India - Second Haryana Irrigation Project

Document of FILE CLE The World ]Bank FOR OFFICIAL USE ONLY Report No. P-3443-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 139.0 MILLION (EQUIVALENT TO US$150 MII TO INDIA FOR THE HARYANA IRRIGATION II PROJECT January 3, 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 December 28, 1982) US$1 = Rs 9.775841 Rs 1 = US$0.102293 Rs 1 million = US$102,293 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were made at US$1.00 = Rs 9.0, which represents the average exchange rate projected over the disbursement period. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms used in this Report ATW - Augmentation Tubewell ERR - Economic Rate of Return GOH - Government of Haryana GOI - Government of India HSEB - Haryana State Electricity Board HSMITC - Haryana State Minor Irrigation (Tubewells) Corporation ICB - International Competitive Bidding ID - Irrigation Department IDA - International Development Association 0 & M - Operations and Maintenance PH - Public Health Branch of PWD PWD - Public Works Department R & D - Research and Development RDTU - Research and Development and Training Unit SIA - Sprinkler Irrigation Association SMC - Shareholders Maintenance Committee SPU - Special Project Unit SYL - Sutlej-Yamuna Link Canal UNDP - United Nations Development Program WUA - Water Users Association WYC - Western Yamuna Canal J  FOR OFFICIAL USE ONLY INDIA HARYANA IRRIGATIOtI II PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: State of Haryana. Amount: SDR 139.0 million (US$150 million equivalent). Terms: Standard. Re-Lending Terms: As part of Central assistance to States for development projects on terms and conditions applicable at the time. The Governmert of India would bear the foreign exchange risk. Project Description: The four-year project would continue the Government of Haryana's State-wide canal and watercourse modernization program by lining about 2,900 km of branch, distributory and minor canals; lining about 7 millior meters of watercourses; and providing supplementary irrigation water through t:he installation of 325 augmentation tubewells. Village water supplies and access roads would be provided and pilot studies undertaken to test sprinkler irrigation systems and raise the efficiency and performance of the modernized canal/watercourse systems. In this ongoing modernization effort, the project risks are considered minimal. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Estimated Costs: I/ US$ Millions Item Local Foreign Total Canal Modernization 73.5 14.4 87.9 Watercourse Modernization 52.4 7.2 59.6 Augmentation Tubewells 10.6 3.2 13.8 Sprinkler Irrigation 1.9 0.6 2.5 Village Water Supplies 16.4 4.1 20.5 Village Access Roads 3.8 1.0 4.8 R & D Training & Technical Service 4.9 1.0 5.9 Engineering, Supervision and Administration 26.0 - 26.0 Land Acquisition 2.3 - 2.3 Base Cost 191.8 31.5 223.3 Physical Contingencies 13.3 2.2 15.5 Price Contingencies 52.9 8.6 61.5 Total Project Cost 258.0 42.3 300.3 Financing Plan: IDA Credit 107.7 42.3 150.0 Local Financing 150.3 - 150.3 Estimated Disbursements: FY83 FY84 FY85 FY86 FY87 Annual 5.0 30.0 47.0 48.0 20.0 Cumulative 5.0 35.0 82.0 130.0 150.0 Rate of Return: 29%. Appraisal Report: No. 4099-IN, dated January 4, 1983. 1/ Including taxes and duties which are negligible.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 139.0 MILLION (EQUIVALENT TO US$150 MILLION) TO INDIA FOR THE HARYANA IRRIGATION II PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount of SDR 139.0 million (US$150 million equivalent) on standard IDA terms to help finance a second phase of the ongoing irrigation modernization program being undertaken by the Government of Haryana (GOH). The Government of India (GOI) would channel the proceeds of the credit to GOH in accordance with KOI's standard terms and arrangements for financing State development projects. The exchange risk would be borne by GOI. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospects of India" (3872-IN, dated April 7, 1982), was distributed to the Executive Directors on April 19, 1982. Country data sheets are attached as Annex I. Background 3. India is a large and diverse country with a population of about 700 million (in mid-1982) and an annual per capita income of US$240. Economic growth has been slow in the past, averaging about 3.6% per annum over the past 30 years. 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. Consequently the latter have only an insecure grasp on the means of existence. Growth of value-added in agr:Lculture -- 2.3% per annum over the past 30 years -- 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 measu-ed in 1970/71 prices) from 60% to about 40%, while the share of industry rose from 15% to around 24%. 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. 4. Nevertheless, there has been steady progress on several fronts. In the face of a large and rapidly growing population, India has been able to increase agricultural output faster than total population while eliminating 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Second Railway Modernization and Maintenance Project (No. P-3396-IN), dated October 25, 1982.  -2- persistent dependence on foodgrain imports. Savings and investment have increased markedly since 1950/51: gross domestic savings more than doubled from 10.8% of GDP (at factor cost) to 24.8%, while gross domestic investment rose from 12.5% of GDP to 26.2%. 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; for a few years in the late 1970s, surpluses arose, and at the present time, foreign savings are about 10% of investment. External assistance has been low both as a percentage of GDP and in per capita terms. Net external assistance has never risen above 3% of GDP, and was less than 1% at the end of the 1970s. 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 1979/80 averaged only 3.5% per annum, only marginally higher than the volume growth of imports over the same period. 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 7.6% 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, contributed to this growth, liberalized access to imported inputs and more effective export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by relatively rapid export growth and an expanding level of foodgrain output, which culminated in a record 132 million tons of foodgrain production in 1978/79. As a result, growth in real GDP, agricultural and industrial value-added, substantially exceeded the historical 30-year trends (paragraph 3). 