India - Maharashtra Water Utilization Project

Document of The World Bank o FOR OFFICIAL USE ONLY Report No. P-3585-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$22.7 MILLION AND A PROPOSED CREDIT OF SDR 29.6 MILLION TO INDIA FOR THE MAHARASHTRA WATER UTILIZATION PROJECT May 19, 1983 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of May 13, 1983) US$1.00 = Rs 10.030026 Rs 1 = US$0.099706 Rs 1 million = US$99,706 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were made at US$1.00.= Rs 9.5, which represents the average exchange rate projected over the disbursement peri.od. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms used in this Rdport CAD - Command Area Development CADA - Command Area Development Authority cusec - cubic feet per second ERR - economic rate of return GOI - Government of India GOM - Government of Maharashtra ha - hectares ID - Irrigation Department NABARD - National Bank for Agricultural Refinance and Development O&M - operation and maintenance RWS - rotational water supply tpy - tons per year WALMI - Water and Land Management Institute  FOR OFFICIAL USE ONLY INDIA MAHARASHTRA WATER UTILIZATION PROJECT CREDIT, LOAN AND PROJECT SUMMARY Borrower: India, acting by its President (GOI). Beneficiary: Government of Maharashtra (GOM). Amount: IDA Credit: SDR 29.6 million (US$32.0 million equivalent) Bank Loan: US$22.7 million, including capitalized front-end fee. Terms: IDA Credit: Standard. Bank Loan: Repayment over 20 years, including 5 years grace at the standard variable interest rate. Re-Lending Terms: From GOI to GOM as part of Central assistance to States for development projects on terms and conditions applicable at the time. GOI would bear the foreign exchange risk. Project Description: The project would seek to raise agricultural production and farm incomes by increasing the effective utilization of available irrigation water supplies. The project would upgrade irrigation and drainage systems of selected areas covering 95,000 ha in five existing irrigation schemes. To ensure reliable water supplies to the farm level, the project would emphasize improvements to minor networks and field channels. It would provide construction and equipment, training, adaptive research and improved water management. Possible risks under the proposed project are minimal. This document has a restricted distribution and may be used by recipients only in the performance of | their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Estimated Cost: 1/ (US$ Millions) Item Local Foreign Total 2/ Land Acquisition 0.1 _ 0.1 Distributaries 3.2 0.3 3.5 Minors 6.5 0.3 6.8 Field Channels 13.8 0.7 14.5 Link and Main Drains 2.4 0.1 2.5 Offices and Quarters 4.9 1.2 6.1 Training 2.0 0.6 2.7 Vehicles and Equipment 1.4 3.8 5.2 Adaptive Research 1.3 0.3 1.6 Engineering Research, 1.2 0.5 1.7 Monitoring and Evaluation Engineering, Supervision and Administration 12.3 0.1 12.4 Base Cost 49.2 8.0 57.2 Physical Contingencies 6.0 1.1 7.1 Price Contingencies 12.3 1.4 13.7 Total Project Cost 67.5 10.5 78.0 Front-end Fee on Bank Loan - 0.1 0.1 Total Financing Required 67.5 10.6 78.1 Financing Plan: Local Foreign Total Bank/IDA 44.1 10.6 54.7 GOM/GOI 23.4 - 23.4 Total 67.5 10.6 78.1 Estimated Disbursements: (US$ Million) Bank/IDA FY FY84 FY85 FY86 FY87 FY88 FY89 Annual 6.9 8.3 10.4 11.1 9.5 8.5 Cumulative 6.9 15.2 25.6 36.7 46.2 54.7 Rate of Return: About 36% Appraisal Report: No. 4349-IN, dated May 20, 1983 1/ Net of taxes and duties, which are applicable to only a few items of equipment, and which are, in the aggregate, insignificant. 2/ Discrepancies due to rounding.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO INDIA FOR THE MAHARASHTRA WATER UTILIZATION PROJECT 1. I submit the following report and recommendatlon on a proposed loan in an amount equivalent to US$22.7 million (including a capitalized front-end fee of US$0.06 million) and a development credit of SDR 29.6 million (US$32 million equivalent) on standard IDA terms to India to help finance the upgrad- ing of irrigation and drainage systems in the State of Maharashtra. The Bank loan would have a term of 20 years, including five years of grace, at the applicable interest rate. The proceeds of the loan and of the credit would be channelled to the Government of Maharashtra in accordance with the Government of India's standard terms and arrangements for financing State development projects. Exchange risks would be borne by the Government of India. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation of India and Resource Mobi- lization Issues" (4395-IN, dated April 11, 1983), was distributed to the Execu- tive 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) and an annual per capita 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 -- 2.2% 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 been 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 1.4% per year in the 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 production. 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 Himalayan Watershed Management Project (No. P-3570-IN), dated May 11, 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 emphasis 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 expanding 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% at 1.6 percentage 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 1982/83 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 4.5%-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. This resulted from a combination of several factors, notably the decline in agriculture income, persistent (though les- sened) 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 momen- tum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in support of this effort. Similarly, the timely implementation of various 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. Neverthe- less, 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 and there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily from better utilization of existing capacity, but in the future most improvement must  -4- 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 phenomenon 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 22.4% of GDP in the last three years, Is high by any standard, particularly considering India's low income and the l.arge 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 was a significarnt 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 0.4% of GDP in 1979/80 to 1.8%, 2.3% and 2.l1% 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 1980/81 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 time 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 payments 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 terns from the Euro-dollar market in addition to much greater utilization of sue- pliers- 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 commercial  -5- 