indias 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 India, not only to help the economuy adjust to the more recent oil price increases and the overall deterioration in the ;world trade environment but also to maintain the rela- tively higher growth rates achieved during the first two years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component teads to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, and water supply. 27. 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 anount of IDA funds that can reasonably be allocated to India remains small in relation to Indiaes needs for external support. This requirement for additional assistance can be met, in part, through Bank lending. Given its developmert prospects and policies, India is judged credit-worthy for Bank leading to supplement IDA assistince. A con- tinuation of efforts already underway to achieve growth in pr'iductive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth shoutlI result in continued economic growth and improvement in the balance of payments. Despite recent setbacks, India-s external payments position is still manageable. The ratio of Indias debt service to the level of exports was about llZ in 1982/83 and is projected to remain below 20% through 1995/96. As of Harch 31, 1983, outstanding loans to India held by the Bank totalled US$3,471 million, of which US$1,854 million remain to be disbursed, leaving a net amount outstanding of US$1,617 million. 28. 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 34Z of total commitments, 13% of gross disbursements, and 12% of net disburseiments as compared with 50X, 43% and 53%, respectively, in 1981/82. On March 31, 1982, India-s outstanding and disbursed external public debt was about US$17.9 billion, of which the Bank Group-s share was US$7.1 billion or 38% (IDA-s US$5.9 billion and IBRD-s Us$1.2 billion). In 1981/82, about 16.0% of India-s total debt service payments were to the Bank Group.  -10- PART III - RAINFED FAdUYING IN INDIA Background 29. About 70% of Indias net cropped area (143 million ha) is exclusively dependent on rainfall. Even at full development of irrigation, about 50% (70 million ha) would remain rainfed. Production from these areas is greatly affected by the irregularity of the monsoon. Precipitation often occurs at high intensity, reducing the potential for infiltration of moisture into the soil and increasing the danger of soil erosion and crop damage on heavy soils due to inadequate drainage. These conditions reduce farmers- willingness to invest in costly inputs and better crop care and, as a result, overall production from rainfed areas remains low and unstable and much land lies seasonally fallow. Consequently, most rainfed cultivation is only subsis- tence oriented. 30. Although national investment priorities have been directed toward the development of irrigable lands, because of the colossal acreage involved, rainfed lands contribute over 40% of the total foodgrain produced in the country. Improvement in rainfed farming is, therefore, of major importance both for increasing overaLl food supply to the nation as well as for address- ing the social and economic needs of many millions of farming families. 31. Agro-climatic Features of Rainfed Areas. A tropical climate charac- terized by a tigh incidence of solar radiation, high temperatures and unreli- able rainfall resulting in spells of drought and flood, affects agriculture in most of the western and central zones of India, including the States of Andhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra. Selected for the project are sub-humid areas within the States. They have annual rainfall over 750 mm, but have poor possibilities for growing more than one crop without major changes in cropping systems and soil and water management practices. Red alfisols and black vertisols are the two predominant soil types. The alfisols are erodable, deficient in soil nutrients, and moisture retention is limited due to their texture and shallowness. The vertisols, on the other hand, are sticky when wet, hard and deeply cracked when dry. Present agricultural systems in rainfed areas are based on a single crop grown in either the kharif (rainy summer season) or rabi (dry winter season) with crops grown on residual moisture. The major crops grown, which are largely for subsistence, include sorghum, millets, wheat, pigeon pea, groundnuts, cotton and soybea s and fodder for family livestock. Between 10% and 40% of a village area, usually located at the higher elevations of catchments, are marginal for arable farming and should remain uncultivated. The areas are eroded and denuded, mainly as a result of over-exploitation through animal grazing and fuelvood collection. The arable lands are located in the lower lying and flatter areas of the catchments. Increasing populo- tion pressure, however, has expanded cultivation toward the upper reaches where soils are shallower and slopes steeper, thus exacerbating erosion.  -11- 32. Technology for Development. Since 1970, considerable progress has been made in the development of technology for improved rainfed farming. Yields in rainfed agriculture now can be significantly improved by proper soil and water management measures, an adequate level of inputs and proper methods of crop husbandry. Of particular importance to this progress is the work carried out under Credit 526-IN, the Drought Prone Areas Project, at research institutes and programs such as those of the Indian Council oE Agricultural Research (ICAR), the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT), the Indo-United Kingdom Dryland Project, and in the Kandi Watershed Project in Punnj3-b, (Loan 1897-IN), the Himalayan Watershed Mtanagement Project (Ln. 2295-IN) and a number of operational research projects at various other locations. 