India - Kerala Social Forestry Project

Document of TIhe World Bank FOR OFFICIAL USE ONLY C R e , t Report No. P-385 8-IN REPORT AND RECOMMEN-DATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT IN AN AMOUNT OF SDR 30.6 MILION TO INDIA FOR THE KERALA SOCIAL FORESTRY PROJECT July 11, 1984 This document bas a restricted distributio and may be used by recipients only in the performace of their oIcial duties. Its contents may not otherwise be disclosed withot World Rank authorintion.  -ii- CURRENCY EQUIVALENTS (As of June 26, 1984) US$1.00 = Rs 11.205621 Rs 1.00 = US$0.089 Rs 1 million = US$89,000 The US Dollar/Rupee excbange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rste of US$1 to Rs 11. FISCAL YEAR April 1 - March 31 ABBREVIATIONS CCF - Chief Conservator of Forests GOI - Government of India GOK - Government of Kerala LCB - Local Competitive Bidding MEG - Monitoring and Evaluation Office SAE - Secretariat for Agriculture and Forests SFW - Social Forestry Wing  FOR OFFICIL USE ONLY KERALA SOCIAL FORESTRY PROJECT CREDIT AND PROJECT SDU1NAR Borrower: India, acting by its President. Beneficiary: Government of Kerala (GOK). Amount: SDR 30.6 million (US$31.8 million equivalent) Terms: Standard On-lending Terms: From the Goverument of India (GOI) to the Government of Kerala 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. Proiect Description: The project would increase supplies of fuelvood, small tizber and poles through the establishment of about 85,000 ha of plantations. It would also execute a pilot program for producing medicinal plants and strengthen the institutional capabilities through provision for training of existing personnel; additional staff; investment in research and addi- tional vehicles and equipment. A wood balance study would also be undertaken. The project faces no major risks. However, wastage of seedlings could occur if the Social Forestry Wing's capacity for distribution is overstretched. The risk would be minimized by an undertaking that GOK would not expand the seedling distribution program without prior consultation with the Association. Since it is intended to use the existing agricultural extension service instead of expanding the extension service of the Department of Forestry, the new approach entails a risk regarding effective coordination. Bovever, GOK has finalized arrangements satisfactory to IDA to ensure effective coordination between the Department of Agriculture and Forestry Department with regard to providing forestry extension services. Furthermore, insect damage could occur on Ailanthus trees. However, effective insecticides are available and extension advice would focus on the potential problem. Thidocument has a resricted distribution and may be used by repents only in the performance of ofeixial duties. Its contents uay not otherwise be didowd without World Dank sutorizatzion  -iv- Estimated Cost IJ: (USS millions) Local ForeiJn Total A. Organization and Management 14.4 0.8 15.2 B. Plautation Activities Seedling Production 12.9 1.5 14.4 Large Block Plantations 6.4 0.0 6.4 Small Block Plantations 0.4 - 0.4 Strip Plantations 0.8 - 0.8 Tribal Fuelvood Plantations 0.8 - 0.8 Tribal Medicinal Pilot Scheme 0.1 - 0.1 Plantation Protection 0.3 - 0.3 Sub-total Plantation Activities 21.7 1.5 23.2 C. Extension and Publicity 0.3 0.1 0.4 D. Training 2.1 0.4 2.5 E. Research and Studies 0.1 - 0.1 Total Baseline Costs 38.6 2.8 41.4 Physical Contingencies 2.4 0.2 2.6 Price Contingencies 9.8 0.7 10.5 Total Project Cost 50.8 3.7 54.5 Financina Plan: (USS millions) Local Foreifu Total GOIIGOK 22.7 - 22.7 IDA 28.1 3.7 31.8 Total 50.8 3.7 54.5 ~~== Estimated Disbursements (USS millions) FY85 FY86 FY87 FY88 FY89 FY90 FY91 Annual 2.6 4.6 4.7 5.8 6.0 6.3 1.8 Cumulative 2.6 7.2 11.9 17.7 23.7 30.0 31.8 Rate of Return: About 26%. Appraisal ReDort: No. 5036-IN, dated July 11, 1984. j1 Includes taxes and duties of US$1.5 million equivalent.  INTERNATIOTAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDAION OF THE PRESIDENT TO THE EXECUITrVE DIRECTORS ON A PROPOSED CREDIT TO MNDIA FOR THE KERALA SOCIAL FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed IDA Credit to India for SDR 30.6 million (US$31.8 million equivalent) on standard IDA terms, to help finance a social forestry project in order to increase supplies of fuelvood, poles and timber to rural and semi-urban areas in the State of Kerala. The proceeds of the Credit would be channeled to the Government of Kerala in accordance with the Government of India's standard terms and arrangements for financing State development projects. The exchange risk would be borne by the Government of India. PART I - THE ECONOMY jJ 2. An economic report, "Situation and Prospects of the Indian Economy - A Medium Term Perspective" (4962-IN, dated April 16, 1984), was distributed to the Executive Directors on April 23, 1984. Country data sheets are attached as Annex 1. Backzround 3. India is a large and diverse country with a population of about 750 million (in mid-1984) and an snnual per capita income of US$260. 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 who own little or no land. Growth of value-added in agriculture - 2.2Z since 1950151 - has been slower than growth of industrial value-added (5.3% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 52% in 1950/51 to about 33% in 1981/82, while the share of industry rose from 202 to around 26Z. 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 grovth has been slow over the past three decades, averaging about 3.6Z 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 markedly since 1950/51: the gross national savings rate more than doubled from 10.8Z of GDP (at factor cost) to 22.7Z in 1983/84, while the gross domestic investment rate rose from 12.5% of GDP to 24.8% in 1983/84. Foreign savings (balance of payments deficit on current account) have never I/ Parts I and II of the report are similar to Parts I and II of the President's Report for the National Cooperative Development Corporation III Project (No. P-3833-IN), dated May 30, 1984.  -2- financed a major portion of domestic investment: a peak of about 20% was reached during the early 1960s. Currently, foreign savings account for about 8Z of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3Z of GDP and averaging below 12 for the past five years. Net use of foreign savings has never risen above 3Z or 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 grovth 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, 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 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 5.3%, 3.3% and 8.1%, respectively, during the 1975/76 to 1978/79 period. 