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 which 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 10% 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 oil). With good economic policies and reasonable access 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 invest- ment, 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 to India's stage of develop- ment, in which a large and growing proportion of investment has been needed to build up basic infrastructure. These services, such as power, transport 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  -6- can prejudice growth in other sectors where large investments have been made. As demonstrated in the last three years, performance in the basic service sectors can be improved through better planning and management, thus leading to higher productivity and capacity utilization throughout the economy. At the same time, programs to expand domestic capacity are vital. In the case of tradeable commodities like coal, steel and cement, this is 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 from 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 will require growing access to world financial markets to complement concessional assistance. These commercial sources of funds will be important 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 invest- ment, 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 borrow- ing, 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 assis- tance. 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 Goverrment's effort to maintain an adequate rate of growth while adjusting the structure of the Indian economy to a more open and efficient environment requires foreign  -7- resources in addition to the level of commercial borrowing available to India. India is still a very poor country with a large rural sector and enormous 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 trade policy and con- certed efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of savings both foreign and domestic, 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 make 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 that 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 overes- timated, 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 its 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 non-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 for 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 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 and the provision of secure village water supplies. Operations such as the community health volunteer program and the national adult literacy campaign provide encouraging  -8- evidence that well-targetted, relatively low-cost programs can lead to enhalnced prospects for India-s poor. PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 71 loans and 156 development credits to India totalling US$4,683 million and US$11,447 million (both net of cancellation), respectively. Of these amounts, US$1,332 million has been repaid, and US$5,907 million was still urndisbursed as of March 31, 1983e Bank Group disbursements to India in the current fiscal year through March 31, 1983 totalled US$1,008 million, representing an increase of about 17 percent over the same period last year. Annex II contains a summary statement of disburse- ments as of March 31, 1983, and notes on the execution of ongoirng projects. 23. Since 1959, IFC has made 28 commitments in India totalling US$220.4 million, of which US$28.3 million has been repaid, US$56.2 million sold and US$17.3 million cancelled. Of the balance of US$113.6 million, US$111.1 mil- lion represents loans and US$7.5 million equity. A summary statement of IFC operations as of March 31, 1983, is also included in Annex II (page 5). 24. The thrust of Bank Group assistance to India has been consistent writh the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricultural produc- tivity, 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 medium- and small-scale industrial enterprises, primarily in the private sector, through its support of development finance instituticins. 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 active 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 aimed at rapidly Increasing the domestic 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  -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 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- tation infrastructure would mitigate a key constraint to achieving higher levels of economic growth so that further 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 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 India, not only to help the economy 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 tends 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 amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support. This requirement for additional assistance can be met, in part, through Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A con- tinuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should 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 India's debt service to the level of exports was about 11% in 1982/83 and is projected to remain below 20% through 1995/96. As of March 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 conr- 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 50%, 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.  -1 0- PART III - AGRICULTURE AND IRRIGATION IN MAHARASHTRA 29. The State of Maharashtra in Western India covers an area of 30.8 mil- lion ha and has a population of 62.7 million (1981), making it the third largest State in the Union. By Indian standards, the State is highly urbanized and industrialized. Manufacturing has expanded more rapidly than agriculture (4.8% per annum), but the fastest-growing industrial activities (chemicals, engineering, etc.) have been capital-intensive. Much of the industrial growth and related economic activities has been concentrated in Bombay and Poona, leading to urban congestion and widening intra-State income disparities. Not- withstanding the importance of industry in the State's economy, two-thirds of the labor force is employed in agriculture. Thus, the Government of Maharashtra (GOM) views increased farm productivity as a prerequisite to a more rapid and balanced overall economic development. Maharashtra had a per capita income of Rs 2,021 (US$212) in 1979/80, considerably above the national averge of Rs 1,267. Between 1970/71 and 1979/80, the State's real per capita income increased by an average of 2.7% per annum, relative to a 1.6% annual increase for India as a whole. 