33. It is estimated that proper crop husbandry alone would increase yields by 50%-60Z in years of normal rainfall. The incremental benefits derived from improved land management practices are estimated to be 1OX-20Z in years of average rainfall, but considerably higher in years with abnormal rainfall because the benefits from investment in land management works are more in terms of reducing the effects of drought or floods and of stabilizing, and eventually improving, the ecological conditions of a catch- ment area. These strategies For land and crop -anagement have, so far, been successfully tested in a number of operational research programs of 10 to 30 ha in extent, and all States expected to participate in the proposed project have benefitted from such a program. 34. Institutional and Inputs Support. In each of the four States, agricultural extension services have been reorganized with IDA assistance, (IDA credits Z1l9-IN, 862-IN, 712-IN and 1135-IN), through introduction of the -training and visit system. The extension services now need only inten- sification to meet the special needs of rainfed areas. Agricultural research which is the responsibility of the Agricultural Universities in each State and ICAR is being strengthened through the IDA-assisted National Agricultural Research Project (Credit 855-IN). To date, the main thrust for research on rainfed agriculture has been provided by ICAR-s 23 centers of the All-India Coordinated Research Project for Dryland Agriculture, located in different agroclimatic regions throughout India. A number of other Indian agencies are also involved in research in various specialized areas. ICRISAT at Hyderabad has, since 1972, been involved in genetic and farming systems research for rainfed agriculture. Progress in identifying and overcoming farmer level constraints has been made by the State Universities and ICAR through increased use of operational research conducted in farmers- fields. 35. Outlets for obtaining input supplies such as seed, fertilizers, agricultural chemicals, and tools and equipment are generally limited in number and farmers often have to travel considerable distances to procure their requirements. Improvement in farming systems and increased production are required to provide incentives to private dealers or others to stock increasing amounts of requirements. Marketing facilities for subsistence crops are marginally developed and need strengthening. Availability of production credit through cooperatives, private banks and medium and long- term credit from various sources is also underdeveloped due to lack of demand in the past. All watersheds are served by minimal road systems which are adequate for present transportation needs.  -12- PART IV - THE PROJECT Background 36. The Project first croposed in 1976, was prepared by the Government of India and the States of Andhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra, with assistance from the Bank-s Resident Mission. The long gestation period reflects the difficulties in arriving at a consensus on the project concept and choice of technology as well as the fluctuating impor- tance assigned to this project by the Central and State Governments. It was appraised by the Associationds missioas which visited India in September 1982 and Je_Uary 1983. Negotiations were held in Washington D.C. in October 1983 with an Indian delegation coordinated by Mr. N. Misra, Director of the Government of India-s, Department of Economic Affairs, Ministry of Finance. The Staff Appraisal Report (No. 4561-IN), dated November 16, 1983, is being circulated to the Executive Directors separately. A Supplementary Project Data Sheet is attached as Annex III. Project Objectives 37. The overall objectives of the pilot project would be to develop widespread adoption of technology for increasing and stabilizing crop and forage yields, and production of fuelvood and timber in slo-eted rainfed farming areas. This would be achieved by introduction of improved soil and moisture management measures, better crop and rangeland husbandry practi:es and reforestation. Furthermore, the project would focus on the efficiency of the organizational structure for implementing essential works, and contain- ment of the unit costs of such works and technical packages important criteria in determtning the further replicability of the development proposals. A monttoring and impact evaluation capacity would be an important feature of the project to assure early feedback and formulation o7 sound future programs. In addition, strong backstopping from location-specific operational research would be essential for the proper evolution and adapta- tion of new technology. Project Rationale 38. About 70X of all farmers in India will remain dependent on rainfed lands. Consequently, a concerted effort to increase and stabilize the produc- tivity of their lands is urgently required. A body of experience exists in development techniques for specific rainfed conditions. However, much of this is based on a few years- experience only, and an Integrated effort by communities involving measures for improving crop and non-arable lands in one compact area has yet to be applied on a meaningful scale. Consequently, the major thrust of the project would be the large scale verification of this set of already developed technological packages which are applicable under dif- ferent environmental and social conditions. As rainfed farming has to optimize in the long