India - Railway Electrification and Workshop Modernization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3793-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$280.7 MILLION TO INDIA FOR THE RAILWAY ELECTRIFICATION AND WORKSHOP MODERNIZATION PROJECT April 30, 1984 This document has a restricted distribution and may be used by recipients only in the perilormance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii- CURRENCY EQUIVALENTS (As of April 17, 1984) US$1.00 = Rs 10.80000 Rs 1.00 = US$ 0.092592 Rs 1 million = US$ 92,592 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$1.00 to Rs 10.8. FISCAL YEAR April 1 - March 31 Abbreviations and Acronyms AC - Alternating Current BG - Broad Gange (1.676m) DC - Direct Current DCW - Diesel Component Works GOI - Government of India ICB - International Competitive Bidding ICF - Integral Coach Factory IR - Indian Railways kv - kilovolt (1000 volts) MG - Meter Gange mw - megawatt NG - Narrow Gange (0.762m and 0.610m) NTPC - National Transport Policy Committee ORE - Overhead Equipment OIS - Operating Information System REPCM - Railway Electrification Planning, Coordinating and Monitoring Group Rkm - Route kilometer RTEC - Rail Tariff Enquiry Committee Ton-km - Ton kilometer  - ii i- FOR OFFICIAIL USE ONLY INDIA RAILWAY ELECTRIFICATION AND WORKSHOP MODERNIZATION PROJECT LOAN AND PROJECT SUMMARY Borrower: India, acting by its President (GOI). Beneficiary: Indian Railways (IR). Amount: Bank Loan: US$280.7 million, including capitalized front-end fee. Terms: Repayment over 20 years, including five years' grace at the standard variable interest rate. Relending Terms: GOI will on-lend the proceeds of the loan as GOI's capital- at-charge to IR in accordance with its standard arrange- ments f'or financing IR's capital expenditure program. IR pays a dividend on the total capital-at-charge at a rate determined by GOI, currently 6.5% per annum. GOI will carry the interest and exchange risks. Purpose: The purpose of the proposed project is to increase IRs carrying capacity to meet growing traffic demand; to improve the utilization of existing assets; and to strenglthen the IR organization in selected operational areas. The project consists of: (a) electrification of some 3000 route kilometers of IR's 7500 route-kilometers program for the remainder of this decade-focusing on the major trunk routes between India's four major cities New Delhi, Bombay, Madras and Calcutta, together with provision of ancilliary testing and maintenance equipment; (b) modernization of six major workshops, the Integral Coach Factory (:ECF), and selected maintenance depots; (c) provision of advLsory services and training for the electrification and workshop modernization components. Project risks are considered to be within acceptable limits. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authori;ation.  - iv- Estimated Project Costs: (US$ Millions) Local 1/ Foreign Total A. Electrification: (i) Lines Electrification 525.0 104.0 629.0 (ii) Test/maintenance equipment 3.0 7.0 10.0 Sub Total 528.0 111.0 639.0 B. Workshop Modernization: (i) Major Workshops 73.0 60.0 133.0 (ii) Maintenance Depots 86.0 86.0 172.0 Sub Total 159.0 146.0 305.0 C. Technical Advisory Services & Training (i) Electrification 2.0 1.0 3.0 (ii) Workshop Modernization 1.0 3.0 4.0 Sub Total 3.0 4.0 7.0 Total project base cost 690.0 261.0 951.0 Physical Contingencies 58.0 20.0 78.0 Price Contingencies 129.0 54.0 183.0 Total Project Cost 877.0 1/ 335.0 1212.0 Front-End Fee -- 0.7 0.7 Total Financing Required 877.0 1J 335.7 1212.7 Financing Plan: (US$ Millions) Local Foreign Total IBRD -- 280.7 280.7 GOI 877.0 55.0 932.0 877.0 335.7 1212.7 1/ Including an estimated US$211 million in taxes and duties.  _v Estimated Disbursements: (US$ Millions) IDA Fiscal Year FY85 FY86 FY87 FY88 FY89 FY90 Annual 12.0 2/ 63.0 100.0 65.0 30.0 10.7 Cumulative 12.0 75.0 175.0 240.0 270.0 280.7 Overall Rate of Return: 25.0Z Appraisal Report: No. 4940-IN, dated April 26, 1984 2/ Including front-end fee of US$0.7 million.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR THE RAILWAY ELECTRIFICATION AND WORKSHOP MODERNIZATION PROJECT 1. I submit the following report and recommendation on a proposed loan to India in the amount of US$280.7 million on standard terms to help finance the electrification of the Indian Railways (IR) main trunk routes and the modernization of selected key maintenance workshops. PART I - THE ECONOMY 1/ BackRround 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. 3. India is a large and diverse country with a population of about 700 mil- lion (in mid-1982) and an annual per capita income of US$250. The economy is dominated by agriculture which employs more than two-thirds of the 'Labor force. However, the land base is not sufficient to provide an adequate livelihood to everyone engaged in agricultural activities, especially those with little or no land. Growth of value-added in agriculture -- 2.2% since 1950/51 -- has been slower than growth of industrial value-added (5.0% per annum). As a result, there has been a gradual decline in the share of agriculture in GDP (at factor cost) from 60% to just under 40%, while the share of industry rose from 15% to around 25%. But industrialization has not been rapid enough to absorb the growing labor force, or to bring about a rapid economic transformation, with significantly higher productivity and income levels. As a result economic growth has been slow over the past three decades, averaging about 3.6% per annum since 1950/51. 4. Nevertheless, there has been steady progress with per capita income rising by about 1.4% per year in the period 1950 to 1980. Despite the large population base and its relatively rapid growth, India has been able to eliminate persistent dependence on foodgrain imports through significant improvements in agricultural production. Savings and investment have increased 1/ Parts I and II of the report are substantially the same as Parts I and II of the President's Report for the Madhya Pradesh Fertilizer Project (No. P-3776-IN), dated April 13, 1984.  -2- markedly since 1950/51: gross national savings more than doubled from 10.8% of GDP (at factor cost) to 22.8% in 1982/83, while gross domestic investment rose from 12.5% of GDP to 24.9% in 1982/83. Foreign savings (balance of payments deficit on current account) have never financed a major portion of domestic investment: a peak of about 20% was reached during the early 1960s. Surpluses arose for a few years in the late 1970s, and at the present time, foreign savings are about 8% of investment. External assistance has been low both as a percentage of GDP and in per capita terms, never rising above 3% of GDP and averaging below 1% for the past five years. "Net foreign savings have never risen above 3% of GDP, and presently stands at 2.1%. 