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 relatively large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks coincided with the preparation 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% per annum. Recent Trends 7. Despite the effects of two severe droughts in 1979/80 and 1982/83, India's economy in the early 1980s continued to grow at the faster pace of the second half of the 1970s. Between the two droughts (from 1979/80 to 1982/83), GDP growth averaged almost 5% per annum, while between the two recovery years (from 198C!81 to 1983/84), it was 4.5% per annum -- substan- tially higher than India's long-term growth rate of 3.6%. Continued rapid economic growth has resulted from a development strategy which includes higher investment levels and liberalizee policies on imports, industrial 'icensing, prices, and commercial borrowing. These policies, by easing constraints on the supply of infrastructure and basic commodities, were 3 determining factor in the improved performance of the economy and the industrial sector. This overall improvement in performance, combined with a more restrictive monetary policy in 1981/82 anid 1982!83, resulted in a sharp decline in the rate of inflation. The growth rate of wholesale prices declined from over 18% in 1980/81 to only 2.6% in 1982/83, but rose to over  -3- 9Z in 1983/84, mainly due to the effect of the 1982183 drq5zht on food prices. Further improvements in the policy envirouwent will be required to maintain these higher levels of economic growth and investment without put- ting undue pressure on the balance of payments or reviving inflationary expectations. 8. Economic growth in the' early 1980. has not been steady, reflecti'g the uneven rainfall during the period. In 1980/81 and 1981182, the economy substantially recovered from the 1979 drought, with real CDP growing by 7.6Z and 5.3X, respectively. While industrial output expanded by 41 in 1980181 and 8.6Z in 1981182, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15Z and 5.5Z, respectively. The supply of power, coal, and rail transport, already improved in 1980/81, was further expanded in 1981182, recording growth rates of about 101, 9.6Z and 12.5S, respectively. This overall improvement in the Indian economy was halted in 1982/83 by a severe drought in aid-1982 which reduced agricultural production by 4Z, brought down the GDP growth rate to 1.8Z, and put further strains on the already difficult balance of payments and domestic resource situation. The timely implementation of various economic policies relating to foodgrain imports, procurement and distribution, and the allocation of power to irrigation pumps mitigated the otherwise very distressing effects of the poor monsoon. The economy recovered ia 1983/84, led by a robust agricul- tural sector - GDP grew by about 6.51 to 7Z with agricultural production growth in the 91-10% rsage and industrial growth of 4.5x. The major factors- contributing to the good economic performance during 1983/84 were the excel- lent monsoon, combined with adequate agricultural policies and programs, and satisfactory performance of the coal and transport sectors. The power sector, however, emerged again as a constraint on higher growth, especially in industry. 9. Agricultural production rebounded strongly in 1983184 in response to the monsoon, improved use of inputs and continued expansion of irrigation. Overall fooagrain production rose by 10Z-121 over the previous year, reaching a new record of 142-144 million tons, a substantial increase over the pre- vious peak of 133 million tons in 1981/82. Corrected for weather variations, foodgrain production continues to grow at a trend of 2.6Z per annumr- sufficient to maintain a broad balance between supply and steadily increasing domestic demand. Nonetheless, the balance remains delicate, and the need for foodgrain imports to saintnin consumer supplies or adequate buffer stocks could arise from time to time. Thus, adequate management of foodgrain stocks and programs to expand irrigation, strengthen extension and encourage the efficient use of other agricultural inputs continue to receive high priority. 10. Basic infrastructure services had a mixzed performance in 1983184, partially because of sluggish demand from industry during the first half of the year but also due to a failure to maintain the productivity gains of 1980-82. Electricity generation grew only by about 3.7X due to low reservoir water levels during the first half of the year, delays in the commissioning of new capacity, and a deterioration of capacity utilization in thrrmal plants. As a result, power generation was about 11.5X below requirements and constituted a maior bottleneck in the economy. Key industries which were adversely affected by power constraints included steel, fertilizers, cement, and coal. To improve performance in the pover sector, the Government recently increased incentives for higher labor and managment productivity in thermal plants. Railway freight traffic, measured in ton-ims, grew by only  -4- 0.5% in 1983/84, reflecting sluggish demand. Coal production increased by about 6.5Z in 1983/84 reaching 139 million tons. When combied with stocks already available this level of productiou was sufficient to meet the rela- tively slov demand growth. Infrastructural constraints would have emerged much more sharply had the pace of industriaj growth and demand been more rapid. It is therefore critically important that India maintain the pace of investment in these key sectors,,mobilize sufficient resources to do so, and implement programs to enhance productivity. 11. The Indian economy has reverted from a situation of resource surplus in the late 1970s to an aggregate resource deficit. The gap between gross investment and national savings increased from negligible levels during the late 1970s to an average equivalent to 2.1% of GDP in 1980-84. India's gross national savings rate, which averaged 22.6% of GDP in the last four years, is high by any standard, particularly considering India's low income and the large proportion of its population below the poverty line. The scope for a substantial increase in the savings rate is therefore quite limited. If India is to maintain investment at about 25% of GDP, a major effort will be required to raise additional domestic resources particularly in the public sector. 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. This would also allow a marginal decline in the use of foreign savings from the recent 2.1%-2.3Z of GDP to 1.5Z-l.8%, to ensure a sus- tainable external debt service burden. 12. India's external resource position has changed notably since the late 1970s. The current account balance, which recorded surpluses from 1976/77 to 1978/79, reverted to deficits averaging US$3.5 billion and 2.1X of GDP during 1980/81 to 1983/84. Several developments contributed to these relatively larger current account deficits. First, the terms of trade deteriorated sharply in 1979/80 due to the second round of oil price increases and con- tinued to move against India during the first three years of the 1980s. Second, a more liberal import policy towards industrial inputs was pursued. Third, net invisibles declined as travel receipts fell off, workers' remit- tances stagnated (reflecting slower development activity in the Middle East), and payment of interest on higher levels of foreign debt increased. Faced with severe infrastructural constraints and a deterioration in its balance of payments, India initiated an adjustment program in 1980/81 designed to raise the growth rate from its historical level of 3.6Z to 5.22 while adjusting the country's external balance to the adverse price developments in the world markets. The main elements of this strategy are export promotion, import substitution where economically justifiable, implementation of a coherent energy pqlicy designed to meet the energy needs of the economy while curbing the growth of oil imports, and continued movement toward 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 program is being successfully implemented, and is leading to substantial improvements. 