terms the utilization cf rainfall for plant and animal production within a catchment area, a comprehensive approach has to be taken to erosion control and the husbandry of crops, rangelands, forests and livestock. The project would focus on these essential activities which, if  -13- the project proves successful at mid-term review to be conducted in the third year of project implementation (para 59), would be replicated in other areas (para 59). Other activities could, however, also be considered at the mid- term review. Project Description 39. The project would, over seven years, develop about 250,000 ha located in eight watersheds in the States of kadhra Pradesh, Karnataka, Madhya Pradesh and Maharashtra. One watershed (of about 25,000 ha) has been iden- tified in each of these States for initial development. Four additional watersheds would be selected from these States, based on agreed criteria. Consideration would be given to only those areas with rainfall of 750mm annually, soil types for which technological packages have been successfully tested and, where basic supporting services (agricultural extension, markets, iaputs, credit and transportation) are available. 40. The development of watersheds would include crop production activities, soil conservation works, oversowiag on grazing lands, replanting with fuel and fodder trees on existing forest reserves, distribution of seedlings, rainwater utilization, staff training, technical assistance, project administration and preparation of a possible follow-on project. 41. The basic unit of development would be the watershed, for which it would be essential to establish full knowledge of existing conditions and the potential for development before comprehensive watershed development activities are planned. This requires a multi-disciplinary approach and close coooeration between researchers and specialists in the various disciplines, and among farmers. The project is designed to address these needs. The disciplines involved would include forestry, agriculture, soil conservation and sociology which would be provided from existing line depart- ments of State Governments, agricultural universities and other research institutions. To facilitate quick adoption of recommended measures, budgetary assistance would be essential for some of these works even if individual farmers are the sole beneficiaries. Detailed Features Watershed Plans and Criteria for Project Activities 42. Before the preparation of a detailed plan for development of each watershed, baseline surveys would be carried out covering socio-economic conditions, including land ownership, land use, agro-climate and rainfall, present cropping regimes, livestock and human populations. The survey, together with a a topographic map, would form the basis for determining the watershed eligibility for inclusion in the project. Baseline surveys have been completed for the first four watersheds. 43. Following approval, a phased Master Watershed Plan would be prepared which would detail recommendations for changes in cropping rmtterns, cropping intensity and crop husbandry practices, soil conservation works, on-farm land development needs, and development to be undertaken on grazing and forest areas. It would provide details of any additional requirements for agricul- tural support services and also spell out the farmers- obligations. Master Watershed Plans have been appraised for three watersheds. The watersheds  -14- would be divided into sub-watersheds, for which Sub-Waters'ed Plans would be prepared for implementation. The sub-watershed projects would be appraised in accordance with the following criteria agreed between GOI and the Association (draft Development Credit Agreement, Section 3.04): (a) the adequacy of input supplies and services; (b) the use of up-to-date design procedures for conservation structures; (c) evidence of fariners willingness to participate; (d) maximum cost criteria for (i) total costs per unit area of the watershed (Rs 1,700 per ha) (ii) cost of works per unit area of cul- tivated land (iii) cost of land development for irrigation (this would vary amongst States) (Rs 5,000 ha) and (iv) cost of forestry development per mui- area of public land (again varying amongst States); (e) limiting irrigation investment to not more than 5% of total costs; and (f) adequacy of arrange- ments for operational and onr-farm research. Sub-Watershed Plans will be prepared and presented to the Watershed Development Committee for appraisal. 44. Crop Land Development. Soil and water conservation measures would be directed at improving land and water management, leading to increased and stable agricultural production and prevention of soil erosion. To reinforce these proposals it would be necessary to reduce and contain the flow of water from adjacent grazing and forest areas as well as crop land. 45. The project would promote improved cultivation methods designed to retain moisture in the soil profile, reduce soil loss and improve drainage. Crops and crop production practices, which promote the optimum use of the available rainfall in a restricted growing season, would be introduced. Techniques to be employed would include the planting of improved crop varieties, sequential cropping and intercropping, precision placement of seed and fertilizer, and timely interculture for weed control. Introduction of these technologies would require sound and timely professional advice and provision of adequate and timely amounts of credit and farm inputs. 