5. Before the 1970s, India placed relatively less emphasis on export promotion and more on import substitution. The volume growth of exports between 1950/51 and 1969/70 averaged only 2.2% per annum, while the volume growth of imports over the same period was 4.3%. In the early to mid-1970s, however, India's terms of trade, which had remained roughly constant during the 1960s, deteriorated sharply. In response, the Government introduced various policy measures designed to stimulate exports. As a result, the volume of India's exports grew on average about 7.3% per annum for the 1970s as a whole, a performance which demonstrates that sustained rapid growth is possible. While expanding world markets, particularly in the nearby Middle East, con- tributed to this growth, liberalized access to imported inputs and more effec- tive export incentives played a major role. 6. Moving into the second half of the 1970s, the Indian economy was buoyed by higher levels of investment and an expanding level of foodgrain output. As a result, growth in real GDP and in agricultural and industrial value-added, substantially exceeded the historical 30-year trends (paragraph 3) averaging 4.9%, 3.9% and 5.6%, respectively. In 1979180, however, this momentum was broken when the worst drought in recent years, combined with a doubling of international oil prices and domestic supply shortages, led to a sharp fall in foodgrain production, a decline in GDP, and the opening up of a large trade deficit. Severe inflationary pressures also emerged after several years of virtual price stability. These setbacks in 1979/80 coincided with the prepara- tion of the Sixth Five-Year Plan which laid down a program of adjustment that aimed at improving the trade deficit, removing infrastructural bottlenecks and ensuring price stability with an overall growth of the economy of 5.2%, 1.6 per- centage points above the trend growth of 3.6%. Recent Trends 7. In 1980/81 and 1981/82, the economy substantially recovered with real GDP growing by 7.9% and 5.2%, respectively. While industrial cutput expanded by 4% in 1980/81 and 8.6% in 1981/82, recovery was particularly robust in agriculture where normal weather helped output to rise by more than 15% and 5.5%, respectively. The availability of power, coal, and rail transport, already improved in 1980/81, was even better in 1981/82, recording growth rates of about 10%, 9.6% and 12.9%, respectively. The easing of constraints on the supply of infrastructure and basic commodities was a determining factor in the improved performance of the industrial sector. This overall improvement in the Indian economy, combined with a more restrictive monetary policy contributed to a sharp decline in the rate of inflation. Wholesale prices rose by about 9% on an average annual basis in 1981/82 and by only 2.5% in 1982/83, reflecting a strong deceleration from a peak increase of 18% in 1980/81.  -3- 8. After two years of fairly solid performance, the Indian economy Eaced 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 improver-ents 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 t:ons in 1981/82, declined to 124-127 million tons. Production of most other ma jor 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 Governiment 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 thie 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 t:o an increase in capacity utilization in thermal plants resulting from improved overall management, stabilization of most of the new large units and better availability of coal due to the combina- tion of increased coal production and improved railway performance. Nevertheless, power shortages remain the major bottleneck in the economy. Railway traffic grew by only 3.7% in 1982/83 reflecting a slowdown from 1981/82. The lower growth was due not to a decline in the operational efficiency of the railways but rather to slack demand from core sectors like steel, iron ore, coal washeries and fertilizers. Coal production growth (4% in 1982/83), after 10% growth in the two preceding years was creditable. There were no major shortages and there were improvements in the quality of coal. Recent easing of shortages and bottlenecks in infrastructure has come primarily  -4- 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 in these key sectors and mobilize sufficient resources to do so. 11. The Indian economy has reverted from a situation of resource surplus, which had been a temporary phenomenon of the late 1970s, to one of resource scarcity. Investment has again grown quicker than national savings, and the scope for further increases in the latter appears limited. India's gross national savings rate, which averaged 22.4% of GDP in the last three years, is high by any standard, particularly considering India's low income and the large proportion of its population living below the poverty line. Future increases in savings will depend heavily upon the enhanced profitability of public sector enterprises which would require better utilization of capacity, more efficient operations and adequate pricing policies. In 1981/82 there 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 investment 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 balance of payments. The current account balance which recorded surpluses between 1976/77 and 1978/79, sharply deteriorated to deficits of nearly US$2.9 billion in 1980/81 and US$3.8 billion in 1981/82 (1.8% and 2.3% of GDP, respectively). This was partly due to a sharp rise in the oil import bill as a result of both the disruption of oil production in northeast India in 1980 and significant oil price increases, and to a more liberal import policy aimed at providing producers with access to inputs for higher capacity utilization, greater efficiency, improved technology and capacity expansion. The current account deficit in 1982/83 declined to US$3.3 billion or 2.1% of GDP. The improvemenat would have been greater had not the drought resulted in the need to rebuild food stocks through imports and at the same time led to a lower level of GDP growth. This improvement in the balance of payments is to a significant degree the result of India's develop- ment and adjustment efforts over the past threse 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. lNevertheless, 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% os: GDP, envisaged in the Sixth Plan coupled with the limited possibilities of raising domestic savings beyond the present high levels, necessarily implies a need for external resources. Faced with a reduction in the availability of bilateral and multilateral concessional assistance, India has begun to borrow significant amounts on commercial terms from the Euro-dollar market in addition to much greater utilization of suppliers' and export credits. India's favorable debt service profile has enabled India to tap commercial capital markets at favorable spreads (over relatively high underlying rates). In the period 1980-82 India contracted  -5- commercial loans totalling over US$2,000 million and suppliers' credits of about US$520 million. The bulk of the loans are linked to specific development projects in the public sector while the credits are linked, by and large, to development projects in the private sector. India also reached an agreement with the International Monetary Fund for the use of the Extended Fund Facility for SDR 5 billion, of which SDR 2.5 billion have already been drawn. The transfer of funds under the EFF has stemmed the use of foreign exchange reser- ves which had fallen to less than four months of import coverage in 1981/82. In 1982183, in addition to continued use of the EFF, financing requirements were met by increased non-concessional borrowing (about US$2,000 million in new committments) and a 10% increase ia net aid disbursement. Development Prospects 14. The experience of recent years illustrates that India has the capacity to grow and develop at a more rapid pace. Although the industrial sector is small compared to the size of the economy, it nevertheless is large in absolute terms and has a highly diversified structure, capable of manufacturing a wide variety of consumer and capital goods. Basic infrastructure -- irrigation, railways, telecommunications, power, roads and ports -- is extensive compared to many countries, although tfhere is considerable need for additional capacity as well as improvement in the utilization of existing capacity. India is also well-endowed with human resources and with institutional infrastructure for development. Finally, India has an extensive natural resource base in terms of land, water, and minerals (primarily coal and ferrous ores, but also gas and oil). With good economic policies and reasonable access to foreign savings, India has the capability for managing these considerable resources to accelerate its long-term growth. 