India - Second Farakka Thermal Power Project

Document of The World Bank FOR OFFICIAL USE ONLY C _ O& , Report No. P-3826-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$300.8 MILLION TO INDIA FOR THE SECOND FARAKKA THERMAL POWER PROJECT May 22, 1984 This document has a restricted distribution and may be used by recipients oniv in the performance of their official duties. Its contents may not otherwise he disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of May 18, 1984) US$1.00 = Rs 11.093 Rs 1.00 = US$0.0901 Rs 1 million = US$90,100 The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were, except as otherwise noted, made at the rate of US$1 to Rs 10.8. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms BSEB - Bihar State Electricity Board CEA - Central Electricity Authority CWC - Central Water Commission DESU - Delhi Electricity Supply Undertaking GOI - Government of India GOWB - Government of West Bengal HVDC - High Voltage Direct Current ICB - International Competitive Bidding LCB - Local Coumpetitive Bidding LRMC - Long Run Marginal Cost NHPC - National Hydroelectric Power Corporation NTPC - National Thermal Power Corporation OPEC - Organization o:f Petroleum Exporting Countries OSEB - Orissa State Electricity Board PLCC - Power Line Carrier Communication REB - Regional Electricity Board REC - Rural Electrification Corporation SEB - State Electricity Board WBSEB - West Bengal State Electricity Board  FOR OFFICIAL USE ONLY INDIA SECOND FARAKKA THERMAL POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President. Beneficiary: National Thermal Power Corporation Limited (NTPC). Amount: US$300.8 million, including capitalized front-end fee. Terms: Repayment over 20 years, including five years' grace, at the applicable rate of interest; front-end fee of 0.25% of the base loan amount. OnlendinR Terms: From the Government of India (GOI) to NTPC, with repayment over 20 years, including five years' grace, at the interest rate applicable at the time for GOI onlending to industrial and commercial undertakings in the power sector, not less than 13% per annum. GOI will bear the foreign exchange and interest rate risks. Project Description: The project's main objective is to assist in meeting the electricity demand in the Eastern Region of India through the addition of 1,000 MW of thermal capacity at the Farakka thermal power plant in West Bengal. The project comprises the installation of two 500 MW generating units including boilers, turbogenerator sets, electrical and mechanical auxiliary equipment, associated civil works and common services and facilities. The project includes also the construction of about 640 km of associated transmission lines. There are no risks other than those normally associated with this type of project. All the major equipment components are manufactured in India, and there is adequate understanding of and experience with their installation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Estimated Cost: 1/ (US$ millions) Item Local Foreign Total Preliminary Works 5.7 - 5.7 Civil Works 98.2 1.7 99.9 Steam Generators, Turbogenerator Units and Accessories 280.] 212.6 492.7 Coal Handling and Transportation Equipment 28.8 15.9 44.7 Substations and Other Electrical Works 19.2 45.1 64.3 Transmission Facilities 98.6 30.6 129.2 Consultancy 7.2 0.5 7.7 Engineering and Administration 65.6 - 65.6 Base Cost 603.4 306.4 909.8 Physical Contingencies 28.2 15.3 43.5 Price Contingencies 154.4 83.3 237.7 Total Project Cost 786.0 405.0 1,191.0 Interest during Construction 33.4 115.3 148.7 Front-end Fee on Bank Loan - 0.8 0.8 Total Financing Requirements 819.4 521.1 1,340.5 Financing Plan: (US$ millinns) Local Foreign Total IBRD Loan - 300.8 300.8 GOI Loans and Equity 2/ 735.4 220.3 955.7 NTPC Internal Resources 84.0 - 84.0 Total 819.4 521.1 1,340.5 1/ Includes taxes and duties of about US$69 million. 2 Additional external financing up to an amount of about US$150 million may become available to finance the purchase of the steam generator and high pressure piping. In this event, GOI's contribution to project financing would be reduced accordingly.  -iii- Estimated Disbursements: (US$ millions) Bank FY FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Annual 18.0 1/ 40.0 63.0 51.0 57.0 36.0 23.0 12.8 Cumulative 18.0 58.0 121.0 172.0 229.0 265.0 288.0 300.8 Rate of Return: About 13%. Appraisal Report: No. 4967-IN, dated May 18, 1984. 1/ Including payment of front-end fee of about US$0.8 million.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR A SECOND FARAKKA THERMAL POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to India for US$300.8 million on standard terms to help finance the construc- tion of the second stage of development of the Farakka thermal power station in the Murshidabad district in the State of West Bengal. The project is designed to provide an additional 1,000 megawatts of electricity generating capacity to supplement the 600 megawatts provided under the first stage. The proceeds of the loan will be onlent by the Government to the National Thermal Power Corporation for twenty years, including five years' grace, at the interest rate applicable at the time for Government onlending to industrial and commercial undertakings in the power sector, not less than the current rate of 13% per annum. Additional financing of up to US$150 million equivalent, in the form of export credits and official bilateral assistance, may be provided towards the purchase of the steam generators and associated equipment. The exchange and interest rate risks will be borne by the Government of India. PART I - THE ECONOMY i/ 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 I. Background 3. India is a large and diverse country with a population of about 750 mil- lion (in mid-1984) and an annual 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 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. 1/ Parts I and II of the report are similar to Parts I and II of the President's Report for the Upper Ganga Irrigation Modernization Project (No. P-3804-IN), dated May 3, 1984.  -2- 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: 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. Extiernal 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 197(0s, 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 dowa a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substantially recovered with real GDP growing by 7.9% and 5.2%, respectively. While industrial output expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery wras 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 sect:or. This overall improvement in the  -3- 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. 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 lessened) power shortages, a textile strike in Bombay, as well as depressed export markets and increased competition from imports. The Government was able, however, to protect the level of savings to a large extent and keep the momentum of the investment program through largely successful public sector resource mobilization efforts. Foreign savings played a crucial role in sup- port of this effort. Similarly, the timely implementation of 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. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% in 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational  --4- 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 improve- ment must result from added capacity. It is therefore critically important that India maintain the pace of investment int 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 phenom(enon 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 large proportion of its population livinLg 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 significant increase in public savings due to improved profitability of various public sector enterprises. This trend which was maintained in 1982/83 needs to be accelerated. The gap between gross investmenl: and national savings which rose from 0.4% of GDP in 1979/80 to 1.8%, 2.3% and 2.1%, respectively in the first three years of the 1980s, has been financed by foreign savings. 12. India's ability to generate resources to meet its development objec- tives has become increasingly linked to the ba;lance of payments. The current account balance which recorded surpluses between 1976177 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 GDE? 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  -5- assistance, India has begun to borrow sig-nificant amounts on commercial terms from the Euro-dollar market in addition to much greater utilization of suppliers' and export credits. India's favorable debt service profile has enabled India to tap commercial capital markets at favorable spreads (over relatively high underlying rates). In the period 1980-84 India contracted commercial loans totalling over US$6,000 million and suppliers' credits of over US$1,020 million. This borrowing has been used for specific development projects in the public and private sectors (mainly for petroleum exploration and development, steel, aluminum and shipping). India also reached an agree- ment with the International Monetary Fund for the use of the Extended Fund Facility for SDR 5 billion, of which SDR 3.9 billion have already been drawn. The transfer of funds under this arrangement has stemmed the use of foreign exchange reserves which had fallen to less than four months of import coverage in 1981/82. In January 1984, India announced that it would not utilize the remaining SDR 1.1 billion because her external accounts have adjusted more rapidly than was envisaged at the time the arrangement was formulated. 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 fifth year. The Plan assigns priority to agriculture, energy development, the growth of exports and domestic import substitutes where appropriate, and the removal of infrastructural bottlenecks. Overall performance has so far been encouraging, although bottlenecks in key sectors such as power and transport are likely to persist. Moreover, fulfillment of the Plan targets will require additional resource mobilization. The efforts of the Central Government to raise resour- ces have so far been impressive and are likely to be broadly sufficient to meet the financing requirements of the Central Government's share in plan investment, even if some increase in inflation is experienced above current low levels. However, a shortfall in public savings is likely to occur in some States unless further measures are introduced. There will be a need also for continuous efforts to maintain the current level of private savings. Recent increases in interest rates and tax concessions on time deposits and the con- tinued dampening of inflationary expectations should stimulate such savings. 16. The higher capital formation rates of the past few years augur well for future income growth. However, returns to investment have so far been relatively low. Much of this phenomenon relates to India's stage of development, in which a large and growing proportion of investment has been  -6- needed to build up basic infrastructure. These services, such as power, tran- sport and irrigation, have inherently high capital-output ratios. However, there is scope to improve the sectoral capital-output ratios through greater efficiency and better management. Bottlenecks in basic infrastructural sectors clearly can prejudice growth in other sectors where large investments have been made. As demonstrated in the last three yearS, performance in the basic serv- ice sectors can be improved through better planning and management, thus leaLd- ing 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 clomestic 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 commercLal 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 expectea to be available from normal concessional sources. Given the favorable structure of India's external debt, which reflects the past reliance on concessional sources, India should remain creditworthy for a substantial growth in external borrowing. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. In the longer term, income growth represents the best strategy for achieving these needed adjustments, both by generating higher savings for further investment, and by fostering the development of export and import-substituting industry to improve the balance of payments. In the short term, a relatively large external borrowing, including an increased emphasis on commercial borrowing, will be necessary to cope with the balance of payments consequences of such a growth strategy. However, an important element in providing India with the capacity to adjust flexibly will be adequate flows of concessional assistance. Although India is currently in a position to increase borrowing on commercial terms from the very low levels; of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather  -7- than accept debt on unfavorable or unmanageable terms. The Government's effort to maintain an adequate rate of growth while adjusting the structure of the Indian economy to a more open and efficient environment requires foreign 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 1979180 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 685.2 million, or about 14 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. The expectation of a measurable decline in the population growth rate has not materialized. 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 evidence that well-targetted, relatively low-cost programs can lead to enhanced prospects for India's poor.  PART II - BANK GROUP OPERATIONS IN INDIA 22. Since 1949, the Bank Group has made 76 loans and 160 development credits to India totalling US$5,183 million and US$11,851 million (both net of cancellation), respect:ively. Of these amounlts, US$1,387 million has been repaid, and US$6,224 million was still undisbursed as of September 30, 1983. Bank &roup disbursements to India in the currernt fiscal year through September 30, 1983 totalled US$286 million, representing a decrease of about 2 percent over the same period last year. Annex II contains a summary state- ment of disbursements as of September 30, 1983. 23. Since 1959, IFC has made 29 commitments in India totalling US$224 million, of which US$30 million has been repaid, US$56 million sold and US$18 million cancelled. Of the balance of US$120 million, US$113 million represents loans and US$8 million equ:ity. A summary statemnent of IFC disbursements as of September 30, 1983, is also included in Annex L:E (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 agricultural productivity, and efforts to improve the availability of basic agricultural inputs to farmers through credit, fertilizer, marketing, storage, and seed projects. Major elements of the lending program have also been directed at helping to meet the energy needs of the economy while curbing the growth of oil imports, and to ease the infrastructure bottlenecks which have hampered economic growth in India, particularly through power generation and distribution, and railways and telecormunications proiects. 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 develop- ment finance institutions, Recognizing the importance of improving the ability to satisfy the essential needs of urban and rural populations, the Bank Group has supported nutrition and family planning programs, a rural roads project, as well as water supply and sewerage and other urban infrastructure projects. 25. This pattern of assistance remains highly relevant, and consonant with Government priorities, as reflected in the Sixth Plan. The coutinued active involvement of the Bank Group i.n 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 programt of investments aimeel 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 and gas resources is a central element of th:is program, which should be supple- mented bv investments in hydro and thermal power generation, and in the expan-  -9.- 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, India continues to require a substantial level of foreign assistance to India, both to offset the overall deterioration in the world trade environment, 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 competi- tiveness 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 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 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 about 20% and remain around that level through 1995/96. As of September 30, 1983, outstanding loans to India held by the Bank totalled US$3,932 million, of which US$2,100 million remain to be disbursed, leaving a net amount outstanding of US$1,832 million. 28. Of the external assistance received by India, the proportion con- tributed by the Bank Group has grown significantly. In 1969/70, the Bank Group accounted for 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.  -10-' PART III - THE POWER SECTOR Background 29. India's economic growth depends to a large degree on the development of the power sector; shortages of power have an immediate impact on virtually all activities of the economy. The development of the sector is therefore receiving high priority in Central and State Government investment planning, and the power sector now accounts for the largest share of India's public investment program (18% of the Sixth Five-Year Plan outlay). Power Supply and Demand -- India-Wide 30. In the 1950s and 1960s, India's power generation kept pace with its demand for power, with both installed capacity and power generation growing at an average annual rate of about 11%. Since 1970, supply has fallen short of demand primarily because of delays in commissioning new power projects, operating and maintenance problems, and severe budget constraints which have limited investment in the sector. The situati.on has been aggravated by unstable coal supplies caused by disruptions in coal mining and transport, and the declining quality of available coal. However, growth in power generation has been progressively stepped up: during the first half of the 1970s, it averaged only 5% annually; in the second half of the decade, considerable improvement was made, with growth in both generation and capacity averaging about 8% annually. The situation has further improved in 1980/81 and 1981/82, with an annual growth of about 8% in power generation exceeding a 6.5% annual growth rate in installed capacity, indicating better utilization of existing resources. Nevertheless, power shortages persist irn many parts of the country, particularly in the Eastern Region. Total installed generating capacity as of March 1983 was about 38,100 MW (including non-utility plant), of which about 63% was conventional thermal, 35% hydro, and 2% nuclear. 