46. To this end, the Project States would: (i) strengthen the extension services with additional staffing and reduce the number of farm families per Village Extension Worker (VEW) during the project implementation period; and (ii) permanently add to the strength of the supervisory staff and provide subject matter specialists in soil and water management, fodder production, pasture management and farm forestry (draft Project Agreement, Section 3.03). The project would provide for transport, equipment and other expenses for specialists assigned to the Watershed Development Teams and State Cells (paras 55 and 56). Project States would provide improved seeds, and storage of adequate seed supplies to meet weather induced changes in cropping pat- terns (draft Project Agreement, Sections 3.04 and 3.06). Furthermore, the project would plan for improvement in storage facilities for inputs and produce at the watershed level. State Governments would ensure that credit is also made available at locations convenient to farmers (draft Project Agreement, Section 3.05) 47. Development of Non-arable Land. Development of nonr-arable land, (including all public grazing land, forest land and individually-owned per- manent fallows), would entail re-establishment of vegetative cover, which would be augmented by protective soil conservation works. Livestock forage production would be improved by oversowing all public and communal grazing lands and about 70% of private fallow land with Stylosanthes hamata a hardy legume. Farm forestry would be developed on about 30% of all permanent fallows and on about 5% of existing cropland ieemed marginal for crop produc-  -15- tion and on field boundaries, about 8,000 ha in all. About 2500 trees suitable for fuel and fodder, would be planted per hectare; Eucalyptus spp would be the main type. Farmers would be responsible for planting and sub- sequent maintenance-. Reforestation on public lands would be undertaken on about 30% of existing forest reserves (14,000 ha). About 2,500 trees per ha of mixed species including Eucalyptus spp, Pinus roxburghii, and Leucaena leucocephala would be planted. The Forestry Department would be responsible for planting and maintenance, as well as for producing or arranging the production of seedlings. Rainwater Utilization 48. The project would support development of a limited number of farm ponds and shallow wells to encourage better utilization of rain falling within watersheds. The water impounded would provide drinking water for livestock and support lifesaving irrigation Eor one to five hectares of rainfed crops. Effective methods of pond lining, water usage and sharing would also be developed. Information on groundwater resources would be provided to the farmers to encourage construction of new shallow wells, using existing institutional credit to provide water for supplementary irrigation of rainfed crops. Until the completion of the mid-term review, development of stock watering and farm ponds in diversion drains and existing nalas, would be only on an experimental basis. Where the potential for supplemental lifesaving irrigation is evident, water user groups would be set up to ensure suitable distribution procedures, maintenance of works and cost repayment by the benefiting farmers. Works exceeding an average cost of Rs 5000/ha (irrigated) would not be considered, except as a part of a research program. Research and Local Training 49. To ensure widespread feedback and exchange of information among participating States, and dissemination of information from research rganizations working on watershed development issues, a Technical Cell wotuld be established in the Watershed Development Council (WDC). The Cell would consist of a Research Coordinator assisted by five professional scientists located at specialized research institutes, and necessary support staff. These scientists would provide guidance to field-level technical staff, extensian subject-matter specialists and researchers at the Indian Council for Agricultural Research, and the State Agricultural Universities (SAUs) and would publish information on new and innovative techniques and experience being developed at research centers throughout India. The Research Coordinator would arrange for the training of middle and senior level staff responsible for project implementation, in the latest techniques available. Provision would also be made to engage consultants to supplement expertise not available within the Watershed Development Council. 50. The project would support research on inexpensive ox-drawn implements for land preparation and farming for different types of soils and farming systems. It would also support a program to select improved Stylosanthes cultivars. This would be directed by the All-India Coordinated Research Project for Dryland Agriculture. The IDA financed National Agricultural Research Project (Cr. 855-IN) provides funds to the SAUs for agricultural research. Under the project these funds would be supplemented witlh grants from GOI to enable SAUs to undertake research specific to the needs of selected watersheds (draft Development Credit Agreement, Section 4.03).  -16- Provision would be made for additional professional staff and technicians, equipment and vehicles, and for incremental operating expenses. 51. Technical Assistance and Overseas Training. The Overseas Development Administration of the United Kingdom is expected to finance about 50 man- months of technical assistance in: land-use planning (24 man-months), use of satellite imagery (6 man-months), hydrological studies (6 man-months), agricultural economics (6 man-months), and pasture development (8 man- months). Terms of reference have been discussed and agreed. The project would provide for 50 man-months of overseas training for about 25 individuals in the above specialties and project management. 