15. The medium-term framework for advancing India's development objectives is the Sixth Five-Year Plan (1980/81-1984/85), which is now in its fourth year. The Plan assigns priority to agriculture, energy development, the growth of exports and domestic import substitutes where appropriate, and the removal of infrastructural bottlenecks., Overall performance has so far been encouraging, although bottlenecks in key sectors such as power and transport are likely to persist. Moreover, fulfillment of the Plan targets will require additional resource mobilization. The efforts of the Central Government to raise resour- ces have so far been impressive and are likely to be broadly sufficient: to meet the financing requirements of the Central Government's share in plan 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 a:Lso 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 needed to build up basic inifrastructure. These services, such as power, tran- sport and irrigation, have inherently high capital-output ratios. Howrever, there is scope to improve the sectoral capital-output ratios through greater efficiency and better management. Bottlenecks in basic infrastructural sectors clearly can prejudice growth in other sectors where large investments have been  -6- made. As demonstrated in the laLst three years, performance in the basic serv- ice sectors can be improved through better planning and management, thus lead- 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. W4hile the gap between domestic consumption of petroleum and production remainis large, the prospects for progressive substitution of domestic petroleum for imports are quite bright. In 1981, and again in early 1983, resources for exploration and development were raised by successive price increases for domestic crude and products. India's dependence on oil imports dropped from 63% in 1979/80 to about 45% now and a scheduled expansion in production is expected to decrease oil imports (in crude equivalent terms) to about 33% of consumption by 1984/85. The rapidly expanding level of exploration activity, combined with the possibilities for accelerated offtake from known fields, offers much encouragement for India's longer-term energy prospects. 18. Despite an expected continued decline in. its current account deficits from the current 2.1% to about 1.7% of GDP by the late 1980s, India will require growing access to world financial markets to complement concessional assistance. These commercial sources of funds will be important in the future since India's current account deficits, though not large relative to the size of the economy, will nevertheless be large in absolute terms and will neces- sitate external borrowing beyond levels expected to be available from normal concessional sources. Given the favorable structure of India's external debt, which reflects the past reliance on concessional sources, India should remain creditworthy for a substantial growth in external borrowing. 19. India's development prospects over the next few years will hinge on the extent to which the economy can be brought into both internal and external balance, while at the same time achieving more rapid growth than in the past. In the longer term, income growth represents tbe 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 pDsition to increase borrowing on commercial terms from the very low levels of the past, there are, of course, limits beyond which India will choose to sacrifice growth objectives rather than accept debt on unfavorable or unmanageable terms. The Government's effort to maintain an adequate rate of growth while adjusting the structure of the Indian economy to a more open and 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  -7- investment requirements for human development and basic infrastructure. The fact that India has been able over the past seven years to maintain a rate of growth above the long term trend, despite the poor monsoons of 1979/80 anid 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 5.3% growth rate would mean a doubling of the trend rate of growth of per capita income of less than 1.4% per annum. Success in these efforts would make a significant difference to the prospects of easing poverty in India. 20. A large and growing population and severe poverty underline the need to accelerate India's development efforts. The 1981 Census placed India's popula- tion at 683.8 million, or about 12 million higher than official projections. The fact that there was no decline in inter-census rates of population growth, equivalent to about 2.2% per annum, is a cause for concern. While further analysis of the Census may suggest this rate of growth to be slightly overestimated, the expectation of a measurable decline in the population growth rate has not materialized. Until the results of the Census are fully analyzed, firm judgements about the reasons for this outcome are not possible. However, the results re-emphasize the need for continuing efforts to strengthen the health and family planning program in a broad range of activities and services. These efforts are given high priority in the Sixth Plan, which aims at a rise in the proportion of protected couples in the reproductive age group from 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 standaids of the poor will depend to a large extent on the overall growth of the econiomy, 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 enicouraged 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 fast:er 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.  -8- PART II - BANK GROUP OPERZATIONS 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), respectively. Of these amounts, US$1,387 million has been repaid, and US$6,224 million was still undisbursed as of September 30, 1983. Bank Group disbursements to India in the current 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 equity. A summary statement of IFC disbursements as of September 30, 1983, is also included in Annex II (page 4). 24. The thrust of Bank Group assistance to India has been consistent with the country's development objectives in its support of agriculture, energy and infrastructure. Of particular importance have been investments in irrigation, extension and 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 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 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 continued active involvement of the Bank Group in agriculture, energy and infrastructure development will appropriately contribute to India's adjustment and growth prospects. Irrigation will need continuing support, with emphasis on improved efficiency in water conveyance systems to ensure reliable delivery to farmers' fields. In addition, major investments to develop the large Narmada River basin will be vital to India's efforts to increase agricultural production. Important complements to these efforts, such as fertilizer production and distribution, agricultural credit and extension, will continue to receive support. A continued program of investments aimed at rapidly increasing the domestic supply of energy will clearly be necessary if India is to curb the cost of oil imports and alleviate the critical power shortages which constrain output in both the agricultural and industrial sectors. Exploitation of oil and gas resources is a central element of this program, which should be supple- mented by investments in hydro and thermal power generation, and in the expan- sion of the transmission and distribution networks. Industrial projects to increase the domestic production of basic commodities, which have been in short supply and which India has a comparative advantage in producing, should also receive high priority. Finally, raising the efficiency and levels of transpor-  -9- tation infrastructure would mitigate a key constraint to achieving higher levels of economic growth so that further support of the railways and for ports development will be particularly appropriate. 26. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in part to the response of the aid community, India successfully adjusted to the changed world price situation of the mid-1970s. However, there a is now a need for increased foreign assistance to India, not only to help the economy adjust to the more recent oil price increases and the overall deterioration in the world trade environment but also to maintain the rela- tively higher growth rates achieved during the first two years of the Sixth Plan. As in the past, Bank Group assistance for projects in India should aim to include the financing of local expenditures. India imports relativelyt few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Consequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, and water supply. 27. India's poverty and needs are such that whenever possible, external capital requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support. This requirement for additional assistance can be met, in part, through Bank lending. Given its development prospects and policies, India is judged credit-worthy for Bank lending to supplement IDA assistance. A con- tinuation of efforts already underway to achieve growth in productive capacity, trade expansion, higher levels of savings, foodgrains self-sufficiency and a reduction in the rate of population growth should result in continued economic growth and improvement in the balance of payments. Despite recent setbacks, India's external payments position is still manageable. The ratio of Inidia's debt service to the level of exports was about 11% in 1982/83 and is projected to remain below 20% through 1995/96. As of 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 TRANSPORT SECTOR General 29. Road and rail transport are the dominant modes of transport throughout India with the railways system providing mainly trunk services and the highway system functioning mainly as a feeder system to the rail- ways or for short-to-medium transportation needs, where there are compara- tive cost advantages over the railways. Other modes of transport are at present of minor importance as general goods and passenger carriers: coastal shipping and pipelines each carry about 3% of the total freight traffic in terms of ton-kilometers, and air transport about 1% of total passenger-kilometers. These modes are, however, important within their specialized area, and there is scope for considerable expansion within each mode. 30. The transport sector plays a vital role in India: virtually all the other sectors are dependent on efficient and reliable transport serv- ices and the railway system is a key determinant in the efficient opera- tion of each of these sectors. It is therefore of paramount importance that the transport sector generally, and the railways system in particular, does not become a constraint to development, and that the vital production activities of the economy are not hindered by inefficien- cies in the sector. 31. There has been in the last two decades a decline in investments for the development of the transport system relative to development investments elsewhere in the economy. Expressed as a percentage of total public investment, GOI investment in the transport sector decreased from a very substantial 24% in the Second plan period 1956-61 to 13% during 1980-84, the first four years of the current: Sixth plan. The Sixth plan, which covers the period 1980-85, provided an outlay of Rs 51.0 billion for railways. Actual investment is estimated at Rs 65.9 billion since alloca- tions were increased in recognition of the inadequacy of the initial outlay and to partially compensate for increases in railway costs during the period. Real allocations for railways during the Sixth plan are expected to exceed the previous high investment level of 1961-66 reflect- ing growing awareness by the Government of the magnitude of railway problems. In spite of this higher allocation, the railways will not be able to achieve the targets originally set in respect of electrification, track renewals and rolling stock procurement, hence many of the projects will spill over into the Seventh plan period. 32. There have also been significant shifts in the volume, origin and destination of traffic flows over the past two decades. There is more movement of foodgrain traffic in the north-south direction as imports of these items have virtually ceased and the restrictions on foodgrain tran- sport have been lifted. Fertilizer imports through the cities of Madras and Bombay have increased as has cement movements in the east-west direction. These changes have had a significant impact on the railways  -11- operations where, inter alia, average leadsl/ for most freight movements have increased. The average lead has increased from 669 km in the early 1970s to 706 km in 1978-83, thuas tying up freight wagons and motive power for longer periods per movement and correspondingly decreasing effective freight capacity. Furthermore the road transport system, which was never designed to carry bulk freight volumes over long distances, is being forced to carry some freight that the rail system cannot carry, at a higher cost to the economy. All of these factors have contributed to supply shortages of vital commodities such as coal, cement and fertilizer and, coupled with freight congestion in the main ports, has resulted in serious dislocations and shortages in critical segments of the economy in the past few years. 33. The Indian transport sector is under the jurisdiction of various ministries: major ports, shipping and roads are under the Ministry of Shipping and Transport; railways are under the Ministry of Railways; civil aviation is under the Ministry of Tourism and Civil Aviation; and pipelines are under the Ministry of Petroleum. A number of committees at cabinet and secretarial level are involved in transport coordination, but no single unit below the Prime Minister has complete responsibility for coordination. While railways are exclusively under the central government, highways and road transport, minor ports and inland water transport are the joint responsibility of central and state governments. Given the importance of coordinated transport policy formulation, the National Transport Policy Coimmittee (NTPC), supported by a study group within the Planning Commission has prepared a framework for overall tran- sport planning and coordination in India. The Committee's report, presented to GOI in 1980, contains sound recommendations that will provide a framework for better development of the country's transport sector. GOI approved most of the NTPC's recommendations in March 1982 and has begun to implement them. GOl has emphasized its committment to the continued expansion of the transport sector, and to encouraging increased efficiency within the railway sector. THE RAILWAY SUBSECTOR 34. The backbone of India's internal freight and passenger transporta- tion system is the railways, which carries about two-thirds of the total freight and nearly one-half of the passenger traffic. The railway has the crucial responsibility of moving freight traffic from the localized production centers of commodities such as steel, cement and coal to the few concentrated centers of manufacture and trade and from the (essen- tially northern) foodgrain surplus centers to all domestic markets throughout India. Agricultural and mineral products, together, account for an estimated 70% of total freight movements. Transport capacity to be planned and provided by the railway is therefore closely tied to the country's foodgrain requirements, to the forecast demands of the coal, 1/ "Lead" - the average distance traveled by a ton of freight.  -12- power, steel and cement sectors and related heavy industries and to forecast passenger movements. Indian Railways 35. GOI owns and operates the railway system through Indian Railways (IR). IR's operations are very large by world standards with assets of some Rs 86 billion, and 1.7 million employees. Indian Railways is con- trolled and directed by a Board consisting of five Members headed by a Chairman who is, ex officio, a Principal Secretary to the Government, reporting to the Minister of Railways. The Board performs the dual func- tions of the secretariat to the Minister of Railways and of an executive body responsible for railway operation. The quality of senior staff is excellent and their knowledge of modern railway technology is good. 36. The IR network is divided into 9 Zonal Railways, each with its own General Manager and staff. IR"s indigenous production capacity consists of three factories manufacturing locomotives and rolling stock. Two new factories are under construction, one for production of wheels and axles (partly financed under Credit 844-IN) and one for the remanufacture of critical diesel locomotive components (partly financed under Loan 2210-IN/ Credit 1299-IN). IR also owns 41 Workshops undertaking regular or unscheduled heavy repairs of locomotives and rolling stock and 200 smaller Repair and Maintenance workshops or support units scattered throughout the network. 37. The last 25 years of planned development of IR has brought about extensive modernization, including a major shift in the mode of traction from steam to diesel and electric traction. About 2,500 diesel and 1,100 electric locomotives introduced since 1960 nlow carry about 85% of the total freight traffic. During the same period the number of freight wagons in the fleet has grown about 2 1/2 times to 390,000 wagons and the passenger stock has doubled to about 25,000 coaches. About 7,000 steam locomotives remain in service. IR's track network is slightly in excess of 60,000 route-km of which about 13,000 rotute-km is multiple tracked and about 13,700 km of (mainly) broad gauge track has been electrified. About 63% of total track is broad gauge (BG), 32% is meter gauge (MG) and 5% is narrow gauge (NG). Of the 24,000 route-km of BG track, about 15,000 route-km constitutes the heavy density lines over which the average traf- fic density exceeds 20 million gross ton-km per year. On important routes, the track is being strengthened and modernized to enable IR to meet the increasing demands of both passenger and freight traffic. Due to financial constraints, however, the allocation for track renewal has been decreasing over the years and the track renewal program on the primary BG lines averages only about 900 km per year as compared to an estimated requirement of some 1,400 km per year. IR Performance 38. The railway network performance over the past decade has been encouraging--both on a year-to-year comparative basis and compared to the  -13- other railway systems in deaveloping countries. For freight traffic irn the period 1971/72 through 1983/84, originating tonnage has increased by 60 million tons to 258.0 million tons, an increase of 30% Passenger traf- fic during the same period has ialso grown from 2.54 billion passengers to 3.27 billion passengers, an increase of 28%. The growth in traffic during this period has not been linear, however. The reasons for the variabLe growth (with its corresponding adverse affects on IR's profitability) include external factors - those that are outside IR's controls, such as civil disturbances and labor unrest; sectoral factors - those that are peculiar to IR--such as inefficiencies by the major users in wagon loading and unloading; and internal factors such as lower-than-normal locomotive and rolling stock reliability due to poor maintenance or obsolete equip- ment being kept in service; management-related factors, such as the lack of sophisticated financial and operating control systems and associated communications networks that are essential to efficient railway management. GOI/IR is keenly aware of these causative factors and is committed to improvement as discussed elsewhere in this Report. The Bank's Role in the Sector 39. Bank Group lending in the transport sector began in 1949 with a railway loan and since has included ports, rural roads, highway projects, urban transportation, oil tankers and a pipeline. Substantial indirect support to the sector has also been provided through industrial import credits under which imports of materials and components for manufacture have been financed. The Railway subsector, in the past 34 years, has received direct assistance totalling US$1.4 billion through 15 loans and credits. 40. Through the first six loans and seven credits approved between 1949 and 1975, the Bank Group assistance to IR (which totalled about US$900 million), was aimed at the rehabilitation and subsequent modern- ization of railway infrastructure, motive power and rolling stock and improvements in operating efficiency, administration and planning. During this period the main railway infrastructure has been improved, domesl:ic production has commenced for both diesel and electric locomotives, as well as for coaches and wagons, and has resulted in an improved motive power and rolling stock fleet. 41. Commencing in 1978 (Credit 844-IN), the Bank Group s support has been directed at improving the utilization of existing IR assets through the modernization of existing maintenance workshops, the import of spare parts and raw materials and components for the maintenance of existing locomotives and the manufacture of wheels and axles to meet existing demands. In addition to financial assistance, there have been consult- ations by Bank Group staff and consultants which reviewed heavy engineer- ing technology, electrical and diesel traction technology, maintenance procedures, telecommunications, management structures and computerized operating information systems. The findings of these review missions have been extensively discussed with GOI - especially the Ministries of Railways, and Finance and with members of the Planning Commission and has  -14- resulted in IR clearly identifying its investment priorities and in developing national programs for addressing them. 42. Project performance audits have been carried out for Credits 280-IN and 448-IN and the audit findings are contained in Report No. 1658 of June 30, 1977. The report found that the projects were implemented on time and the re-estimated rates of return were similar to the appraisal forecast. Because of unusual economic and political circumstances the financial situation of IR deteriorated during the 12th project period (Credit 448-IN), but improved again from the mid 1970s. The report also found, as the Government itself found, that transport planning and coor- dination remained rather weak. In 1978, GOI set up the National Transport Policy Committee (NTPC) and its report resulted in the