30. Agriculture contributes 30% to 35% to the State's income. About 43% of the agricultural labor force is landless. Some 18.2 million ha, or nearly 60% of the State, is under cultivation and there is little scope for increasing the net sown area. Agriculture in Maharashtra is predominantly rainfed; only 8.4% of the total cropped area is under irrigation. The cropping intensity is among the lowest in India (110%) and cannot be increased substantially without irrigation. The average farm size is 3.7 ha, with significant variations across the State. In contrast to a number of Indian States, over 92% of the holdings are owner-occupied. Cereals (sorghum, millet, paddy, wheat and pul- ses) account for about 60% of the gross cropped area. Yields are low and the State is a net importer of foodgrains. The rate of agricultural growth, which had been sluggish since the early 1960s (averaging 0.7% per annum) accelerated in the 1970s following a succession of favorable monsoons and in response to GOM's agricultural development programs. In particular, high-yielding varieties of rice, sorghum, and wheat have been promoted and have gained wide acceptance. Other significant developments have been the growth of irrigated sugarcane and horticultural crops, and the rapid increase in fertilizer con- sumption, particularly in irrigated zones. Nevertheless, considerable scope for improvement in agricultural techniques still exists. 31. Present irrigation standards reflect the main objective of past Government irrigation policy--to provide drought protection over extensive areas planted to foodgrains. However, improved high-yielding crop varieties, the spread of modern agricultural practices and the introduction of more com- plex and diversified cropping patterns are placing new demands on irrigation systems. Better irrigation design and operation standards have become neces- sary to meet the need for more reliable water supplies.  -1 1- 32. The water resources potential of Maharashtra is limited by the seasonality of the major rivers, and by topography. Out of a gross cropped area of 20 million ha, only 2.5 million ha , or 12.5% of the gross cropped area, is now irrigated, less than half the national average, of which 1.1 mil- lion ha is from wells. The present irrigation potential is estimated at 6.3 mil- lion ha. Assuming improvements in irrigation efficiencies, the ultimate poten- tial could be as high as 8.9 million ha, including 2.7 million ha from groundwater sources. Necessary improvements to irrigation efficiencies entail improved operation of the conveyance systems, and the systematic introduction of rotational water supply to provide equitable access to water for farmers in the command areas. 33. Groundwater resources are substantial, but easy opportunities for well development have already been utilized. At Independence, some 0.5 mil- lion ha in Maharashtra were irrigated from wells. Groundwater development increased by 4.2% per annum during the 1950s. During the 1960s and early 1970s the well-irrigated area increased further, partly because of replacement of traditional animal-operated water lifts by electric and diesel pumps. Individual and cooperative river lift irrigation schemes have also spread. These investments--largely carried out by the private sector--have made a substantial contribution to agricultural growth. 34. Since Independence, COM has invested the equivalent of US$1.3 billion in major and medium surface irrigation schemes, adding 870,000 ha to the irrigation potential of the State. This implies a cost of US$1,500 per ha, a reasonable level by international standards, but some 40% higher than the all-India average. Seasonality of river flows, lack of major storage pos- sibilities, difficult soil conditions and the GOM policy of spreading irriga- tion benefits over wide areas helps explain the relatively high costs. Returns on this capital could be substantially enhanced by correcting deficiencies in planning, design, construction and operating standards of existing irrigation systems. Bank Group Lending for Irrigation in Maharashtra 35. IDA's first credit for irrigation in Maharashtra for the Purna Irrigation Project (Credit 23-IN for US$ 13 million), was approved in July 1962. The main works included a dam at Yeldari, a re-regulating reservoir at Sidheshwar, about 86 km of main canal and 400 km of distributaries, to irrigate some 61,000 ha. This scheme was completed in the early 1970s. 1/ However, agricultural production in the project area increased only slowly due, inter alia, to an inadequately constructed irrigation conveyance system, lack of coordinated crop and water planning, and drainage deficiencies. 1/ The Bankls Operations Evaluations Department had not yet been established, so a Project Performance Audit was not undertaken.  -12- 36. A US$70 million credit (Credit 736-IN) was approved in October 1977 for the Maharashtra Irrigation I Project which included completion of the on-going construction of irrigation infrastructure to serve 95,000 ha in the Jayakwadi Scheme, land shaping and field channels over 45,000 ha, as well as rehabilitation of the irrigation distribution system and drainage construction on 30,000 ha in the Purna Scheme. Approximately 84% of this credit has been disbursed; the project is scheduled for completion by 1984. The main problem with the project has been the initial poor quality of construction. However, the Irrigation Department has since improved Its techniLcal standards and is making the necessary repairs. 37. IDA approved in October 1979 a US$210 million credit (Credit 954--IN) for the Maharashtra Irrigation II Project. Tnis credit finances a five-year time slice of a composite project consisting of five new irrigation schemes (Upper Wardha, Upper Penganga, Kukadi, Krishna and Warna), and priority work in two existing schemes, Mula and Girna, all located on the drought-prone Deccan plateau.l/ This project would bring some 147,000 ha of land under irrigation. The total area commanded by the six new schemes would ultimately comprise about 620,000 ha. Improvement works are still on-going in the Girna and Mula schemes and mainly aim at the removal of major bottlenecks in the existing conveyance system, selective lining and additional water control structures. Project progress is satisfactory. 38. The Maharashtra Water Utilization Project builds on the success of two components developed under the Maharashtra Irrigation II Project: (i) a pilot water management component to identify appropriate conveyance tech- nologies for the minor water distribution system, and (ii) establishment of a Water and Land Management Institute (WALMI) to train irrigation engineers In the design and management of irrigation projects. 39. Maharashtra's irrigation has also benefitted from four IDA-financed multi-State operations of the Agricultural Refinance and Development Corpora- tion (now renamed the National Bank for Agricultural Refinance and Development - NABARD) directed towards the development of the State's groundwater resour- ces. IDA has also contributed to the development of Maharashtra's irrigation potential through an agricultural extension project and through multi-State operations of the Rural Electrification Corporation. PART IV - THE PROJECT 40. The proposed project was appraised in November/December 1982. A report entitled "Staff Appraisal Report, Maharashtra Water Utilization Project" 1/ One additional new scheme, Bhima, also appraised by IDA, is being financed by IFAD.  -13- (No. 4349-IN, dated May 20, 1983) is being distributed separately to the Execu- tive Directors. Negotiations were held in Washington in May 1983. The Govern- ment of India and the Government of Maharashtra were represented by a delega- tion coordinated by Mr. V. Govindarajan of the Department of Economic Affairs, GOI. Project Description 41. The project would seek to raise agricultural production and farm incomes by increasing the effective utilization of available irrigation water supplies. The project would upgrade, over a five-year period, the irrigation distribution network of selected areas on an aggregate of 94,450 ha, in five existing irrigation schemes, viz, Jayakwadi (42,350 ha), Purna (10,500 ha), Mula (21,970 ha), Girna (11,030 ha), and Khadakwasla (8,600 ha). The project would emphasize improvements to minor irrigation networks and field channels, so as to ensure reliable water supplies to the farm level. It would include improvements to surface drainage and access along canals, improved systems operations, the promotion of land shaping, the identification of suitable on-farm irrigation practices and viable cropping systems through adaptive research, and the training of farmers, canal inspectors, and land development assistants. The project would complement infrastructure development by sup- porting various components aimed at intensifying the utilization of available water supplies. Criteria satisfactory to the Bank Group for the planning, design and construction have been developed by which GOM would carry out the upgrading of the irrigation and drainage network (described below in paras 42-45)(Section 2.03(a), Project Agreement). 42. Improvements to Distributaries. Improvements would be made to ensure a reliable water supply to the head of the minor, This would involve the construction of additional cross regulators, repair of structures and gates, the replacement of structures where they are beyond repair, and the reshaping of canal sections or repair to embankments, where necessary. 43. Upgrading of Minors. Minors would be improved by clearing, silt removal and resectioning, and construction of additional structures (e.g., cross regulators and tail escapes), where required. Minors would be extended to reduce the size of the irrigation service areas (chaks) to a 25 ha maximum, and water-measuring devices at the head of each minor would be provided and selective lining undertaken. 44. Upgrading of Field Irrigation Channels. These channels take off from minors through gated outlets and convey irrigation water within the chak to individual farms. Work on field channels would include clearance and resec- tioning of the channels and their extension, where necessary, to reach all farms, provision of additional structures where required, water measuring devices downstream of the chak outlet, and selective lining.  -1 4- 45. Drainage Improvements. Field drainage channels would be constructed within every chak to assure drainage for every farm. The field drains would be connected to link drains to convey the drainage water to existing natural drainage channels, which would also be improved as necessary. 46. Canal Service Roads. Canal service roads would be improved (or constructed where they do not exist at present), concurrently with the con- struction or reshaping of the canal embankments along the distributaries and minors. 47. Buildings. This component would include six training centers (two in Jayakwadi and one in each other scheme) for farmers, Canal Inspectors and Land Development Assistants and the necessary additional offices and quarters for construction and operation and maintenance staff. 48. Equipment. This would include vehicles, trucks, surveying equipment, construction equipment, extrusion machines (for the pre-fabrication of concrete field channel sections), mini-computers, communication equipment, and equipment for monitoring, training and research. 49. Training. To ensure implementation of the project to agreed stand- ards, all engineering staff working on the project would be trained at Maharashtra's WALMI, established under the Maharashtra Irrigation II Project to train irrigation engineers in the design and management of irrigation projects. Maharashtra would ensure that Command Area Development Authority (CADA) staff would be trained In accordance with project implementation, staffing and train- ing schedules agreed with the Bank Group (Section 2.03(c), Project Agreement). The training programs to be financed under the project would be as follows: (a) Farmers. Farmers would be trained at Training Centers to be estaLb- lished under the project, to make maximum use of available water under prevail- ing difficult topographic and soil conditions. Each Center would have suitable staff housing and classroom and hostel facilities for about 35-40 people. The Centers would first train the contact farmers of the farmer groups organized under the Training & Visit system of agricultural extension, and then others as time and opportunity permit. (b) Canal Inspectors. The introduction of improved system operations would require the training of about 1,000 Canal Inspectors. The Command Area Development Authorities (CADAs) would train all inspectors in the scheme areas, concentrating on system operations, irrigation scheduling, water management, water accounting, maintenance, and communications with farmers. (c) Land Development Assistants. One WALMI-trained Junior Engineer would normally be assisted by two Assistants in the design and rehabilitation of minors and field channels. The training of about 300 Assistants would focus on survey methods, planning and design of project works, preparation of cost estimates, construction methods and quality control.  -15- (d) Study Tour. A three-week study tour would be organized for six senior project engineers and agriculturalists to observe engineering and agricultural practices developed in countries with soil types similar to those in Maharashtra. GOM has submitted a training program and syllabi to the Bank Group, and would carry out training activities under the project in accordance with the program and syllabi furnished to the Bank Group (Section 2.16, Project Agreement). 