52. Preparation of Follow-on Project. The project would provide for preparation of a follow-on project. Assistance would be provided to the States for preparation of baseline surveys, including preparation of base maps and/or satellite imagery, and commissioning of special studies to evaluate such additional compoaents as roads, expansion of marketing, input services or irrigation. The terms and conditions for preparations of follow- on projects have been discussed and are acceptable to IDA. Project Organization and Coordination 53. Overall responsibility for coordination and executioa of the project would be with GOI-s Ministry of Agriculture. A National Watershed Development Policy Committee has been created under the chairmanship of the Secretary, Ministry of Agriculture, and comprising GOI-s representatives with responsibilities for animal husbandry, forests, finance, planning, ICAR, agricultural extension, credit, plant protection and seeds, and concerned Secretaries from the participating States and the Director of the Soil and Water Conservation Institute. A Watershed Development Commnissioner of Joint Secretary rank has been appointed to act as the member-secretary of the Committee. Appointments of three key *officials including a Research Coordinator, Land Use Planner and Economist would be finalized by March 31, 1984. The Watershed Development Commissioner would be assisted by a Watershed Development Council, in the Ministry of Agriculture, which would be the central project unit and would have the day to day supervisory responsibility. NWDPC would have the powers to approve or reject sub- watershed projects. 54. The main functions of the Watershed Deve.opment Council would include appraisal of all master plans and their submission to NWDPC for approval; ag.?r4isal of all sub-watershed plans until the mid-term review and on a sample basis thereafter; release of funds for project implementation; techni- cal assistance to the States; and project monitoring. The WDC would comprise specialists in Forestry, Soil Conservation, Agriculture, Economics and Sociology, and would include a Research Coordinator. The regular staff would be supplemented by local consultants for appraisal and supervision of sub- projects and for staff training. WDC would be provided with administrative support staff and a monitoring unit. 55. At the State level, a State Watershed Development Policy Committee would be established at the start of project implementation, and would be responsible for State level approval of the master plans and sub-watershed plans prior to their submission to WDC. The Committee would review implemen- tation progress, resolve problems, and ensure coordination among participat-  -17- ing agencies. The Committee would be chaired by the State Chief Secretary or the Secretauy of Agric,ulture, and would consist of the heads of other depart- ments and agencies involved. The CommLittee would be assisted by a State Watershed Development Cell headed by a Watershed Development Coordinator. The main functions of the Cell would include: (a) watershed selection and preparation of master plans; (b) technical assistance to the Watershed Development Team; (c) appraisal of sub-watershed plans and release of funds to implement them; and (d) project supervision and monitoring. 56. At project District level, a District Watershed Development Committee would be established under the District Collector (or Deputy Commissioner), and would meet at least quarterly to review and approve watershed plans and village implementation plans and implementation progress, coordinate line department activities and resolve local problems. The responsibility for detailed sub-project planning and imrlementation would lie with the Watershed Development Team headed by a full-time Watershed Development Team Leader. The Team-s composition would vary among States but, in every case, the Team would be headed by an Additional Collector with technical staff seconded from concerned line departments. The Team-s responsibilities would include: preparation of a comprehensive watershed master plan with its implementation schedule, sub-watershed plans, annual budgets, and financial and implementa- tion reports. The team would also be responsible for plan implementation, and would, with the assistance of the agricultural extension service and local organizations, ensure farmers- participation in the planning and Lmplementation of the project activities. The Project States would set up, prior to the approval of watershed and sub-watershed development plans, the State Watershed Development Policy Committees, State Watershed Development Cells, District Watershed Development Committees and Watershed Development Cells (draft Development Credit Agreement, Section 4.05). Monitoring and Evaluation 57. Monitoring and evaluation of project progress and its impact would be an essential feature of the project. It would be monitored at three levels -- first at the sub-watershed, then at the State, and finally at GOI levels. Each Watershed Development Team would ensure continued collection of data during implementation on various project inputs, project activities and physical and financial achievements. Monitoring at the State level would be the responsibility of the State Watershed Development Cell and would include: (a) a comparative examination of watershed development performance within the State; (b) recommendations on areas that should be intensively monitored and proposals for changes in the monitoring system; (c) provision of assistance to Team Leaders in identifying and improving weak areas; and (d) collection of monitoring reports and forwarding the collated report with comments to the State Watershed Policy Committee and Watershed Development Council (GOI). At GOI level, project monitoring would be the responsibility of the WDC. In addition to the functions of the State Cells, WDC would be responsible for coordinating thee mlionitoring reports from all the project States. WDC would submit to IDA six-monthly progress reports each June and December, giving details of staff positions, a summary of activities undertaken in the last six months, and physical and financial targets achieved and problems encortettered during project implementation (draft Project Agreement, Section 2.05b(iii)).  -18- 58. Two categories of project evaluation would be undertaken during the project period -- ongoing evaluation and a mid-term review. Ongoing evalua- tion would include: (a) technical assessment of the success or failure of the technical packages applied in project implementation; (b) behavioral evalua- tion to examine people's response to and perceptions of project input delivery systems and institutiLns; and (c) short-term special studies to answer questions raised by the technical and behavioral evaluations and on subjects directly related to project design and performance. GOI has iden- tified competent institutions to carry out such evaluations and special studies. 59. Mid-term Review. Given the innovative nature of the project, GOI, the Project States and IDA would undertake a joint mid-term review of the project within the first quarter of the third year of the project (draft Development Credit Agreement, Section 4.02 and draft Project Agreement, Section 3.02). The project concepts, design, allocation of funds, staffing patterns, and components would be reassessed in the light of performance. At the mid-term review, decisions would be taken on additional watershed development in other areas of the States. If the project proves successful, and if additional technical capacity has at that time been generated, this review could become the first step in the preparation of a series of follow- on projects that could be extended to other States. Production and Disposal of Output 6o. At full development, the annual incremental production from the eight watersheds would be about 15,600 tons of foodgrains, 5,000 tons of cotton, 6,600 tons of pulses, 8,700 tons of oilseed, 130,000 tons of fodder and 194,000m3 of fuelwood. The project would increase the incomes of 45,000 farm families and 18,030 landless families living in the project area. There exists a ready market in project areas to absorb most of the incremental agricultural production. Watershed master plans would include plans for marketing the surplus cotton, soybeans, maize and oilseeds. Cooperatives in each State would be eligible for loans from existing instituttonal sources for establishing marketing and storage facilities. The fuelwood produced would satisfy local demand, and increased fodder production would offset present shortages in livestock feed. Cost Recovery 61. The cost for project works oa public lands would not be recovered. Existing State laws governing watershed development programs provide for recovery of capital costs for soil conservatlon works .:arried out by governr- ment agencies on private lands. Marginal farmers, 1/ n"ill farmers, farmers belonging to Scheduled Castes and Tribes and others identified under the Integrated Rural Development Program, however, are entitled to subsidies which range froin about 30% to 80% of the investment costs. Thus, in effect, there is only partial recovery of capital costs in the case of these farmers. Repayments are in the form of land cess recovered in equal annual install- 1/ Farmers owning less than 6 ha of farmland, or with less than Rs 3,600 income per annum from nonr-agricultural activities, are defined as mar- ginal farmers for cost recovery purposes.  -19- ments over 15 years with an initial five-year grace period. As an aid to establishing and managing future cost recovery policy, the Project States would review their present procedures Eor collection of loans given to farmers as well as cost recovery policies, including an analysis of farmers- ability to pay with respect to Project investments, and would submit the findings to IDA at the time of the mid-term review (draft Project Agreement, Section 3.08). Project Cost and Financing 62. Total project costs are estimated at US$45.5 million equivalent, including taxes and duties of US$700,000. Foreign expenditure costs are estimated at US$1.5 million. Major cost components are: conservation works (US$11.96 million); forest plantations (US$6.75 million); vehicles and equip- ment (US$1.14 million); salaries and allowances (US$6.77 million); operations and maintenance (US$1.20 million); maintenance of developed land and conser- vation works (US$0.53 million); research, mid-term evaluation and project preparation (US$1.42 million); and technical assistance and training (US$0.7 million). Physical contingencies (US$4.19 million) of 20% have been applied to civil works and 10% to equipment, training and operating costs. Price contingencies (US$10.8 million) have been applied as follows: local prices at 7Z for 1983-86 and 6% for 1986/87 onwards and foreign costs at 7.5%. 