establishment of a high level Committee to review and implement the recommendations contained in the NTPC's report. Many of these recommendations are now under implementation. Overall, the audit report concluded that IR's performance had been satisfactory and that GOI/IR has sought to meet the covenant requirements set out in the various Credit Akgreements. Credit 844-IN (November 13, 1978) is progressing somewhat more slowly than projected at appraisal due to delays in equipment deliveries but commitments and the physical construction is now onl schedule. The most recent combined loan and credit (Ln. 2210-IN/Cr. 1290-IN, December 23 1982) continues the modernization program begun under Cr. 844-IN and addressed the modern- ization and improvement of diesel electric locomotive maintenance and reliability and the technology being used ini the mainline AC1/ electric locomotives. Technical assistance was also provided to assist IR in improving the efficiency with which it manages its manufacturing units. Progress on construction of the diesel component works and on procurement of spare parts and materials for the unit exchange program is progressing satisfactorily. On other components of the project however, progress has been somewhat slower than expected, but supervision missions are actively following up to enhance implementation and the situation is now improving. Operating Information Systems (OIS) 43. While IR's management continues to take measures to resolve key operational bottlenecks, it is constrained in the extent of actions it can initiate because of a lack of modern management tools which other large railways have employed. Adoption of a real-timeJ/ operating information system (OIS) - a key management tool for any large railroad-- has been under consideration by IR for several years. The Bank Group's audit of the eleventh and twelve railway projects also recommended th,e use of computers to provide on-line information on freight carrying capacity and its optimal utilization. Considerable progress has been made: a task 1/ AC - Alternating Current 2/ That is, data is maintained, accessed and updated directly into the computer instantaneously.  -15- force was assembled in 1979 to study OIS' used elsewhere in the world and its report was issued in August L979. Further, in November/December 1981, a multi-disciplinary team visited and studied railway OIS in the UK, France, Germany, USA and Canada, and recommended an OIS of the type cur- rently in use in both Britain and Canada for use in IR. The OIS chosen requires a substantial related telecommunication and data transmission network and the implementation of both the telecoms/data network and the computerized OIS is now beginning. Some delays have been experienced as a number of government agencies and departments are involved and it has proved difficult to gain agreement between the various agencies as to what constitutes an appropriate mix of centralized and decentralized computer functions and where the locus of development of the hardware and software should be. Satisfactory progress by GOI/IR in the selection and implemen- tation of the OIS and related telecommunications has been a prerequisite to the continued processing of this project. Selection of the consultants who will be collaborating with GOI/IR in implementing the OIS is a condi- tion of effectijeness of the proposed loan (Section 5.01, Loan Agreement). Rationale for Bank Group Involvement 44. The rationale for continued Bank involvement with Indian Railuays is two-fold: first, it is playing a significant role in delineating IR's investment priorities on a continuing basis -- a role that is proving invaluable in assisting IR in following a sound investment strategy. Under the proposed project the primary focus would shift from the modern- ization of diesel and electric motive power commenced under 844-IN and 2210-IN/1299-IN and would focus primarily on the modernization of coaches and wagons, completion of the electrification of primary trunk lines and initiating action on utilizing better quality track material. Second, IR still faces the basic problem that sustained expansion of capacity to adequately meet the expected growth in traffic will demand a substantial improvement both in technology and in management and operating procedures. A stepped-up investment effort in critical areas involving a substantial share of India's total investment in transportation, requires a strong, continuous presence by the Bank to ensure that the necessary development occurs in a timely manner. PART IV - THE PROJECT 45. The project was prepared by Indian Railways with the assistance of Bank staff. It was appraised in March 1983. Subsequent processing of the project was delayed pending action related to the OIS (see paragraph 43). A report entitled Staff Appraisal Report, Railway Electrification and Workshop Modernization Project (No. 4940-IN), is being distributed separately to the Executive Directors. Negotiations were held in Washington D.C. in March and April 1984. The Government of India and Indian Railways was represented by a delegation coordinated by Mr. Misra, Department of Economic Affairs, GOI. A supplementary project data sheet is attached as Annex III.  -16- Proiect Obiectives 46. The overall objective of the Bank's involvement with IR is to channel its investments into improving the utilization of IR's existing assets. In this project specifically, the objective is to focus IR's investment priorities on improving the maintenance of IR's rolling stock; increasing the pace of electrification of high traffic density lines; and continuing the process of upgrading IR's managerial capacities. Proiect Description 47. The proposed loan would support the electrification of about 3,000 route-km of IR's accelerated plan to complete the electrification of the major trunk routes connecting the quadrilateral formed by the four major cities of Delhi, Bombay, Calcutta and Madras and its diagonals, together with the acquisition of overhead equipment recording/testing cars and a number of specialized maintenance vehicles for the newly electrified lines. To ensure that full benefits will be derived from the electrifica- tion program, this component includes a detailed review of the Ghat 1/ operations near Bombay with a view to streamlining the operations of that section and providing appropriate communications facilities. 48. The project would also finance the modernization of six of IR's major workshops, the Integral Coach Factory (ICF) located at Perambur, near Madras, and a number of Maintenance Depots, together with the acquisition of parts and components that are needed for expanding the Unit Exchange system in these workshops that was introduced under Credit 844-IN and supported in Loan 2210-IN/1299-IN. In all the Workshops and Depots, the emphasis would be on modernizing equipment, improving materials han- dling procedures, improving quality control., work flow procedures, and introducing appropriate management information systems and training. 49. Training for the electrification and workshop modernization com- ponents would be provided under the project, to ensure that the latest skills are made available to the IR. Some 1,500 man months of local and overseas training is provided at a cost of US$3.0 million under the elec- trification component to re-train drivers, introduce line electrification skills and train staff in signalling and telecommunications. 