13. A positive development in India's balance of payments is the reduc- tion in the trade deficit from US$7.7 billion in 1980/81 to US$5.9 billion in 1983/84 despite unfavorable world market conditions and iuport -~~~~~~~~~~~ _  -5- liberalization. Export volume growth and import substitution of oil and petroleum products, metals and fertilizers more than offset the substantial increase in "other" imports. These "other" imports consist mainly of industrial imports and capital goods which historically have been in chronic short su'ply and which are of critical importance to capacity utilization, product quality, and plant mddernization and expansion. A major factor in the decline of the trade deficit was the lower net import bill for petroleum, which dropped from US$6.7 billion in 1980/81 to US$3.4 billion in 1983/84 in response to a successful oil development program that reduced import needs and allowed crude oil exports, which totalled about US$1.5 billion in 1983/84. These structural changes in the balance of payments are to a sig- nificant degree the result of India's development and adjustment efforts over the past three years. It is expected that the balance of payments vill continue to be under strain for the next several years, since the adjustment strategy vill continue to require high levels of imports. 14. Even assuming a favorable export performance, India will need exter- nal capital flows to augment its own resources for the foreseeable future, given the low per capita income level in the country, the already high savings rate, and the import requirement associated with improved growth rates. Faced with a growing need for external capital inflows and stagnation in the availability of concessional assistance, India decided at the start of the Sixth Plan to increase borrowings from the International Monetary Fund (IMF) and commercial banks to substantial levels. In the period covering the fiscal years 1981/82 to 1983184. India drew SDR 3.9 billion from the Extended Fund Facility of the IMF. In addition, India borrowed significant amounts on commercial terms from the Euro-dollar market and increased the use of suzppliers' and export credits. In the period 1980-84, India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,000 million. The bulk of this borrowing has been used for specific development projects in the public and private sector (mostly for petroleum exploration and development, steel, power, aluminum and shipping). India's favorable debt service position and the nature of its borrowings, for project-related purposes instead of direct balance of payments support, enabled it to tap commercial capital markets at favorable spreads. This larger commercial borrowing and transfer of funds under the arrangement vith the IMF has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. Development Prospects 15. 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 manufac- turing a wide variety of consumer and capital goods. Basic infrastructure - irrigation, railways, telecommunications, power, roads and ports -- is exten- sive compared to many countries, although there is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India also has a wide range of institutions capable of fostering development and is well-endowed with human resources. Finally, India has an extensive natural resource base in terms of land, vater, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic  -6- policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its'1ong-term growth. 16. The Government is currently preparing the Seventh Plan which will lay down the development strategy for 1985/86-1989/90. This strategy is expected to continue the emphasis of the Sixth Plan on agriculture, energy development, export promotion, domestic import substitution where economi- cally justifiable and the removal of infrastructural bottlenecks. Overall Sixth Plan performance has been encouraging, with aggregate real investment projected to be about 30X higher than in the period 1975-80-a creditable performance indeed. The Sixth Plan expenditure targets, however, will not be fulfilled as resource mobilization by the public sector will fall short of the financing requirements of planned public investment. Actual aggregate real investment is projected to be about 7Z below the original target for the period 1980-85, private investment being 5Z to 1OZ higher and public invest- ment about 20% lower in real terms than actually projected. In terms of meeting Plan expenditure targets, the performance of the Central Government is considerably better than that of the State Governments. The Central Government's Plan outlays are likely to reach about 80Z to 902 of the original Plan allocation in real terms, while the States' will probably achieve only about 50% of their targets. Bottlenecks in key sectors such as power, transport and irrigation are likely to persist as a consequence of real investment shortfalls relative to original Plan allocations. 17. Although Sixth Plan expenditure targets will not be met, India's capital formation rates have increased from 22.6Z in 1975-80 to 24.7Z of GDP in 1980-84. Recent higher capital formation rates are encouraging for future income growth, but returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and groving proportion of investment has been needed to build up basic infrastructure services which have inherently high capital-output ratios. However, there is scope to reduce capital-output ratios through improvements in efficiency. As discussed in greater detail in our recent economic reports, 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, expan- sion of planned capacity in accordance with the requirements of the rest of the economy will be vital for sustained growth. 18. Under the Sixth Plan, India has an ambitious oil development program backed by substantial financial comitment. Performance under the program -has been excellent with real investment and oil production levels running yell ahead of Plan Targets. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. While the gap between domestic consumption of petroleum and production remains large, India's dependence on oil imports dropped from 63% of consumption in 1979/80 to about 41% in 1983/84 and is expected to decrease to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined vith the possibilities for accelerated offtake from known fields, offers much encouragement for India's  -7- longer-term energy prospects. At the same time, the increases in domestic petroleum prices have helped encourages conservation and slow demand growth. 