50. Adaptive Agricultural Research. Adaptive research would principally focus on developing and demonstrating: (a) irrigation practices suitable for farmers' fields before land shaping; (b) cropping sequences and farming systems suitable to the physical environment and the various farming skills; and (c) farming with purchased input levels that fall short of the optimum usually recommended by research stations. Adaptive research would be integrated into the on-going IDA-financed Agricultural Extension Project (Credit 1135-IN) and would develop recommendations that the extension organization would dissemi- nate. Subject Matter Specialists would receive additional training in irrigated agriculture at WALMI. GOM would submit annually to the Bank Group for review and comment adaptive research programs to be carried out during the forthcoming farming seasons and thereafter carry out such programs (Sec- tion 2.15, Project Agreement). 51. Water Management and Engineering Research. GOM has established two research divisions under the Directorate of Irrigation, Research and Develop- ment to develop and evaluate new modes of system operation, irrigation schedul- ing and irrigation practices, and develop cost-effective designs for structures and for lining. GOM would prepare a detailed work plan for the two divisions for the period up to 1989, furnish it to the Bank Group for comment by December 31, 1983 and thereafter establish and apply suitable work programs (Sec- tion 2.07(a) and (b), Project Agreement). 52. Land Shaping. One of the major constraints to maximizing crop yields under irrigation in the project area is uneven water distribution in the fields. To some extent, this can be mitigated by the proper orientation of the fields relative to the inlet and the contours but, for maximum efficiency, land shaping must be undertaken. This work has been typically executed with heavy machinery, bulldozers and scrapers, operated by agencies of the State Government with little farmer involvement. Under the project, the procedure for land shaping will be changed. Land shaping by the landowner utilizing his own resources will be promoted through a free technical advisory service provided under the project; landowners would be free to invite any private or public agency to assist them. GOM would take all action as shall be necessary to promote land shaping in the Project area (Section 2.12, Project Agreement). Project Implementation 53. Irrigation development in Maharashtra is the responsibility of the Department of Irrigation, which is divided into two Wings: the Irrigation Wing  -16- and the Command Area Development (CAD) Wing. The Irrigation Wing is respon- sible for all new construction above chak outlets, while the CAD is responsible for all construction below the chak outlets, all modernization work and opera- tion and maintenance (O&M). The implementation of the Maharashtra Water Utilization Project would be the responsibility of the CAD Wing through its Command Area Development Authorities (CADAs). The CAD Wing is headed by a Secretary and Commissioner, CAD. 54. Construction of the project works and subsequent management and operation would be the responsibility of CADAs in each of the five project areas. All survey, design, planning, procurement and construction activities would be carried out by engineers assigned to the respective CADA headquarters, divisions, subdivisions and sections. 55. The project would be implemented over a five-year perlod beginning November 1983. Initially, high priority would be given to the design and construction of additional offices, quarters and training centers, the procure- ment of equipment, the positioning of staff and the preparation of designs for subsequent years. Careful planning would have to be undertaken by the engineer in charge to synchronize the construction schedule with the irrigation schedule. 56. Operation and Maintenance (O&M). Responsibility for the day-to-day operation of the canal system above the outlets rests with the CADAs. Until recently a typical O&M budget In Maharashtra provided an allocation of Rs 20 per ha per year. Recently this was increased to Rs 80, wnich Is adequate for the project. GOM would (i) operate and adequately maintain the irrigation and drainage network (except for field channels--see para 57 below) and canal roads and provide sufficient funds to carry out such operation and maintenance; (ii) cause each CADA not later than 30 days after the end of the rainy season of each year, commencing in 1984, to carry out a survey of the required repairs in each irrigation system in their respective jurisdictions; and (iii) cause each CADA to carry out the repairs (Sections 2.03(b) and 2.08, Project Agree- ment). 57. Strong efforts would have to be made by GOM to ensure that the field and drainage channels within the outlets are also maintained. After comple- tion, the channels will be tested for compliance with planning and design criteria and handed over to farmers' organizations for operation and main- tenance. GOM would take all action as shall be required to ensure that farmers' organizations properly operate and maintain upgraded field irrigation and drainage channels. It would promptly repair and maintain such channels at farmers' cost in case the required works are not carried out by the concerned farmers' organizations (Section 2.13, Project Agreement). 58. Improved System Operations. Under the system of operation tradition- ally practiced in Maharashtra, farmers have to submit applications in advance for the supply of irrigation water for one or more seasons or several years.  -17- Supplies to the individual farmers are then sanctioned after considering fac- tors such as water availability, crops planned to be grown and drainage condi- tions in the area. At present, water applications are still being received after the irrigation season has begun, so that irrigation schedules have to be revised (by hand) two or three times each season. This is a difficult and time-consuming process, considering the large number of farm units. The effect has been an unreliable and inefficient water supply to individual farms. 59. In the Mula area, rotational water supply (RWS), with a fixed dura- tion of supply per ha, has recently been introduced as a pilot operation on 3,000 ha, together with rigid water scheduling among the chaks on the minor. This new system has been very well received by the farmers and would now be extended to the project areas. The rehabilitation of the irrigation networks would make it possible to reduce irrigation intervals and create a better match between water availabilities and crop water requirements. Efforts would be made gradually to introduce mini-computers to prepare the irrigation schedules; this would also facilitate keeping flows more or less constant in minors and distributaries. 