31. Industrial power consumption accounts for about 60% of all electricity sold, while agricultur,e (mainly irrigation) accounts for 18%, domestic use 12%, and other uses 10%. As a result of accelerated agricultural development, power consumption iD. the rural areas, where more than 80% of India's population livess, has shown marked growth in recent years. The number of villages which have been electrified, for example, increased from just over 3,000 in 1950/51 to an estimated 300,000 (representing about 52% of all villages in India) by the end of 1982. India's Central Electricity Authority (CEA) has projected in its long-term national power plan that over the period from 1982/83 to 1994/95, generating capacity will grow at an average annual rate of about 9.5% to a level of about 106,000 MW, of which about 59,000 1MW (56%) would be thermal, 44,000 MW (41%) hydro and 3,500 MW (3%) nuclesar. About 15,000 MW of the additional generating capacity is expected to be added by! 1984/85.  -11- Power Supply and Demand - Eastern Region 32. The Eastern Region, in which the proposed project is located, comprises the States of West Bengal, Orissa and Bihar. The major supply authorities of the Eastern Region are the State Electricity Boards (SEBs) of these States, the Damodar Valley Corporation, the Calcutta Electricity Supply Corporation, and Durgapur Products Limited. The total installed capacity in the Region as of March 1983 was about 5,800 MW, of which 17% was thermal, and the remainder hydro. Projects already committed would increase installed capacity in 1988/89 by 4,360 MW, of which 3,570 MW (82%) is thermal. Further new projects identified for study total about 5,720 MW, of which 3,655 MW (64%) is thermal. 33. Potential unconstrained peak demand in the Eastern Region is expected to grow by about 8% per annum until 1995. Although installed capacity is projected to increase at a rate of about 9.5% per annum until 1995, relatively reliable supply is unlikely to be attained before the early 1990s. The probability of loss of load, particularly if high forced outage rates continue, will be unacceptably high throughout the 1980s. Supply restrictions will have to continue for some time to come, and can only be eased through the timely implementation of projects and rapid improvement in plant maintenance. New additions to capacity in the Eastern Region during the 1980s will be predominantly thermal. New sites available for hydro development are limited and will take time to develop. However hydro-power development is planned to increase significantly during the early 1990s, so that by 1995 it is expected that about 30% of total installed capacity in the Region will be hydro. The Farakka power plant (2,100 MW) in West Bengal, together with the future Kahalgaon power plant (2,800 MW) in Bihar and the Talcher plant (3,000 MW) in Orissa, all of which will be owned by NTPC, will contribute to a significant increase in thermal power capacity in the Eastern Region, and would contribute to the elimination of the present power and energy deficit by the end of the decade. Bank Group Operations in the Power Sector 34. Since 1954, the Bank Group has made 15 loans to India for power projects amounting to US$1,389.6 million and 16 credits totalling US$2,266.0 million. Of these amounts, US$2,465.4 million is for generating plant; US$23.0 million for construction equipment for the Beas Hydroelectric Project; US$630.7 million for the provision of high-voltage transmission; and US$536.5 million for the support of rural electrification schemes. Sixteen projects have been completed: ten for generating plant, the Beas Project, four for power transmission, and the First Rural Electrification Project. The First Singrauli (Credit 685-IN of April 1977), Third Trombay (Loan 1549-IN of June 1978), and Second Rural Electrification (Credit 911-IN of June 1979) Projects are scheduled to be completed this year. The First Korba (Credit 793-IN of May 1978) and First Ramagundam (Credit 874-IN and Loan 1648-IN of February 1979) Thermal Power Projects are in an advanced stage of implementation. The loan for the Third Rural Electrification Project (Loan 2165-IN) was approved in June 1982. The loan for the Central Power Transmission Project (Loan 2283-IN), and the loan and credit for the Upper Indravati Hydro Project (Loan 2278-IN and Credit 1356-IN), were  -12- approved in May 1983. The loan and Special Fund credit for the Bodhghat Hydroelectric Project were approved in May 1984. The Singrauli and Korba projects are on schedule, but some delays have occurred in the Third Rural Electrification Project. The first five uniits of the Singrauli project and the first two units of the Korba project were commissioned on schedule. The Farakka and Ramagundam projects are proceeding satisfactorily, the first unit at Ramagundam having been commissioned four months ahead of schedule. Unit 5 at Trombay (the Third Trombay Project) was sy7nchronized in January 1984, about a year behind schedule. 