50. The report of the Rail Tariff Enquiry Committee (RTEC) included many recommendations for restructuring IR's tariffs. These recommenda- tions have been, or are being, implemented and GOI/IR has provided infor- mation on the expected completion dates for the remainder of the recommen- dations contained in that report. Agreement has been reached that GOI/IR will maintain passenger fares and freight rates and take all other action 1/ GHAT operations refers to that portion of IR's network in the hilly country near Bombay that currently is a major bottleneck to increased freight movements into, and out of, Bombay.  -17- as may be necessary to enable IIR to meet, annually, all operating expenses, make appropriate contributions to the depreciation reserve fund and pay the appropriate dividends on the capital-at-charge (Section 4.02, Loan Agreement). Agreement has also been reached that appropriations to the Depreciation Reserve Fund (DRF) for fiscal years 1985 through 198'9 shall be at least equal to that appropriated in 1984 (Section 4.03, Loan Agreement). Efficient utilization of IR's assets will be promoted through the following actions: IR will ensure that an adequate supply of motive power will be available to utilize the newly electrified lines; IR will ensure an adequate motive power and an adequate supply of power to the electrified network; IR will study optimal maintenance standards for both rolling stock and motive power; and IR will install communication systems on the key North East Ghat sections of the Central Railways. Project Cost and Financing 51. IR's provisional investment program for the period FY84-90 is Rs 120 billion (US$11 bil'lion). The proposed project, which forms part of the program, is estimated to cost Rs 13,099 million (US$1,213 million) including US$211 million in taxes and duties. The foreign exchange com- ponent of the project is estimated at US$336 million. The proposed loan would provide about 23% of total project costs, net of duties and taxes, and 83% of the foreign exchange cost. The balance would be financed by GOI/IR from internal cash generation and from capital-at-charge infusions. Procurement and Disbursement 52. Procurement of the items under this project would be as shown in Annex IV attached. Items financed by the Bank would be procured by IR in accordance with the Bank Group's guidelines. All equipment and materials would be procured through International Competitive Bidding (ICB) except for contracts of US100,000 equivalent or less which, in aggregate, would amount to less than US$10 million equivalent. Also, minor items of material and equipment associated with contracts for installation/erection of signalling and telecommunication may be procured in accordance with IR's usual business practices. This is estimated to amount to less than US$10 million equivalent. Local manufacturers are expected to win con- tracts valued at up to US$20 million on items under the project bid under ICB procedures. A domestic preference of 15%, or the import duty, whichever is less, would be applied to bids of local manufacturers in bid evaluation. 53. The proceeds of the loan would be disbursed against 100% of the c.i.f. cost of imported items; 100% of the ex-factory cost of items procured from domestic suppliers; and 100% of the cost of training services. Retroactive financing in an amount not exceeding US$5 miLlion would be provided for eligible expenditures on the electrification com- ponents incurred after May 1, 1983. Disbursements under the loan is expected to be completed by March 31, 1990 and the closing date wou'Ld be September 30, 1990.  -18- Project Management and Implementation 54. IR will be the executing agency for all portions of the proposed project and will implement the project as part of its ongoing works and manufacturing program. IR has shown itself to be experienced in managing large construction projects, in the installation, testing and commission- ing of large-scale plants and other major project undertakings. 55. To execute the accelerated line electrification program, IR has set up a central organization for railway electrification -- the Railway Electrification Planning Coordination and Monitoring (REPCM) Group situated at Nagpur, in central India. Five field units have also been created directly under this central organization. Two additional field units have been set up under the South-Central and Southern railways. In addition, IR utilizes outside contractors for construction work and the installation of overhead equipment (OHE). Appropriate training schools and facilities have been set up and the organizational arrangements for carrying out the electrification program are adequate and competent staff are being appointed. GOI/IR would recruit and maintain appropriately trained personnel as needed to meet the needs of the electrification program (Section 3.04, Loan Agreement). 56. The Central Organization for Modernization of Workshops (COFMOW), a specialized organization wholly devoted to the task of managing the workshop modernization program, which began operation in 1973, would continue this role in the workshop modernization component of the proposed project (Section 3.04, Loan Agreement). 57. A detailed implementation program showing the phasing of the electrification work and the availability of locomotives and trained manpower to complete this work and the planning of the workshop modern- ization program has been agreed between the Bank and GOI/IR (Section 3.01, Loan Agreement). The progress reporting arrangements and details of these reports, including GOI preparation of a final report upon completion of the project, have also been agreed (Section 3.03, Loan Agreement). 58. With the increasing size and complexity of IR's manufacturing operations, the earlier projects (Loan 2210-IN/Credit 1299-IN and Credit 844-IN) provided for a Management Information System designecd specifically for manufacturing plants. This same management information system would also be introduced at the modernized workshops. IR's Financial Performance 59. As a result of a number of far-reaching recommendations made by the RTEC, and their implementation, freight rates and passenger fares have been increased substantially and, more importantly, many rates are based on the principle of recovering the fully allocated cost of the commodity/class of travel. There has, therefore, been a substantial reduction in the degree of cross-subsidization and loss carrying practices. As a result, IR made net surpluses, after dividends in all  -19- years FY77 through FY83 except FY79 and FY80 -- the years immediately prior to the increases. For FY84 IR has been unable to cover a portion of the dividend payment due GOI. For future years FY85-FY90, based on the Bank's conservative assumptions, the financial forecast indicates that IR would require small tariff increases (about 2% annually in real terms) to cover its full dividend payment. Agreement has been reached that GOI/IR will maintain passenger fares and freight rates sufficient to cover all expenses including depreciation and dividends to GOI (Section 4.02, Loan Agreement and paragraph 50). Operating ratios would be favorable despite large sums appropriated to the DRF and IR is expected to increase its internal generation of resources, to finance capital investment, to about 50% compared with an average of about 40% in previous years. Economic Justification and Risks 60. The economic case for the proposed project rests on the expected reduction in IR's maintenance and operating costs of both motive power and rolling stock throughout the period. With the project, IR will be able to make better use of its assets, to accelerate improvement in performance and allow it to meet the increasing demands of the Sixth and Sevent:h Five Year Plans while avoiding a larger share of long-haul goods being diverted to the more costly road transport system. The economic rate of rel:urn (ERR) for the project as a whole is 25%. For the electrification component, the ERR of 9 of the 10 sections to be electrified varies from 14.5% to a high 40.5%. One section, from Anuppur to Bilaspur, of only 151 ki, is justified on the basis that it fills the last remaining non- electrified gap in the otherwise completed network and the resulting ERR is an acceptable 14%. Sensitivity analysis show that there is little risk that the ERR will fall below 12%, the estimated opportunity cost of capi- tal for India. The component ERR is most sensitive to the assumed locomotive-kilometers per day and, in the case of 3 sections of track (Itarsi-Nagpur, Nagpur-Durg, and Anuppur-Bilaspur) an assumption that there is only a marginal increase in locomotive km/day over the present diesel rates would cause the ERR to remain at about 12%. All others show acceptable ERRs under likely conditions. 