19. India's development prospects over the next few years will hinge on the extent to which the economy can he brought into both internal and exter- nal balance, while at the same time achieving more rapid growth than in the past. This will require the continuation of the current development strategy which assigns high priority to export promotion, public finance discipline, improvement of economic efficiency, and investment in infrastructure, sup- ported by adequate flows of external borrowing and aid. In the short term, a relatively large level of external borrowing, including an increased emphasis on commercial borrowLing, will be necessary to cope with the balance of pay- ments consequences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance since India is still a very poor country with a large rural sector and enormous investment requirements for human development and basic infrastructure. 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 fact that India has been able over the past decade to maintain a rate of growth above the long term trend, despite the poor monsoons of 1979 and 1982, suggests that a more open trade policy and expanded efforts to remove constraints on the growth of productive capacity, supported by adequate mobilization of both foreign and domestic savings, can sustain a rate of growth closer to 5.0% per annum than to the long-run trend of 3.6Z per annum. If the rate of population growth can be brought 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 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 Iadia's development efforts. The 1981 Census indicated there was no decline in the rate of population growth, which remained about 2.2% per annum in the 1970s despite a measurable decline in fertility rates. The population growth rate failed to decline in the past decade due to a reduc- tion in the infant mortality rate and an increase in life expectancy, reflecting larger availability of food and health services. While this is a welcome development, it implies a greater strain on the economy and re- emphasizes the need for continuing efforts to strengthen the health and family planning programs 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. The Government is reviewing its population policy for the Seventh Plan, with indications of a determination to retain the emphasis on the implementation of family planning, health, education and literacy programs aim2d at reducing fertility rates. 21. Reduction of poverty remains the central goal of Indian economic and social policy. 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 population subsist below the poverty line. Srgnificant reductious in poverty will depend primarily on an acceleration of economic growth, particularly in agriculture, combined with effective implementation of poverty alleviation programs. India's poverty alleviation strategy appropriately recognizes that production-oriented programs, which aim at accelerating the overall pacq of economic growth, and poverty alleviation programs, targetted at those least able to participate in the general growth of the economy, can be mutually reinforcing rather than substituting for each other. Major poverty programs operating on a nationwide basis at present include: the Minimum Needs Program (MNP), the Integrated Rural Development Program (MPDp), and the National Rural Employment Program (NREP). The IRDP and NREP are targeted programs aimed at increasing the incomes of the poor rapidly, either through the transfer of productive assets or direct employment. The MNP, aims at broadening the provision of social infrastruc- ture and basic services which enhance the human capital of the poor and improve living standards. Thes. programs represent a vitally important commitment of the Government to address the needs of the poorest. The scale of the poverty problem in India, combined with the inherent difficulties in implementing poverty programs in any country, imply the need for continued efforts to enhance the effectiveness of these programs. PART II - BANR GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 76 loans and 164 development credits to India totalling US$5,183 million and US$12,016 million (both net of cancellation), respectively. Of these amounts, US$1,452 million has been repaid, and US$5,723 million was still undisbursed as of March 31, 1984. Bank Group disbursements to India in the current fiscal year through March 31, 1984 totalled US$1,072 million, representing an increase of about 6 percent over the same period last year. Annes II contains a sumary state- ment of disbursements as of March 31, 1984. 23. Since 1959, IFC bas made 29 comuitments in India totalling US$224 maillion, of which US$32 million has been repaid, US$56 million sold and US$17 million cancelled. Of the balance of US$118 million, US$111 million repre- sents loans and US$7 million equity. A sumary statement of IFC disburse- ments as of March 31, 1984, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and on-farm development designed to increase agricul- tural productivity, and efforts to improve the availability of basic agricul- tural 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 grovth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through pover 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 institutions. Recognizing the importauce of improving  -g- 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 vell 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 infrastruc- ture development will appropriately contribute to India's adjustment and growth prospects. Irrigation will need continuing support, with emphasis on improved efficiezcy in water conveyance systems to ensure reliable delivery to fazmers' 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 distribuzion, 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 pover shortages which constrain output in both the agricultural and industrial sectors. Exploitation of oil and gas resources is a central element of this program, which should be supplemented by investments in hydro and thermal power generation, and in the expansion 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 compara- tive advantage in producing, should also receive high priority. Finally, raising the e:ficiency and levels of transportation infrastructure would mitigate a key cons traint to achieving higher levels of economic growth so that further support of the railways and for ports development will be par- ticularly 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 co=zmmity, India successfully adjusted to the changed world price situation of the nid-1970s. However, India continues to require a substantial level of foreign assistance both to offset the overall deterioration in the world trade envirozment, and to sustain the relatively higher investment and growth rates achieved during the first four 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 and irrigation. 