60. Operation manuals which do not exist at present, would be prepared under the project and would provide detailed rules and procedures, including aspects of timing and frequency of water applications. In conformity with this objective, GOM would establish and apply, after completion of the rehabilita- tion works, detailed water allocation plans for each canal and chak for each farming season, provide a rotational water supply system within each chak, based on pre-determined water flow durations, and on data obtained from reference fields of typical soils and crops (Section 2.11(a), Project Agree- ment)- 61. Quality Control and Farmer Participation. To ensure implementation of the works to agreed standards, all engineering staff assigned to the Project would be trained at WALMI. Specific duties covering survey, design, construc- tion and O&M activities have been agreed between GOM and the Bank Group. Farmer involvement in the operation and maintenance of the irrigation distribu- tion system would be promoted through the establishment by GOM of farmer organizations at the chak, minor and main or branch channel levels. Before works are commissioned, the concerned engineer would certify that chak and farm outlets can receive the design flow, that irrigation water can reach the highest points in the farmers' fields, and that field drainage channels have been constructed (Section 2.10, Project Agreement). 62. Monitoring and Evaluation (a) The demand for irrigation water has developed only slowly in the command areas, and particularly so in Jayakwadi. While the prime objective of the project is to remove the constraint of unreliable and inadequate water supply, it is essential also to learn what the farmers' perceived reasons are for not making more use of irrigation water than they now do, and to endeavor to remove these constraints. A Farmers' Attitude Survey would therefore be undertaken by the agricultural universities. Its contents have been mutually  -18- agreed between GOM and the Bank Group. The first survey would begin in 1983 and thereafter be repeated at two-yearly intervals, at least until all project works are completed and commissioned. The surveys would also indicate progress made by the respondents in water utilization between surveys. (b) Studies would be conducted to evaluate the impact of improved system operations and of the establishment of the farmers organizations. Also to be monitored are: (i) training and positioning of staff; (ii) progress in survey, design and construction, and costs; (iii) extent of land shaping; (iv) seasonal cropping patterns, yields and production; (v) weekly water demand and deliveries by distributary, minor and chak to identify deficiencies in watier distribution or potential improvements in system operation; (vi) reference fields; and (vii) groundwater levels and extraction. GOM would establish monitoring cells in each CADA and would submit to the Bank Group by Decem- ber 31, 1983 a detailed plan for carrying out monitoring and evaluation activities under the project (Section 2.06, Project Agreement). Project Costs and Financing 63. Total project costs are estimated at US$78.1 million equivalent, net of taxes and duties, which are applicable to only a few items of equipment and which are, in the aggregate, insignificant. Foreign exchange costs are estimated at US$10.6 million, or about 13.6% of total project costs. Physical contingencies, which were estimated separately for each item, range from 10% to 20% and average 12.4% of the base cost. Price contingencies, amounting in total to 24% of base cost, have been applied as follows: 8.0% in 1983/84, 7.5% in 1984/85, 7.0% in 1985/86, and 6% thereafter. 64. The proposed Bank loan and IDA credit totalling US$54.7 million equivalent would finance about 70% of project costs, net of taxes and duties, including all foreign exchange costs and some 65% of local costs. The balance of the funds required would be met by State and Central Government sources. GOI would make the proceeds of the loan and credit available to GOM on GOI"s standard terms and arrangements for development assistance to the States. To ensure an early start of the project, it is recommended that the Bank Group finance up to SDR 1 million retroactively for eligible expenditures made after January 1, 1983 on items such as buildings and equipment and costs of conduct- ing the farmers' attitude survey (paragraph 4 of Schedule 1, Development Credit Agreement). Procurement and Disbursement 65. Civil works financed under the project would cost approximately US$35.0 million, excluding physical contingencies, price escalation and engineering and administration costs. The works would be carried out in five different project areas and constructed over a five-year period. Most of the work would be small rehabilitation work on minor canals and field channels adjacent to farmers fields, involving earth work and repairs to or construction of small structures. The work would be highly labor-intensive, spread out over  -19 - large areas, seasonally executed, and scheduled intermittently to avoid disrup- tion of irrigation. This requires great flexibility on the part of contrac- tors. International contractors and larger local contractors do not have this flexibility; moreover, because of the seasonal nature of the work, their over- head costs would be very high. Consequently the works are not suitable for international competitive bidding. The work would be carried out by local village contractors on the basis of small piecework type contracts. Such contracts would be awarded under local procurement procedures which are Ratis- factory to the Bank Group. Some departmental work may be carried o. tlr types of work in which local contractors would experience difficulties, or for quality considerations (such as compaction); such works would be limited to 25% of all works. 66. Equipment and vehicles financed under the project would cost about US$5.2 million, excluding physical and price contingencies. All equipment and vehicles would be procured locally to benefit from existing servicing and supply facilities for spare parts. Adequate competition will result from local competitive bidding among Indian equipment suppliers. Suitable items would be grouped to promote efficiency in tendering. The Central Water Commission has developed standard bid documents and procedures for equipment, materials and supplies which have been approved by the Bank Group and would be used in the project. Contracts for equipment estimated to cost US$50,000 or less may be procured by prudent shopping using normal commercial channels. 