61. The economic case for workshop modernization involves reduced idle time for motive power and rolling stock during periodic overhauls and increased in-service reliability--resulting in savings of locomotives and coaches/wagons required to carry the increasing traffic; reduced costs of overhaul and substantial increase in new capacity. Under the project, the ERR for each workshop varies between 20% and 50%. Under the unlikely case involving both a 20% increase in costs and a 20% decrease in assumed benefits (or a 2-year lag in benefits), all project workshop components remain at or above 12%. 62. All project components involve technology (except for the testing and research elements) which is well established in other parts oi- the world. Technical risks connected with the project are therefore small. Additionally, in the past, IR has successfully implemented similar projects in a timely manner and has built up appropriate managerial and  -20- technical expertise. Risks from inadequate project implementation are therefore considered to be small. The staff examined the environmental aspects and fond that all workshop plans included satisfactory treatment for pollutants. IR, being an integral part of the Central Government, does not carry insurance and the Bank Group guidelines on insurance do not apply. Part V - Legal Instruments and Authority 63. The draft Loan Agreement between India and the Bank and the Recommendation of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being dis- tributed to the Executive Directors separately. 64. Special conditions of the project are listed in Section III of Annex 3. The selection and appointment of the collaborator to assist GOI/IR in implementation of the Operating Information System is a condi- tion of effectiveness of the proposed loan (Section 5.01, Loan Agreement). 65. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. Part VI - Recommendation 66. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President April 30, 1984 by Ernest Stern  ANNEX I Page 1 of 5 INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) /b lb 'b RECENT LOW INCOME MIDDLE INCOHE 1960- 1970- ESTIMATE- ASIA & PACIFIC ASIA & PACIFIC AREA (THOUSAND SQ. NM) TOTAL 3287.6 3287.6 3287.6 AGRICULTURAL 1760.7 1780.5 1811.3 GNP PER CAPITA (US$) 70.0 100.0 260.0 276.7 1028.6 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 114.0 165.0 210.0 398.4 792.8 C POPULATION AND VITAL STATISTICS POPULATION,MID-YEAR (THOUSANDS) 434850.0 547569.0 690183.0 URBAN POPULATION (% OF TOTAL) 18.0 19.8 23.7 21.5 32.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILL) 1001.3 t STATIONARY POPULATION (MULL) 1838.3 YEAR STATIONARY POP. REACHED 2140 POPULATION DENSITY PER SQ. KM. 132.3 166.6 205.3 161.7 260.7 PER SQ. EM. AGRI. LAND 247.0 307.5 372.7 363.1 1696.5 POPULATION AGE STRUCTURE (%) 0-14 YRS 40.9 42.7 39.7 36.6 39.4 15-64 YRS 54.5 54.2 57.2 59.2 57.2 65 AND ABOVE 4.6 3.1 3.0 4.2 3.3 POPULATION GROWTH RATE (%) TOTAL 1.8 2.3 2.1 1.9 2.3 URBAN 2.5 3.3 3.7 4.0 3.9 CRUDE BIRTH RATE (PER THOUS) 43.7 40.0 35.4 29.3 31.3 CRUDE DEATH RATE (PER THOUS) 21.8 16.7 13.3 10.9 9.6 GROSS REPRODUCTION RATE 2.9 2.7 2.4 2.0 2.0 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUS) 64.0 3782.0 6826.0 USERS (% OF MARRIED WOMEN) .. 12.0 23.0 48.1 46.6 FOOD AND NUTRITION INDEX OF FOOD PROD. PER CAPITA (1969-71=100) 98.0 102.0 107.0 111.4 125.2 PER CAPITA SUPPLY OF CALORIES (% OF REQUIREMENTS) 96.0 90.0 87.0 98.1 114.2 PROTEINS (GRAMS PER DAY) 54.0 50.0 47.0 56.7 57.9 OF WHICH ANIMAL AND PULSE 17.0 15.0 13.0/c 13.9 14.1 CHILD (AGES 1-4) DEATH RATE 26.2 20.7 17.0 12.2 7.6 HEALTH LIFE EXPECT. AT BIRTH (YEARS) 43.2 48.1 52.2 59.6 60.2 INFANT MORT. RATE (PER THOUS) 165.0 139.0 121.2 96.6 68.1 ACCESS TO SAFE WATER (%POP) TOTAL * 17.0 33.0/d 32.9 37.1 URBAN .. 60.0 83.07d 70.8 54.8 RURAL *- 6.0 20.07d 22.2 26.4 ACCESS TO EXCRETA DISPOSAL (% OF POPULATION) TOTAL .. 18.0 20.0/e 18.1 41.4 URGAN .. 85.0 87.0/e 72.7 47.5 RURAL *- 1.0 2.07e 4.7 33.4 POPULATION PER PHYSICIAN 4850.0 4890.0 3640.0/f 3506.0 7771.9 POP. PER NURSING PERSON 10980.0/g 8300.0 5380.071 4797.9 2462.6 POP. PER HOSPITAL BED TOTAL 2180.0 1650.0 1310.0/d 1100.6 1047.2 URBAN .. .. 370.071 298.4 651.1 RURAL .. .. 10410.07W 5941.6 2591.9 ADMISSIONS PER HOSPITAL BED .. .. .. .. 27.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.2 5.6 5.2/e URBAN 5.2 5.6 4.87.. RURAL 5.2 5.6 5.37.. AVERAGE NO. OF PERSONS/ROGM TOTAL 2.6 2.8 URBAN 2.6 2.8 .. RURAL 2.6 2.8 ACCESS TO ELECT. (% OF DWELLINGS) TOTAL .. .. URBAN .. .. RURAL .. ..  ANNEX I Page 2 of 5 INDIA - SOCIAL INDICATORS DATA SHEET INDIA REFERENCE GROUPS (WEIGHTED AVERAGES) /a HOST (MOST RECENT ESTIMATE) /b /b lb RECENT lb LOW INCOME MIDDLE INCCtE 1960- 1973 ESTIMATE- ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 61.0 73.0 76.0/f 96.1 101.2 MALE 80.0 90.0 90.071 107.8 106.0 FEMALE 40.0 56.0 61.071 82.9 97.5 SECONDARY: TOTAL 20.0 26.0 28.0/f 30.2 44.9 MALE 30.0 36.0 37.07d 37.3 50.0 FEMALE 10.0 15.0 18.07? 22.2 44.6 VOCATIONAL (% OF SECONDARY) 2.8 1.0 0.7/e 2.3 18.5 PUPIL-TEACHER RATIO PRIMARY 46.0 41.0 43.0/f 34.4 32.7 SECONDARY 16.0 21.0 .. 18.4 23.4 ADULT LITERACY RATE (%) 27.8 33.4 36.0 53.5 72.9 CONSUDPTION PASSENGER CARS/THOUSAND POP 0.6 1.1 1.3/f 1.6 9.7 RADIO RECEIVERS/THOUSAND POP 4.9 21.5 44.4 96.8 113.7 TV RECEIVERS/THOUSAND POP 0.0 0.0 1.7 9.9 50.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 10.6 16.2 19.7 16.4 54.0 CINEMA ANNUAL ATTENDANCE/CAPITA 3.2 4.1 3.7/e 3.6 3.4 LABOR FORCE TOTAL LABOR FORCE (THOUS) 185951.0 219194.0 271179.0 FEMALE (PERCENT) 30.7 32.5 31.8 33.3 33.6 AGRICULTURE (PERCENT) 74.0 74.0 69.3 69.0 50.9 INDUSTRY (PERCENT) 11.0 11.0 13.2 15.8 19.2 PARTICIPATION RATE (PERCENT) TOTAL 42.8 40.0 39.3 42.5 18.6 MALE 57.0 52.4 51.9 54.4 50.7 FEMALE 27.3 26.9 25.9 29.8 26.6 ECONOMIC DEPENDENCY RATIO 1.1 1.1 1.1 1.0 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5% OF HOUSEHOLDS 26.7 26.3/h 22.2/e 16.5 22.2 HIGHEST 20% OF HOUSEHOLDS 51.7 48.97h 49.47e 43.5 48.0 LOWEST 20% OF HOUSEHOLDS 4.1 6.77i- 7.07o 6.9 6.4 LOWEST 40% OF HOUSEHOLDS 13.6 17.27Wh 16.27e 17.5 15.5 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 132.0 133.9 194.5 RURAL .. .. 114.0 111.6 155.0 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. .. 178.0 RURAL .. .. .. .. 164.8 ESTIMATED POP. BELOW ABSOLUTE POVERTY INCOME LEVEL (%) URBAN .. .. 40.3 43.8 24.4 RURAL .. .. 50.7 51.7 41.1 NOT AVAILABLE NOT APPLICABLE N O T E S /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, Data for 1960 refer to any year between 1959 and 1961; Data for 1970" between 1969 and 1971; and data for "Most Recent Estimate" between 1979 and 1981. 1477; /d 1976; /e 1975; /f 197; /g 1962; /h 1964-65. 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