27. India-s poverty and needs are such that -whenever possible, external capital requirements should be provided on concessional terms. Accordingly, the bulk of the Bank Group assistance to India in the past was provided from IDA. However, IDA lending to India has declined from a peak of US$1.5 bil- lion in 1980 to below US$1 billion since that time, mostly due to funding constraints related to IDA 6. Lower IDA 7 replenishment and uncertainties about IDA 8, coupled with increasing claims for IDA funding from other  -10- countries, indicate that the amount of IDA funds available to India is likely to continue declining, even in nominal terns, and will remain small in rela- tion to India's needs for external support. Thus, this requirement for additional assistance vill have to be met, in part, through larger Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A continuation of efforts already undervay to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduc- tion in the rate of population growth should rebult in continued economic growth and improvement in tue balance of payments. Despite recent setbacks, India's external payments position is still wanageable. The ratio of India-s debt service to the level of exports of goods and services and receipts of current transfers was about 12.9% in 1983/84. Over the next several years this ratio is projected to rise to around 20X and remain around that level through 1995196. As of March 31, 1984, outstanding loans to India held by the Bank totalled US$3,884 million, of which US$2,021 million remain to be disbursed, leaving a net amount outstanding of US$1,863 million. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969170, the Bank Group accounted for 34Z of total commitments, 13Z of gross disbursements, and 12% of net disbursements as compared with 62%, 33Z and 37Z, respectively, in 1983184. On March 31, 1984, India-s outstanding and disbursed external public debt was estimated to be about US$26.9 billion, of which the Bank Group's share was US$9.6 b1llion or 36Z (IDA's US$7.8 billion and IBBD's US$1.8 billion). In 1983184, about 19.0Z of India-s total debt service payments were to the Bank Group. PART III - FORESTRY IN INDIA AND KERAILA Backaround 29. India's forest reserve land covers about 75 N ha, or 23% of total land area, but only about 50% of this designated land is tree covered. One of :he serious problems facing India is the degredation and depletion of its forests, which is causing considerable harm to the environment. Forests have been depleted through uncontrolled lopping and felling of treee for fuel and fodde&. Overgrazing has also taken its toll on young trees and grasslands, further removing the groundcover necessary to protect and replenish the topsoil. Unless the decline in forests and other tree resources is steened, the shortage of fuelvood, timber, poles a-d other forest products will become _ncreasingly critical. 30. A study by the National Council of Applied Economic Research estimated total fuelwood consumption in 1978/79 at 95 N tons (125 H m3) or 62 M tons of coal replacement equivalert. Of this, one-third was in the form of logs, the rest in twigs and branches. In addition, 71 M tons of cowdung were burnt (22 H tons coal rep.acement equivalent). The estimated demnd in the year 2000 would be 200 M m3 without considering any substitution of dung with fuelwood. If 502 of tLe energy consumed by dung burning was substituted by fuelwood, the total fuelwoci demand would be about 230 H m3. For industrial wood, the demand has been estimated at about 27 M m3 in 1980 and 65 M m3 in 2000. The total annual wood demand for the year 2000 is therefore  likely to be nearly 300 X m3, equivalent to some 20-30 N ha of mature plantation. Government of India Policies and Social Forestry ProRrams 31. Over the years, GOI has taken an increasingly active role in forestry, which traditionally had been left to private interests and the commercial sector. To meet future fuelvood needs, a Fuelvood Commission Report of 1980 recorxmended a five-fold increase in the current level of social forestry planting. This is reflected in the country's Fifth (1974-79) and Sixth (1980-85) Five-Year Plans, which devoted respectively, 49% and 78% of forestry allccations to social forestry. It 8s expected that about 1.93 N ha of social forestry plantations would be established under the auspices of State forestry programs by the end of 1988, amounting to a total public investment of Rs 5,950 M (US$540 N). Forestry in Kerala 32. Kerala covers 38,663 km2 and is one of the cou atrys smallest States. The State generally enjoys good sunlight, has fertile soils, a plentiful network of water resources, and good rainfall from both the May-August south- west and September-October northeast monsoons. Agroforestry orientation in Kerala is strong. Besides commercially grown tree crops such as coconut and rubber, other trees, including those which provide support for pepper vines or shade for cocoa, cardamom and coffee, compleoent important agricultural crops. In addition, private farmers grow trees like Ailanthus for sale to matchbox/splint and packing case manufacturers, Casuarina for sale as poles, and other species for sale as small timber. 33. Forests cover about 11,239 km2, or 29Z of the Sta:Ces land. The growing stock comprises 167 K m3 of wood, expected to be utilized as follows: 53! fuelvood, 11% plywood, 2Z matchwood, 2 pulpwood and 32% other industrial wood. The increasing difficulty in satisfying local demand for firewood, as well as other uses such as timber and poles, is reflected in the recent rapid price increases for these prodicts. Moreover, the commercial market for vood does not fully reflect the current situation, since non-commercial consump- tion constitutes a major portion of total demand. 34. Decline of Forests. Forested areas have declined for several reasons, and have not been replanted at an adequate rate. Population pres- sures have led to deforestation. Landholdings are quite small (90X of them are under one ha), population density is the highest in India, and Kerala has a population growth rate of about 2.6% per annum. Natural sources of fuel including private trees and agricultural waste, have not increased at the same rate as the population. Formerly productive forest land has been encroached by farmers, submerged following hydro-electric and irrigation works, and redeEignated as wildlife sanctuaries and parks. Moreover, the growing stock available for annual harvesting will further decrease since the Govez-rment of Kerasa (GOK) recently decided, as an environmental measure, to stop clearfelling operations. 35. Fcrest Policy and Organization. GOK aims to protect the existing forests and establish new plantations, and expand the area for tree planta- tion throz_-g farm forestry. It has devoted increasing resouzces to social  -12- forestry and has established regulations for protection. GOK's social forestry expenditure vas Rs 0.4 million and Rs 4.5 million under the Fourth Five-Year Plan (1969-74) and the Fifth Five-Year Plan (1974-79), respectively, and it is planned to be Rs 19.6 million under the current Sixth Five-Year Plan (1980-85). 36. Forestry Institutions. The Government Secretariat for Agriculture and Forests (SAF) administers both agriculture and forestry. The Forest Department has four Chief Conservators of Forests (CCF) and one Additional Chief Conservator, each of whom is directly responsible to the Secretary/Agriculture Production Commissioner of the SAF. Two Forestry Training Schools provide a basic training course for Foresters and Rangers. In 1982, GOK established a separate Social Forestry Wing (SFW) in the Forest Department. Currently, the SFW is staffed with a small headquarters staff and very limited field staff. 