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. The impact of these setbacks is still being felt in the Indian economy, particularly in the balance of payments, and adjustments will be needed for some years to come. However, the short-term recovery process is almost completed and the economy has regained its growth momentum. Recent Trends 7. In 1980/81, the economy substantially recovered with real GDP growing by 7.5%. While industrial output expanded by 4%, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15%. Increased foodgrain production, along with judicious use of Government buffer stocks built up in earlier years, also helped moderate price rises. Inflation remained a serious problem with the annual average wholesale price index rising 18%, although the second half of the year provided clear evidence of a deceleration in inflation.  -3- 8. 1981/82 was a year of solid growth after the rebound in 1980/81 and GDP grew by 5.5%. While foodgrain production rose only modestly over its 1980/81 level, other crops including oilseeds and sugarcane performed well and total agricultural output grew by 4%. 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%, 9.4% and 15% respectively. As constraints on the supply of infrastructare and basic commodities continued to ease, industrial output responded with an 8% increase. The downward trend in inflation continued. Wholesale prices rose by about 9% on an average annual basis, while the increase on a March 1981 to March 1982 basis was less than 2%, showing a continued deceleration. Easier supply conditions, combined with a more restrictive monetary policy, contributed to the sharp decline in the rate of inflation. 9. The performance of the agriculture sector in 1981/82 ensured that supply conditions in the country remained quite favorable. It also provided continuing evidence of the positive effects of large investments and appropriate policies in past years. Foodgrain production reached between 132 and 134 million tons, thus matching or perhaps surpassing the previous record. Irrigated area expanded by 2.5 million hectares, while fertilizer consumption improved over its 1980/81 level by more than 7%, despite substantial price increases. Recent performance and probable future trends suggest that on average foodgrain supplies will exceed demand. However, the balance remains delicate with some imports likely to be required from time to time. Indeed, the effects of the severe 1979/80 drought were still being felt in 1981/82 when 2.25 million tons of wheat were imported to rebuild depleted stocks. Nevertheless, the relatively low import requirement, the ability of the Government to delay imports for as long as two years after the production shortfall, and the decline in foodgrain prices in real terms demonstrate the flexibility and resilierce provided by the public foodgrain system. 10. Shortages of basic commodities and infrastructural services were major contributors to industrial stagnation and the onset of high inflation in 1979/80. This was the culmination of several years of declining capacity utilization in important, interrelated sectors such as power, coal, and rail transport. A major cause of the improved economic climate over the last two years has been a much improved level of output in these sectors, due mainly to greater efficiency and utilization of installed capacity. Expansion of coal output by about 10 million tons for the second successive year and of rail freight traffic to a record level were particularly noteworthy features of the 1981/82 economic performance. The shortfalls in domestic energy production which contributed so heavily to the poor 1979/80 performance have also been reduced. However, even though there remains large scope for improving efficiency, further improvemerts in capacity utilization will become increasingly difficult, and increases in capacity are needed to meet increasing demand. 11. Despite a brief phase in the late 1970s, when savings rates exceeded investment rates and foreign exchange reserves actually increased, recent experience shows that the needs of the ]:ndian economy continue to outstrip  -4- the availability of resources, both internal and external. Investment exceeds domestic savings. The latter, at nearly 25% of GDP, are already high and further increases, particularly from the household sector, will be increasingly difficult to obtain. However, over the last two years, the Government has taken a number of measures to generate higher savings in the public sector. Principal among these were price and tax increases, and subsidy reductions, on a range of commodities produced mainly in the public sector. 12. The shortage of resources is even more apparent in the foreign sector. Problems became serious after 1979/80 when the cost of India's POL imports rose sharply and the terms of trade deteriorated. Coupled with domestic supply shortages and a slowing down in export growth, these factors caused India's current account deficit to rise from only 0.6% of GDP in 1979/80 to 2% of GDP in 1980/81. In 1981/82, the current account deficit rose to US$4.3 billion, representing 2.7% of GDP. Unfavorable movements in export prices and the terms of trade threatened a worse outcome. However, the much improved performance of basic import-substituting industries and a resumption of healthy export volume growth (8.3%) prevented this. To finance this gap in the face of inadequate concessional aid flows, the Government drew down a record US$2.36 billion in foreign exchange reserves, withdrew almost US$700 million under the recently negotiated IMF Extended Fund Facility, and turned increasingly to other non-concessional sources of finance. In 1980/81 and 1981/82 for example, new government guaranteed commitments for commercial borrowing totalling over US$1.3 billion were contracted for major projects. 13. The trends in the volume and terms of India's trade indicate that significant adjustments will need to be made in the economy to bring India's external accounts into reasonable balance at an acceptable level of growth. In particular, there is a need to increase the growth of exports, to increase production of commodities such as fertilizer, cement and steel which India can produce efficiently, in order to reduce imports of these items, to moderate the rise in oil imports through greater domestic production and slower demand growth, and to further reduce the constraints in transportation and other infrastructural facilities which are retarding growth in a wide range of activities, including exports. It is encouraging that, in response to the present balance of payments difficulties, the Government has not reacted by placing more stringent controls on imports, but rather has maintained and extended the more liberal policies evolved in the past several years. Recent improvements in the availability of power, a major constraint facing exporters, and the adoption of several new export and industrial policy measures have improved the prospects for accelerating export growth. Development Prospects 14. The experience of recent years illustrates that India does have the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic  -5- infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although there is considerable Tneed 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 e