67. Disbursements under the credit would be made as follows: (a) 85% of expenditures on civil works; (b) vehicles and equipment--(i) 100% of foreign expenditures on directly imported goods; (ii) 100% of the ex-factory price of locally manufactured goods; (iii) 70% of the cost of other locally procured goods; (iv) 70% of expenditures on salaries of incremental staff for training, adaptive and engineering research, monitoring and evaluation; and (v) 100%/ of expenditures on special surveys and study tours. Disbursement requests for civil works would be made against certificates of expenditure submitted by GOM separately for each sub-project and itemized by project component. Disburse- ments for work within a chak would only be made upon full completion of the work. Disbursement requests for such work would be submitted together with a completion certificate duly signed by the Assistant Engineer in charge stating that all works in the command have been completed in accordance with the agreed planning and design criteria. Also disbursements against departmental works and for payments for Rs 150,000 or less for equipment and vehicles would be made against statements of expenditures, itemized by type of work. Statements of expenditure would be audited annually by independent auditors. Documenta- tion for these works would be retained by GOM and made available for inspection by Bank Group review missions. Full documentation would be required for all other disbursements. It is expected that disbursements will be completed by August 31, 1989.  -20- Cost Recovery 68. Overall collections of water charges int Maharashtra were, in the past, disappointing, having been as low as 35% of dues in 1976/77. Reasons for low collection rates in the past included understaffing of CADA revenue divisions and slow assessments of water charges. Measures recently taken by Maharashstra to improve collections have included use of the rural banking system to assist in the collection effort, posting of additional revenue staff to Superintending Engineers' offices to supervise collections, elimination of water charge sub- sidies on groundnuts, and streamlining administrative procedures for collec- tion. These measures resulted in State-wide collections having risen to over 80% in 1981/82. However, collections of water charges in the Project Area are still only 45%-50% of amounts due, so that additional collection efforts are called for. Maharashtra is examining the feasibility of introducing an individual billing system and of automating the billing process, as well as additional strengthening of revenue staff in CADA, and further procedural improvements in collections. Under the project, Maharashtra would continue to review its procedures for collection of irrigation water charges, and shall take all action as shall be necessary to improve and expedite collection of all such water charges (Section 3.06, Project Agreement). 69. GOM recognizes the importance of introducing an appropriate system of water charges to promote efficient water use by consumers. Experiments with various types of volumetric water charges are at present on-going under the Maharashtra Irrigation II Project; an evaluation of these experiments will be available late 1983 to permit Implementation of a suitable system of charges thereafter. Under the proposed project, GOM would introduce an appropriate system of water charges in the scheme areas after two years of operation of the upgraded field and drainage channels within a chak. The system would ensure direct recovery of annual operation and maintenance costs of the upgraded irrigation system, and a reasonable contribution to the costs of infrastructure investments in the field and drainage channels, having regard, inter alia, to the incentive and repayment capacity of farmers (Section 3.04, Project Agree- ment). With projected cropping patterns, revenues from water charges would average Rs 310 per ha. Project Benefits and Risk 70. Many Indian irrigation projects face varying degrees of water scar- city so that the water supply has to be rationed among the irrigators. The proposed project is exceptional In that It takes place in an environment where water is, by and large, still relatively abundant. The project would enhance the demand for water by upgrading the infrastructure (with emphasis on minors and field channels) and by supplying water regularly and reliably. 71. In calculating the economic rate of return (ERR) the costs of this upgrading have been set against the anticipated benefits of higher irrigation intensities in the five project areas. The project is expected to result an increased production of about 300,000 tons per year (tpy) of sugarcane, 44,000 tpy of foodgrains, about 33,000 tpy of bananas, and 14,000 tpy of  -21- groundnuts. Additional long-term benefits could arise from (a) long-term effect of water savings through higher conveyance efficiencies; (b) induced Investment in land-levelling and land shaping and possible shifts to high value crops; and (c) induced investment in groundwater exploitation. Although these possible benefits have not been included, the ERR is satisfactory, ranging from 19% to 47%, and averaging 36% for the project as a whole. 1/ Incremental farm employment will be the equivalent of about 3.3 milion man-days per annum. 72. The results of a sensitivity analysis indicate that only large (and unlikely in the magnitude required) deviations from the basic assumptions would jeopardize the economic viability of the project. The main risk would be that the resulting increases in water utilization are less than projected either because (i) the reliability of water supply in the modernized areas turns out to be lower than anticipated, or (ii) farmer response to irrigation is less than expected. However, the introduction of improved systems operations, procedures and quality control in design and construction, and the adaptive research, monitoring, evaluation and training programs included in the project would reduce these risks. Moreover, the project has been limited in size to that which can effectively be implemented by staff trained at WALMI. Overall, the project risks are representative of the risks associated with similar types of irrigation scheme in India and are not significant. 73. Environmental Effects. The improved drainage should have positive environmental effects. However, the expansion of irrigation may be accompanied by an increase in the incidence of water related diseases. GOM would take all measures considered necessary to minimize the hazards of malaria and other water-related diseases in the project area (Section 2.23, Project Agreement). PART V - LEGAL INSTRUMENTS AND AUTHORITY 74. The draft Loan Agreement and Development Credit Agreement between India and the Bank and the Association, the draft Project Agreement between the Bank and the Association and the State of Maharashtra, the Report of the Com- mittee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank and the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association are being dis- tributed to the Executive Directors separately. 75. Special conditions of the project are listed in Section III of Annex III. 76. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and of the Association. 1/ For the Jayakwadi scheme the ERR for all past and project investments is estimated at 14%.  -22- PART VI - RECOMMENDATION 77. I recommend that the Executive Directors approve the proposed loan and credit. A.W. Clausen President May 19, 1983  ANNEX I INDIA - SOCIAL INDICATORS DATA SHEET Page 1 of 5 INDIA REFERENCE GROUPS (WEIGHTED AV_RAGES AREA (TROUSAND SQ. KM.) MOST RECENT ESTIMATE TOTAL 3287.6 MOST RECENT LOW INCOME MIDDLE INCOME AGRICULTURAL 1818.2 1960 /b 1970 /b ESTIMATE lb ASIA & PACIFIC ASIA & PACIFIC GNP PER CAPITA (US$) 70.0 110.0 240.0 261.4 890.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 111.2 152.5 194.4 448.7 701.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUS.) 434850.0 547569.0 673207.0 URBAN POPULATION (PERCENT OF TOTAL) 17.9 19.7 22.3 17.3 32.4 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 994.1 STATIONARY POPULATION (MILLIONS) 1694.4 YEAR STATIONARY POPULATION IS REACHED 2115 POPULATION DENSITY PER SQ. KM. 132.3 166.6 200.6 158.1 255.9 PER SQ. 1M. AGRICULTURAL LAND 247.0 307.8 362.8 355.9 1748.0 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 40.9 42.7 40.2 36.8 39.9 15-64 YRS. 54.5 54.2 56.8 59.7 56.8 65 YRS. AND ABOVE 4.6 3.1 3.0 3.5 3.3 POPULATION GROWTH RATE (PERCENT) TOTAL 1.8 2.3 2.1 2.0 2.3 URBAN 2.5 3.3 3.3 3.3 3.9 CRUDE BIRTH RATE (PER THOUSAND) 43.7 40.0 35.6 29.3 31.8 CRUDE DEATH RATE (PER THOUSAND) 21.8 16.7 13.6 11.0 9.8 GROSS REPRODUCTION RATE 2.9 2.7 2.4 2.0 2.0 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) 64.0 3782.0 5619.0 USERS (PERCENT OF MARRIED WOMEN) .. 12.0 22.6 19.3 36.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 98.0 102.0 99.0 108.1 115.6 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 95.6 90.4 88.8/c 97.3 106.4 PROTEINS (GRAMS PER DAY) 53.6 49.7 48.4/i 56.9 54.4 OF WHICH ANIMAL AND PULSE 17.2 14.8 13.1/i 20.0 13.9 CHILD (AGES 1-4) MORTALITY RATE 26.2 20.7 17.4 10.9 6.7 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 43.2 48.1 51.8 57.8 59.8 INFANT MORTALITY RATE (PER THOUSAND) 165.0 139.0 123.4 89.1 63.7 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 17.0 33.0 32.9 32.0 URBAN .. 60.0 83.0 70.7 51.9 RURAL .. 6.0 20.0 22.2 20.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 18.0 20.0 18.1 37.7 URBAN .. 85.0 87.0 72.7 65.7 RURAL .. 1.0 2.0 4.7 24.0 POPULATION PER PHYSICIAN 4850.4 4889.0 3630.6 3297.8 8540.4 POPULATION PER NURSING PERSON 10975.3/d 8296.5 5696.1 4929.3 4829.4 POPULATION PER HOSPITAL BED TOTAL 2178.7 1612.9 1311.0/e 1100.4 1047.5 URBAN .. .. 362.3/e 301.3 651.6 RURAL .. .. 10432.8/e 5815.7 2597.6 ADMISSIONS PER HOSPITAL BED .. .. .. .. 27.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.2 5.6 5.2 URBAN 5.2 5.6 4.8 RURAL 5.2 5.6 5.3 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.6 2.8 URBAN 2.6 2.8 .. RURAL 2.6 2.8 .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. .. .. URBAN .. .. .. .. RURAL .. .. ..  ANNEX I Page 2Apf 5 INDIA-80CIAL INDICATORS DATA SHIET INDIA REFERENCE GROUPS (WEIGETED AVE4IS - MOST RECENT ISTINATE )( MOST RECENT LOW INCOME MIDDLU INCMI 1960 lb 1970 /b ESTItATE /b ASIA 6 FACIFIC ASIA S PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 61.0 73.0 78.0/c 97.4 96.2 MALE 80.0 90.0 92.0/? 101.0 99.S FEMALE 40.0 56.0 63.0/? 87.8 92.1 SECONDARY: TOTAL 20.0 26.0 27.0/c 53.0 37.6 MALE 30.0 36.0 36.0/?i 63.8 41.1 FEMALE 10.0 15.0 17.0/t 41.3 34.1 VOCATIONAL ENROL. (X OF SECONDARY) 8.0 1.0 0.7/f 1.7 20.8 PUPIL-TEAC1ER RATIO PRIMARY 46.1 41.5 51.8/c 37.7 35.5 SECONDARY 16.0 20.9 .. 20.2 23.0 ADULT LITERACY RATE (PERCENT) 28.0 33.4 36.0 52.1 73.1 CONSUHPSION PASSENGER CARS PER THOUSAND POPULATION 0.6 1.1 1.3/c 1.5 9.8 RADIO RECEIVERS PER THOUSAND POPULATION 4.9 21.5 33.6 35.4 116.5 TV RECEIVERS PER THOUSAND POPULATION 0.0 0.0 1.0 3.2 37.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 10.6 16.0 19.8 16.4 53.7 CINEMA ANNUAL ATTENDANCE PER CAPITA 4.1 4.1 3.7 3.6 2.8 LABOR FORCE nYTOA=1OR FORCE (THOUSANDS) 185951.1 219194.2 264204.4 FEMALE (PERCENT) 30.7 32.5 31.8 29.5 33.6 AGRICULTURE (PERCENT) 74.0 74.0 69.3 70.0 52.2 INDUSTRY (PERCENT) 11.0 11.0 13.2 15.0 17.9 PARTICIPATION RATE (PERCENT) TOTAL 42.8 40.0 39.2 40.0 38.5 MALE 57.0 52.4 51.8 51.8 50.5 FEMALE 27.3 26.9 25.9 23.8 26.6 ECONOMIC DEPENDENCY RATIO 1.1 1.1 1.1 1.0 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 26.7 26.3/ 22.2/f HIGHEST 20 PERCENT OF HOUSEHOLDS 51.7 48.97j 49.4/i* LOWEST 20 PERCENT OF HOUSEHOLDS 4.1 6.7/S 7.0/* LOWEST 40 PERCENT OF HOUSEHOLDS 13.6 17.27j 16.2/f POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. . 132.0 133.8 194.7 RURAL . .. 114.0 111.1 155.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. .. 178.2 RURAL .. .. .. .. 164.9 ESTIYATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 40.3 43.8 24.4 RURAL .. .. 50.7 51.7 41.1 Not available Not applicable. NOTES /a The group averages for each indicator are population-veighted aritlmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. /c 1977; /d 1962; /e 1976; If 1975; /I 1964-65. May, 1982  ANNEX I Page 3 of 5 DEFINITIONS OF SOCIAL INDICATORS Notoe Although tht data are drao fIo sources. gene-ally j`dged the -as -ohoettil.i and reltabl. it hboild also be -otd that they nay ro be inter naioaly coparbl Dbho-us fh lo of.sta.dardized dahfittoia and concpts usd by dlffe-os .. rootnle to collecling tba data. The, data ar,on- theles. osaful to de-rrhi orer of goiode tod-trantteds, and oosoeie -etoto major dfi_fero_e b..etween l Th rheeoe rops00 ( to an rnce droo ofreshatmoe n l cneygoptbsealghge nrg noeso h onr ra of .hee .ie. ....tr (enep Io%'th r p Ofil .jl tooses g..u shtyab ftdl( na2NrhArc n tdlets scoe eas hsrne sorto-rutor- .f.llo nterfeec ro aatenorgsaepplt r/lgtdydthrnrotn ifr ah- ard-So end,- shoo oly~ sce o-ie .thouandIsOs.) -pfl-inodne-tohlsallad total,n-ban and min -l hooltor(otl loha - Ttal orfan ato r~ rltog ard Irea nd -Ilan ratrs 1-1 dat. uln n usd Inidad bye . raprl-eroe ofhLpta bd -N hot dPIa d 111 I- aS per colt enclor--y t croed rackrpuo,cl Ptlcn t onIcue. Orl oytl.heno.toehat 19I1, no 19-1 data ab.l,ii. - .a d"'l 11d. sbadca assistant, d. nure, ldmife etc. ehi- offer . tn pat tart acds kat -d it~h aplda- l. fall 1979 Ily.. Oncoor. ind peoid 'alnte rareif- mdIAl aills o ns data.CPT US N al-iA l- b -klp Adosern1 e hoslta- ld~ - Tta noher of selnnlo i-to o h-rar darn. dta -doe-I Aboo ... o ..uahl -loidioon -t t hco h lord) - too toion, adrno OrIn PpultIo Ieeros 1 tna) -hasuu f chn trtorl npoarund _asbod r.n. iso ofla grou of tdinidoa snboishare lnFn -uane a- oni ruon-ruil 19..01, . pl 110,and1990dot.7th--osahol foe tralh.:c, pupoes dooatlontroerrons T-rososhaeho-sof deeoo-ttn.ur-n apro d- h-aogeue tonal pop idno Yby-n e shctotand hA.e rofooluy and90.190 Ptal d eaten dOU ltg.rsprtsy IaInsoru o-otetGorue n netar foefentl 7 o roabnOt honor d--rs Ieeah.tn o nt o oa,.ro,adonl ol royse le fs _tt _tya-ordrgtoocur_auaotadlonr-eu-.rlao-rnprf-roora en In cunfou-pc.flue . In arloo- oalt lor Ontr-lto corn darDl b-- no -lnr sr ---etoul n ot11roally -nclde chIldre agd 0-11 th-repbadI-selnneif~ -plnotr-yeotobijjiogtunt7.tlonenrhgaTaa..t.. y..a.. i.coadjuingdfod