37. SFW distributed 103 M seedlings for farm forestry, and planted 4,418 ha (on degraded land, block plantations, strip plantations and plots in tribal areas) in 1982-83. SFW nov aims to strengthen its organization in order to improve the survival rates of seedlings, the quality of advice given to farmers and the impact of its programs. 38. Villages are grouped under panchayats, which undertake a vide variety of both compulsory and discretionary duties regarding forestry. In addition to Government agencies, voluntary organizations also are active in Kerala. Many of them have collaborated with the SFW in the distribution of seedlings and in advising farmers on planting. The Bank-s Involvement in Indian Forestry 39. The Bank Group, as well as other donors, including the United States Agency for International Development, the British Overseas Administration and the Swedish International Development Agency, have supported India's program for forestry development. The Bank has financed five social forestry projects in India, one of vhich includes two States: the Uttar Pradesh Social Forestry Project (Credit 925-IN; US$23 million; June 1979); the Gujarat Com0uuity Forestry Project (Credit 961-IN; US$37 million; April 1980); the West Bengal Social Forestry Project (Credit 1178-IN; US$29 million; February 1982); the Jamu and Kashmir and Haryana Social Forestry Project (Credit 1286-IN; US$33 million; September 1982) and the Karnataka Social Forestry (Cr. 1432-IU; US$27 million; February 1984). The recent mid-term reviews of the Uttar Pradesh and Gujarat Social Forestry Projects, and supervision of the social forestry projects generally, indicate good overall progress in implementation. 40. The relative emphasis on different types of plantation components has changed in social forestry projects. Focus is nv on farm forestry, which is less expensive than planting on Government land and it yields higher and more direct benefits to farmers, since farmers take all produce/revenues. Farm forestry performance has exceeded appraisal expectations. Other social forestry components are generally progressing well, except for the self-help village woodlots schemes in which performance is below expectations, mainly due to the inability of village administrations to mobilize adequate funds for development works.  -13- PART IV - THE PROJECT Background 41. The project was appraised by a Bank mission which visited India in January/February 1984. Negotiations were held in Washington D.C. in June 1984 with an Indian delegation coordinated by Mr. P. Singh, of the Government of India's Department of Economic Affairs, Ministry of Finance. The Staff Appraisal Report, No 5036-fN, is being distributed to the Executive Directors separately. A Supplementary Data Sheet is attached as Annex III. Project Rationale 42. Kerala, like a number of other Indian States, is experiencing a severe deficit with regard to forest products, especially fuelvood, building poles, small timber and fodder. The deficit is creating social, economic and ecological problems. GOK has devoted substantial resources in order to overcome the problem. However, assistance is needed to (i) adequately expand resource availability for the subsector; (ii) improve project design; (iii) foster family operated nurseries; (iv) implement a pilot program for cultivating medicinal plants; and (v) introduce key institutional changes in order to launch and execute effective social forestry programs. Proiect Obiectives and Description 43. The project's primary objectives are to (i) increase production of fuelvood, small timber poles and fodder; (ii) increase farmers' incomes; (iii) reduce soil erosion and conserve soil moisture; and (iv) strengthen forestry institutions. The project would consist of: (a) forest planting of approximately 85,000 ha; (b) establisbmeut/improvement of nurseries; (c) extension and publicity; (d) training; (e) research and studies; and (f) institution building. Detailed Features Plantation Proaram 44. Farm Forestry (69.200 ha-81% of Total Planting Program Under the Proiect). The project would provide funds for establishing of 69,200 ha of forestry on private farm land through development of additional nurseries and provision of advisory services. For this purpose, GOK would raise and distribute, particularly to small farmers, about 340 million seedlings over a six year project period. A network of small family and school operated nurseries would support this effort. In line vith GOI's policy and in accordance with previous agreements betveen the Bsnk and GOI, only a limited  -14- number of seedlings-3,500 Casuarina and 500 for other species, would be distributed to each farm fa;lly free of charge. This is the estimated number of trees required to meet the domestic needs, mainly for fuelvood, of an average family. Seedlings in excess of the free limit would be charged at the full financial cost of production including the cost of trausportation. Farm forestry, which would constitute the largest portion of the plantation program, is expected to be the most beneficial to farmers, and more flexible with regard to species mix and product utilization. 45. Block Plantations (12.000 bha-14Z of Total Planting Program). Funds would be provided under the project to finance establishment of 12,000 ha of block plantations on Government land; 11,000 ha would be in large blocks and 1,000 ha would be in small blocks. Block plantations would produce addi- tional fuelvood and poles on otherwise unproductive land. The pLantations would be established by the SFW. Laborers from nearby villages and some forest guards would be employed for establisbhent, maintenance and harvesting of the plantations. SFW would bear the cost of establishment and maintenance. Hovever, GOK would recover the direct costs by selling forestry produce at Government depots. GOK would finalize arrangements for sale of fuelwood by June 30, 1986 (paragraph 2 of Schedule 2 of the draft Project Agreement). 46. Strip Plantations (2.000 ha-2Z of Total Planting). Under the project SFW would establish plantations along coastal belts, roadsides, railway and canal strips. SFW's role would be the same as under block plantations. The design of strip plantations would take into account the existing land use patterns so as to avoid adverse conflicts between competing needs. 