35. A project performance audit was conducted in 1980 for the Second Power Transmission Project (Credit 242-IN). The project was considered to have been successful in assisting the nine beneficiary SEBs in extending their transmission systems to help meet their growing power requirements. Utilization of generating capacity in these SEBs exceeded the appraisal forecast. Upgrading the financial management practices of the SEBs, which commenced under this project, is continuiing under subsequent projects. The audit highlighted the difficulties of adequately supervising this project, which consisted of many widely-scattered sub-projects, and of effecting institutional improvements in the absence of a close working relationship between the Bank Group and the beneficiELry SEBs. With the assumption of increased responsibilities by the CEA, which have resulted in greater involvement in SEB operations and project preparation, a considerably more effective relationship with the SEBs is envisaged. Sector Institutions 36. Under the Indian Constitution, the responsibility for supplying power is shared between the Central Government and the State Governments, and full agreement between the Center and the States is required for the implementation of most actions. Various agencies have been established at the State, Regional and national level to promiote the development of an integrated power system within the country. The principal agencies are: the SEBs, the Regional Electricity Boards (REBs), the Central Electricity Authority, the two Central power corporations--the National Thermal Power Corporation (NTPC) and the National Hydro-Electric Power Corporation (NHPC)--and the Rural Electrification Corporation (REC). 37. The SEBs were constituted by the State Governments under the provisions of the Electricity (Supply) Act, 1948, to promote the coordinated development of generation, transmission and distribution of electricity in the most efficient and economical manner, and to control and regulate private licensees and utilities. The States effectively own or control over 90% of electricity supply facilities. While the SEBs are corporate entities and enjoy some autonomy in the management of their day-to-day operations, they are under the control of State Governments in such matters as capital investment, tariffs, borrowings, pay scales and personnel policies. 38. The REBs were established for the Northern, Southern, Eastern, Western and North-Eastern Regions to coordinate the integrated operation of the Regional power systems and to inprove collaboration among the SEBs. The REBs, which function mainly in an advisory role, coordinate the operation of  -13- the Regional system to the maximum benefit of each Region as a whole. They also coordinate overhaul and maintenance programs, determine generation schedules and power availability for inter-State transfer, and determine tariffs for the transfer of power within the Region. 39. The CEA was constituted in 1950 with responsibility for developing national power policy and coordinating the activities of the various agencies involved in electricity supply. It is responsible for the formulation and coordination of plans for power development, optimization of investments in the power sector for the whole country, development of interconnected system operation, training of personnel, and research and development. It accumulates data on operational, economic, f inancial and accounting aspects of the power industry, both at Center and State levels. It also provides consulting support to SEBs on technical matters associated with power projects, and advises them on ffinancial matters. 40. The NTPC and NHPC were incorporated in 1975 bv GOI to construct, own and operate large Central power stations, as well as high-voltage power transmission lines and associated substations. Although the Central Government's role is becoming increasingly significant in the sector, the SEBs will continue to play a major role, particularly in hydro-electric development. The States own most hydro sites and are reluctant to turn over these sources of comparatively inexpensive energy to the Center. In addition, NHPC can develop hydro stations only when water rights issues are resolved. 41. The REC was constituted in 1969 and registered under the Companies Act, 1956, as a limited company wholly owned by the Government of India. Its primary objective is to promote rural electrification schemes prepared by SEBs throughout India by functioning as a financial intermediary with technical expertise, and ensuring the efficient onlending of funds drawn primarily from GOI. REC coordinates its lending operations with the activities of other agencies which provide financing for rural development. Although the amount of REC financial support is small in relation to total SEB operations, REC today finances more than half of total rural electrification investment. Bank Grou9 Strategv in the Power Sector 42. The objectives of the Bank Group's assistance strategy in the sector have evolved from a continuing dialogue with the Government concerning the policies and programs required to deal with the complex problems confronting the Indian electricity supply industry. They are aimed at supporting the efforts of the Indian authorities to: (a) eliminate power shortages through the expansion of generating and transmission capacity, and measures to improve operation and maintenance of existing plant; (b) introduce long-range system planning, on a nationwide basis, to assure implementation of least-cost power development; (c) assist in institution-building by promoting improvements in sector organization and training; and (d) strengthen the financial management of the institutions in the sector, particularly the SEBs.  -14- 43 3 I line with these objectives, the Bank Group has emphasized the need for the Government to pursue a program of improvements in five high priority areas: (a) the performance of thermal power plants; (b) coordination of po-;er developMent with the development of otlher sectors; (c) hydro-electric po wer develo?ment 'kd) the role of the Central sector in the development of power generation and transmission; and (e) tlie financial objectives and practices of SEBs. The recommendations of GOI's Committee on Power, astablished in 1978 to review all aspects of the power sector, and as