63. The proposed credit of US$31 million would finance about 68% of total costs net of taxes and duties. The balance would be borne by the Government of India and the State Governments. It is expected that the British Overseas Development Administration would provide a grant of about US$0.8 million equivalent to finance about 50 man-months of technical assistance and 50 man- months of training. In order to ensure an early start of project actions, retroactive financing of up to US$200,000 is proposed to cover eligible costs incurred after March 1, 1983 for preparing base maps, and for urgently needed planning staff (draft Development Credit Agreement, Schedule 1, para 4). Procurement and Disbursement 64. Civil Works contracts for soil conservation and rainwater utilization (US$17.5 million), project buildings (US$1.15 mitlion), and forestry planta- tions (US$10.45 million) would be small and very widely dispersed, both geographically and over time and would not therefore be suitable for interna- tional competitive bidding. Labor would be the major component of soil conservation works and forestry activities, and these would be carried out by force account. Civil works for project buildings would be contracted under competitive bidding advertised locally, in accordance with established State practices which are satisfactory. Vehicles and equipment (US$1.6 million) would be procured over five years in scattered areas in the four States. As adequate maintenance and availability of spare parts would be of paramount importance, it would be appropriate to purchase locally-made vehicles of types already in use by Government departments and, therefore, these would be procured according to existing Government procedures which are satisfactory to IDA. The balance of the project costs (US$14.62 million) would consist of salaries and allowances of tncremental project staff (US$9.6 million), tech- nical assistance and training (US$0.8 million), research (US$1.73 million), operating expenditures (US$1.66 million), and maintenance of developed land (US$0.73 million), which would not involve procurement. All contracts for  -20- civil works, vehicles, equipment and furniture estimated to cost US$1U0,UOU or more would be reviewed by IDA before bids are invited and contracts awarded. Orders for purchase of minor equipment and furniture would be bulked wherever appropriate and goods valued at less thaa US$50,000 would be )urchased by prudent shopping through normal trade channels. 65. Disbursement of the proceeds of the credit would be as follows: (a) 100% of local expenditures (ex-factory) and 75% of other local expendi- tures for vehicles, equipment, furniture and materials and of amounts dis- bursed for motorcycle and bicycle loans; (b) 100% of expenditures for research, and evaluation; and (c) 70% of expenditures for civil works for soil conservation and buildings, direct costs of forestry plantation, incremental operating costs, and incremental staff costs for the State Watershed Development Cell and the Watershed Development Team. Disbursements for all force account work, salaries and operating costs, local training, civil works expenditures costing Rs 300,000 or less and other procurement involving expenditures costing Rs 150,000 or less each for vehicles and equipment would be made against statements of expenditure. The certificates of expenditure would be audited annually and the audit report would be sub- Tntted to IDA. Supporting documentation for these expenditures would be retained by the State governments for Inspection by Bank staff in the course of review missions. All other disbursement claims would be fully documented. Project Benefits and Risks 66. Quantrftnble benefits from the project would be increased production of crops, fodder and fuelwood. The increase, valued at about US$17.5 million by year 13 of the project, would directly benefit 45,000 farm families. Project implementation would create about 21 million days of employment. In addition, about 780,000 days of incremental farm labor would be required. The improved cultivation practices and conservation measures would result in significantly enhancing the ecology in the project areas by reducing soil erosion. The economic rates of return from investments in the watersheds, based on the estimates on three fully appraised watersheds, range between 26% and 50%. 67. Because of its pilot nature, the project faces various technical, agronomic, organizational and sociological risks. The technical risks include inadequate land use planning capability for rational and comprehen- sive watershed development. The project provides for technical assistance and overseas training which would strengthen the capability of the Central and State Governments in this area. The principal agronomic risk stems from the fact that the project is an early attempt to apply improved cropping techniques in conjunction with soil conservation woreks in farmers- fields on a large scale. This risk would be minimized by the close monitoring systems built into the project and the links with ICAR and the SAUs for impact studies and operational research. In order to ensure adequate farmer response, the proposed project provides for farmers participation and invol- vement in various planning and decision making processes for watershed development. In addition, the proposed improvenents in extension service, coupled with the already growing public awareness of the potential and need for development, should all facilitate the necessary farmer participation. The main organizational risk is the capability of the numerous Central, State and District agencies to coordinate their planning and implementation functions. To minimize this risk, wherever possible, existing policy commit-  -21- tees and bodies have been incorporated in the organizational structure of the project. Moreover, the project has strengthened the hand of the Watershed Development Team at the district level by empowering them to authorize line agencies to disburse Eunds against work carried out to their satisfaction. Finally, the Watershed Development Team would receive technical backstopping from the State Watershed Development Cell and WDC specialists. PART V - LEGAL INSTRUMENTS AND AUTHORITY 68. The draft Credit Agreement between India and the Association, the draft Project Agreemzent between the Association and the States of Andhra Pradesh, Karnataka, i4adhya Pradesh and Maharashtra, 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. 