47. Involvement of Tribals (2.100 ha-3Z of Total Planting). Funds would oe provided to enable SFW to extend special assistance to tribals by (i) establishing 2,000 ha of plantations adjacent to tribal communities to produce fuelwood; (ii) establishing, on a pilot basis, 100 ha of medicinal plants to be cultivated by tribals who would market the plants, and increas- ingly assume responsibility for running the operation; and (iii) setting up a limited number of small nurseries to be run by tribals. In addition, tribals would be employed on GOK plantations, and after acquiring forestry skills, progressively take over responsibility for the plantations adjacent to them. 48. Nurseries and Seedlings. The project would provide funds for establishment/improvement of a large number of small nurseries on family holdings, and to a limited extent, on school grounds. SFW already has been operating about 100 small nurseries, and 472 such nurseries are planned for the first year of the project, increasing to 1,055 by the fifth year. Foresters would closely supervise and assist the operators of the small nurseries-contractor operators. SFW would take an agreed number and type of seedlings for distribution and planting from each operator each year. The seedlings would meet agreed quality standards. Farmers would have easier access to seedlings through these nurseries, which would reduce dis.ributiou costs. The nurseries would be a source of income to the families employed to operate them, and vould reduce SFW's costs. The nurseries would also be used as locations for extension advice to farmers. It is expected that SFW would  -15- establish about 50 large nurseries of its own. Meanvhile, every August, GOI and GOK would reviev the small nurseries scheme and submit a report to IDA. 49. Extension and Publicity. Given the broad scope of the farm forestry component and the fact that farmers would be responsible for the planting and care of about 340 million seedlings, extension and publicity activities would play an important role in project success. On the field extension side, the Social Forestry Wing would have a relatively small but trained cadre of Rangers and Foresters to take responsibility for farm forestry promotion at key distribution and meeting points. As for follow-up with individual farmers, the existing agricultural extension system (vith nearly 2,000 Village Level Workers making fortnightly visits) would lend valuable assis- tance in reinforcing messages on tree planting to farmers. SFW and Agricultural Extension staff would coordinate social forestry activities, in line with similar trends in other States with Bank-financed projects in both social forestry and the Training and Visit system of agricultural extension. The project would also provide funds to enable SFW to sponsor a variety of extensiou and publicity activities including: Ci) a special promotion by voluntary organizations; (ii) extension and publicity publications and materials; (iii) radio announcements and dissemination of information through newspapers and other news media; (iv) talks and demonstrations at meetings and schools; (v) organizing farmers' rallies and meetings; (vi) tours by publicity vans, and (vii) hiring of a local consultant to prepare an informa- tion and publicity program. 50. Training. The project would provide funds for improving the capacity of the forestry training schools to conduct orientation, basic and inservice training for existing staff in social forestry techniques and extension. In addition, training programs would be developed for voluntary organizations, farmers and other interested parties. Training and accommodation facilities at Walayar and Arippa Forestry Training schools, would be expanded and exist- ing buildings would be renovated. Tender documents, including detailed plans for the first year civil works, would be submitted to IDA and contracts are expected to be let by November 30, 1984. 51. Research and Studies. Funds vould be provided for institutions and individual consultants to undertake research related to social forestry, including tree quality, effective extension and appropriate monitoring and evaluation procedures. Funds would also be provided to finance a wood supply and demand study to be completed by December 31, 1985. Organization and Management 52. The Secretary/Forests, Government Secretariat, would have the overall responsibility for all coordination. However, the CCF/Social Forestry, would have the primary responsibility for project implementation by the SFW. The SFW will include at headquarters, four support divisions: (i) training, extension and publicity; (ii) planning and programming; (iii) monitoring and evaluation; and (iv) finance. Two regional Social Forestry Circles each headed by a Regional Conservator, have been established and would be respon- sible for field operations.  -16- 53. The SFW would be strengthened through improved organization, training additional staff and vehicles and equipment. The newly created position of the CCF/Social Forestry has been filled. The positions of Conservator for Training, Extension and Publicity, Conservator for Planning and Progra-ming, Deputy Conservator of Forests for Monitoring and Evaluation and Finance Officer have been sanctioned and filled. The two Regional Conservator posi- tions have been sanctioned and will be filled by December 31, 1984. In addition, 14 positions of District Divisional Conservators of Forests have also been sanctioned. Monitoring and Evaluation 54. The Monitoring anc Evaluation Office (MEO) would monitor progress of project implementation, and undertake an evaluation of the impact of the project, in accordance with the "Operational Guidelines to the Monitoring and Evaluation of Social Forestry in India" formulated by GOI, FAO and IDA. The HEO would carry out a mid-term review after the third year's planting season, and, by March 31, 1987, submit to IDA a report concerning the review (draft Project Agreement, Section 3.02). Cost Recovery 55. The primary objective of the project is to meet critical basic needs of rural and semi-urban people. The Govervment investment associated with the project is seen as part of a rrogram for the uplifting and welfare of the rural population, costs of which traditionally are not recovered from the beneficiaries. However, substantial cost recovery would be made for planta- tions on public lands, by selling the fuelwood and poles produced on such lands. In addition, the costs of seedlings in excess of the free limits would be fully recovered. Moreover, the project would aim at reducing GOK involvement in small nursery operations and thereby gradually divesting itself of a substantial fiscal burden associated with farm forestry development. Project Cost and Financing 56. Total project cost, based on January 1984 prices and projected to July 1984, is estimated at US$54.5 million equivalent, including taxes and duties estimated at US$1.5 million equivalent, or 2.8Z of total project cost. The foreign expenditure component is estimated at US$3.7 million equivalent or 6.8% of the total. Physical contingencies amount to about US$2.6 million or 6.2% or base costs, while price contingencies of about US$10.5 million are based on expected annual price increases for local expenditure of 8X, 7Z, 7Z, 7%, 62, 6Z for the Indian fiscal years 1984-90, and 5%, 8%, 9%, 9%, 9Z, 7%, for foreign expenditures for the same years. 57. The credit of US$31.8 million equivalent would cover about 60Z of total project costs net of duties and taxes. GOI and GOK would contribute the balance of US$22.7 million equivalent, or 40% of the total project cost. Retroactive financing not exceeding US$1.0 million would be provided to cover expenditures incurred after March 31, 1984, for nursery development, advance soilworks for plantations, civil works related to construction of training schools and Trivandrum and regional headquarters, essential vehicles and  -17- equipment, incremental staff employed on the 1984 planting operation (paragraph 4 of Schedule 1 of the draft Credit Agreement) and consultancy services for the wood supply and demand study. Procurement 58. All items to be procured under the project would involve local com- petitive bidding (LCB) or force account procedures. Civil vorks (US$10.8 million) would be small and scattered geographically and over time, consisting mainly of simple housing, office and training facilities. Consequently, contracts would be let on the basis of LCB under GOI's proce- dures satisfactory to IDA. If no responsive bids are received due to the small size of the individual contracts, work would be done by force account. Contracts over US$150,000 would be subject to IDA's prior review. Vehicles (US$1.l million) comprising small numbers of several types, would be pur- chased over two years and, would require purchase of locally made vehicles of types already being used by Government departments. Procurement would be under LCB according to Government procedures acceptable to IDA. Imported research and other technical equipment (US$0.2 million) would be specialized, proprietory, required in small quantities, and therefore, would not be suitable for international competitive bidding. These items, together with other equipment, materials and furniture would be bulked wherever possible and purchased under LCB, except for contracts valued at less than US$20,000 which would be purchased through prudent shopping. Plantation activities (US$31.4 million) would be scattered throughout the State and would be car- ried out through force account according to Government procedures satisfac- tory to IDA. Consultant services would be procured in accordance with IDA guidelines. Disbursements 59. The proceeds of the credit would be disbursed as follows: (a) 50X of total costs for civil works; (b) 100% of CIF price of imported vehicles, equipment and furniture, or 70% if locally procured; (c) 60% of total planta- tion costs; (d) 100% of total costs for foreign and local study tours, and studies, including consultancies; and (e) 60% of incremental staff salaries. 60. Disbursements against expenditures for the following items would be against statements of expenditures certified by the CCF/Social Forestry, the documentation for which would not be submitted to IDA for review but would be retained by the project authorities and made available to IDA review missions for their inspection: (a) plantation costs, local and overseas training costs; (b) payments under civil works contracts not exceeding Rs 300,000 and those carried out under force account; (c) locally procured vehicles, equip- ment and furniture costing Rs 150,000 or less; (d) research, studies and local consultant costs. Disbursement against all other items would be con- tingent upon full and satisfactory documentation. The estimated disbursement schedule has been based on the disbursement record for the ongoing IDA financed Social Forestry projects in India.  -18- Accounts and Audit 61. The Forest Department's Social Forestry Wing would maintain separate project accounts in a readily identifiable form to facilitate their being audited independently from overall accounts. Such accounts and statements of expenditure would be audited anuually by the Government or a private auditing firm satisfactory to IDA in accordance with general auditing principles consistently applied. Audited statements would be made available to IDA not later than six months after the end of each year (draft Project Agreement, Section 3.01). Benefits, Justification and Risks 62. The annual incremental production of forestry products comprising 11.9 million m3 of fuelvood, 13.9 million m3 of sawlogs, 8.0 million m3 of small poles and 16.0 million m3 of large poles would assist in reducing the groving shortage of these products. Most of the production would bec2fit the rural and semi-urban poor, particularly, the landless laborers and small marginal farmers. The farm forestry and small nurseries components would directly increase farmer incomes. Over the six years, the project would generate 530 semi-skilled jobs in the SFW. The small nurseries would provide employment for about 3,000 farmers and the plantation activities would gener- ate 9 million labor days of work on establishment and maintenance of the plantations. In addition, the project would strengthen the SFW and related institutions and enable them to provide effective social forestry guidance and extension services. The project would also help to improve the ecology, soil fertility and climatic conditions. 63. The economic rate of return is estimated at 26Z. The economic rates of return for the individual plantation components range from 15% for strip plantations, to 332 for farm forestry. The sensitivity analysis indicates that the benefits would have to go down by 73% or costs increase by 278%, for the project to be economically unattractive. 64. The project faces no major risks. Hovever, wastage of seedlings could occur if seedlings distribution programs exceeded SFW's capacity for efficient distribution. However, the risk would be minimized by an assurance that IDA would be consulted regarding the introduction of any new distribu- tion programs. It is planned to use the existing agricultural extension service to advise on proper tree planting and maintenance instead of expand- ing the existing extension staff employed by the Department of Forestry. To minimize the risk involved in the new approach, GOK has finalized arrange- ments satisfactory to the Association, to ensure effective coordination between the agricultural and social forestry extension services. It is also possible for insect damage to occur on Ailanthus trees included in the farm forestry planting program. However, effective insecticides are available and extension advice would focus on this problem.  -19- PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The draft IDA Credit Agreement between India and the Association, the draft Project Agreement between the Association and the State of Kerala, and the Recommendation of the Coumittee provided for in Article V, Section l(d), of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 66. Special conditions of the project are listed in Section III of Annex III. 67. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VT - RECOMMENDATION 68. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachment July 11, 1984  AMNE I Page 1 of 5 INDIA - SOCIAL INDICATORS DATA SHEET IDIA RUEERENCE aours (tE:lQ AV A {S) a MtOST (MST RCT ESrmA7t) /b I7galb b "T b LOW IM IDDLE INCCRE lb 1970.-ETMA&- ASIA & PACIFIC ASIA 6 PACIFIC 1960- t70 ESTmAT rs cso*-Ar A (T 9A SQ. 00 TOTAL 3287.6 32U7.6 3287.6 AURtICLTUL. 1760.7 1780.5 1811.3 cp MM CaPITA CUSB) 70.0 100.0 260.0 276.7 1028.6 a cums ar (KILORAMS OF COA.L FIVALERr) 114.0 165.0 210.0 398.4 792.8 PMATI0 AM WIl SDT;SCS POPULATION,MD-YEAR. (TIMOSA-MS) 434850.0 547569.0 690183.0 Ur" POP