69. Special conditions of the project are listed in Section III of Annex III. 70. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 71. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President November 16, 1983  BEST COPY AVAILABLE - ~~~~~~~~~~~~~~ANNEX I Page I of 5 lo - RSOCIAL INWDCATORR 1)84:. SHIRT aDc tvtau amps tCIOItTil AW-lRA(IS7r7 IlOtT (I(ST ROCER?T UTIHATI) Jh 'h Ib L1tiCtT A LOW licUeS NIDIPF S-NCUME l 1970- ICSTIHAT ASIA A PAc-VIC ASIA 4 PAriFIC ARIF (TtteaNSD .9 NW) TOtAL 328776 32R7.6 3217.6 ACRICULTURAL 1760.7 17R0.5 1811.3 Clir PtR CAPITA (US$) 70.0 10o.0 260.0 276.7 10:8.6 IRLT ONm_luFrIll PEt CAPITA (KgILDGRANs oF COAL FouTvALENT) 114.0 163.0 210.0 398 t 792.6 lOlLLA'o AN VI )TAL STATISTICS POruLATtON.NID-11A3l (THOUSANDS) 434810.0 547569.0 690111.M URNERAN poPILATtti 2 or TOTAL)- 16.0 19.N 23.7 21.5 32.9 POPULATIONl PROJECTIONS POPULATION IN YEAR 2000 (MILL) 1001,1 * STATIONARY POPULATION tHILL) 1838.3 YEAR STATIONARY POP. REACUtC 2140 POPULATION DENSITY PER SQ. PM. 112.3 166.6 205.3 161.7 2bO.7 PER SQ. KM. AtRI. LAD 247.0 307.5 372.7 363.1 1696.5 POPULATWON ACE STRUCTUSE (2) 0-14 YRS 40.9 42.7 39.7 36.6 39.4 1s-64 YRs 54.5 54.2 57.2 s5.2 57.2 65 AND ABOVE 4.6 3.1 3.0 4.2 3.1 POPULATION CROWTIf RATE () TOTAL 2.8 2.1 2.3 1.9 2.3 URBAN 2.5 3 3 1.7 4.0 3.9 CRUDE BIRTH RATE (PER THOlS) 41.7 40.0 35.4 29.3 31.3 CRUDE DEAT" RATE (PER TNOUS) 11.H 16.7 13.3 10.9 9.6 CROSS REPRODUCTION RATE 2.9 2.7 2.4 2.0 2.0 PANOLY PLANNING ACCEPTORIS ANNUAL (TIOU) 64.0 3752.0 6826.0 USERS (Z OF MARRIED W011EN) .. 12.0 2.0 468.1 46.6 FMO AND NUMISTOtt INDEX OF FOOD PROD. FER CAPITA (196-71-7OO) 96.0 102.0 107.0 111.4 125.2 PER CAPITA SUPPLY OF CA.ORIES (E or RSotIUTREWET) 96.0 90.0 87.0 98.1 114.2 PROTEINS (CRANS PER DAY) 54.0 50.0 47.0 56.7 57.9 OF 611CR kNThAL AND PULSE 17.0 15.0 13.0Ie 13.9 14.1 CElLO (1AGE t-4) DEATH RATE 26.2 Z.1 17.0 12.2 7.6 HEALTH LIFE EXPECT. AT 11T71 (YCLlS) 43.2 45.1 32.2 59.6 60.2 INFAMT MORT. RATE (PER THOUS) 165.0 139.0 121.2 96.6 68.3 ACCESS TO SAFE VATER (%POP) TotA . 17.0 33.0/d 32.9 37.1 URSAN .. 60.0 83.07d 70.8 54.8 RItMAL .. 6.0 zo.07; 22.z 26.4 ACCESS TO EXCRETA DISPOSAL CZ OF POPULATION) TOTAL . 18.0 20.0/e 18.1 41.4 UNNAl . . 85.0 J7.07; 72.7 47.5 RURAL . 1.0 2.157e 4.7 33.4 POPULArION PER PHYSICIM 4850.0 4890.0 3640.oeE 3506.0 7771.9 POP. PER NURSING PERSON 10980.01a 8300.0 5380.07T 4797.9 2462.6 POP. PER HOSPITAL. D TorAL 2168.0 t650.0 131o.01d 1100.6 1047.2 URBAN .. .. 370.017 298.4 651.1 RURAL .. .. 1o10.07;T 5941.6 2591.9 ADMISSIONS PER NOSPITAL BED .. .. .. .. Z7.0 AVERACE SIZE OF HOUSEHOLD TOTAL 5.2 5.6 5.2/e URBAN 5.2 5.6 A.87 V RURAL 5.2 5.6 5.3 e AVERAGE NO. OF PERSONS/ROON TOTAL 2.6 2.8 ,. .. URBEAF 2.6 2.8 RURAL 2.6 2.8 ACCESS TO ELECT. (Z OF DWELLINGS) TOTSL .. .. URBAN .. .. RURAl. *. '..''  BEST COPY AVAIABL pE AMINEX I Page 2 of 5 DDlllb -~~SOCSL MOMMOR l&TA SKE IIA -WIS ('cr AVCERA=Sa 1IOST (w5: RECEXr EST3f AE) fb b I9700-b ~LOW I31om-MIDL 1960 1970G! E ASrA & PACIFIC ASI AC AJUSIED ElRJLLNlr RATIS mRIAmr: *tL 6SIX n3.0 .6.0/f 96_1 tot.2 KALE 80_0 90.0 9o .7.F 107.8 106.0 FDI.E 40.0 56X0 61 07i 82.9 97.5 SECONDARY=T:OM 20_0 Z6.0 26.Off 30.2 469 KALE 30.0 36.0 3707i 37.3 50_0 FVUILE 10.0 15.0 16a07M 222 -4.6 VOC&TIOSL CZ OIF SD0A) 2.8 1_0 0.7/e 2.3 18_5 PUCPD-TEACER RATI - na E 46.0 4t60 63.0/f 34.4 32_7 SECOlmRV 16.0 2t.0 _- 16.4 23.4 AD.T LIEAIC RATE Ct) 27.8 33.4 36.0 53_5 72.9 PA tR CADSlrNZSAl !OP 0.6 1.1 1.3/f 1.6 9_7 RIDIO EECEIIrSIIO0USAD POP 469 21_5 6.A- 96._ 113.7 V RECE2VENSITHIDOSA POP 0.0 0.0 1.7 -_9 50.1 EBISPAPER CDAILV CERE. IEIERERr) CERCILATI PEAR TI0ISAND POPULATIOS 20.6 16.2 19.7 16.4 51.0 CTSERA ASIML ATTE%DA.CE/CAPMIT 3.Z 4.1 3.71. 3.6 3.4 LABO POEK TAL LABOR FORCE (TTm ) 1I5951.0 Z19194.0 2:1179.0 _ _ FERALE (PERCE1T) 30.7 32Z5 31._ 33.3 33.6 AClICOLTCRE CPERCET) 74_0 74.0 69.3 69.0 50.9 ri1STRw (PERCEST) 11.0 11.0 13_2 15.8 19.Z PATICIPArOK RATE CPERCENT) rcupff6 42.8 40.0 39.3 42.5 38-6 KALE 57.0 52.5 51.9 54.4 50_7 FTVAL 27.3 26.9 25.9 29.8 26.6 EC0NO.IC DEPEIERC RATO 1.1 1.1 1.1 1.0 1o ZcE DISTI3OuVwE POt EraOF PRXVATE IrsNC3 RECEIVED IY HIGIEST 5 OF EO5ELDS 26.7 26.31k ZZ.Z ' 16.5 22.2 sICRES 20% OF qOUSEfLDS 51.7 4697; 49.47 43.5 48.0 LOWEST 2 OF BOUSEIOLDS 4.1 6.77ii 707; 6.9 6.4 LOWEST 4OZ OF OUSEHODS 13.6 17.2IN 16.27; 17.5 15.5 ESTIWATED ABSCL.E POVERTf 1.CGI LEVEL CS5 PER CAPITA) UR ._ _. 132.0 133.9 194.5 IMAL __ . t14.0 111.6 155.0 ESTUIATED RELATIVE PrVERTY IrCOAE LEVEL CUSS PER CAPITA; ORBL _ _. ._ .. 17.0 RlRAL um _. . . . 164.8 ESTDArED POP. BELOU A5SGtfE POVERTY l!CE LE E: CZ) USDAB!'; __ 40.3 *3.8 24.4 RURAL _. .. 50.7 5l.T 41.1 R'r ATlA:E -T APPLICABLE S0 T E S / Ia The group averaes for esch Indicator are papulattoW-r-gted ar1ttS%tc usos. Coverge of couotrles amog the Indicators depends on 1aIIablIIty of data and Is not muform. lb Onleas othervlse noted. -Data for 1960- refer to any year betueo 1959 snd 1961; -Dat for 1970 betwen 1969 and 1971I and data for gILe R.eent Eati te betwse 1979 and 1961. /c 1977; /d 1976- 1e 1975; /f 1978; L 1962; /h 195W-65. Ay 1983  SAW --j.nW-j ".jd~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'- 3-a-I