India - Punjab Flood Protection and Drainage Project

q,.t 4 ,;' R E S T R I C T E D Report No. P (IDA) 16 This report was prepared for use within the Association. 1, may not be pub- lished nor may it be quoted as representing the Association's views. The Association accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR A FLOOD PROTECTION AND DRAINAGE PROJECT IN THE STATE OF PUNJAB November 9, 1961  INTERNATIONAL DEVELORENT ASSOCIATION REPORT AND RECCMBIEENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPiEIENT CREDIT TO THE GOVERNNENT OF INDIA FOR A FLOOD PROTECTION AND DRAINAGE PROJECT IN THE STATE OF PUNJAB 1. I submit herewith the following report and recommendations on a proposed developrment credit to the Government of India in an amount in various currencies equivalent to $10 million to assist in financing a flood protection and surface drainag- project in the State of Punjab. 2. The Association has made two credits to India, one for $60 million for the national highway program and another for $6 million for a tubewell irrigation project in the State of Uttar Pradesh. If the three develop- ment credits which are being considered together, i.e. $10.0 million for this project, $4.5 million for the Shetrunji Irrigation Project in the State of Gujarat and $8 million for the Salandi Irrigation Project in the State of Orissa are approved, the total of the Association's credits to India would amount to $88.5 million. As I indicated previously, I expect to propose to the Executive Directors further credits for projects in the first two years of India's Third Five-Year Plan to bring the total of the Association's contribution to $200 million. PART I - HISTORICAL BACKGROUND 3. A substantial increase in agricultural productivity is one of the basic objectives of India's economic development. During the decade of the First and Second Five-Year Plans, agricultural production rose by about 35%. The Third Plan, which seeks to achieve self-sufficiency in foodgrains and a substantial increase in the output of commercial crops, aims at a rate of increase almost twjice as large. While all possible steps mLust be taken through irrigation and other means to develop new agricultural output, it is just as important to restore to agricultural production land which has become infertile due to flooding and water-logging. In this respect, one of the most badly affected areas in India is a tract of about 8 million acres in East Punjab for which flood protection and drainage works are to be provided in the Third Five-Year Plan. The project was examined by an IDA mission which visited India early this year. Negotiations with representatives of the Government of India and of the State of Punjab commenced on September 29 and were concluded on October 27, 1961. PART II - DESCRIPTION OF THE PROPOSED CREDIT 4. The main features of the proposed credit are as follows:  -2 Purpose: To finance one half of the estimated expenditures on works to be carried out during the Third Plan to provide flood protection and surface drainage in an area of about 8 million acres in the State of Punjab. Part of the proposed credit, equivalent to $3.4 million, would finance the import of equipment. The balance of $6.6 million would be applied, to the local currency cost of these works and would be disbursed on the basis of a percentage of total local expenditures as they are made on the project. J Borrower: India acting by its President. Amount: The equivalent in various currencies of $10 million. Term and Amortization: The term of the credit would be 50 years with a grace period of 10 years. From May 15, 1972 one half of 1 per cent of the principal amount would be repayable semi- annually for 10 years; and 12 per cent semi-annuallLy commencing May 15, 1982 and ending November 15, 2011. Service Charge: 3/4 of 1 per cent per annum on the princi- pal amount of the credit disbursed and outstanding. Payment Dates: May 15 and November 15. Project Agreement: The Association would enter into a Project Agreement with the State of Punjab which will construct and operate the project. PART III - LEGAL INSTRUIENTS AND LEGAL AUTHORITY 5. Attached are a draft Development Credit Agreement between India and the Association (No.1) and a draft Project Agreement between the State of Punjab and the Association (No.2). These agreements conform generally to the pattern of IDA credits which have included a project agreement. 6. The recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association is attached (No.3).  *-3 - PART IV - APPRAISAL OF THE PROPOSED CREDIT The Project 7. A detailed appraisal of the Project (T.Od(IDA)18a) is attached (No.4). As a result of the introduction of perennial irrigation in the nineteenth century, the Punjab became one of the chief agricultural States in India. Unfortunately., however, t:he combined effect of irrigation and the building of embanlnments for roads, railways and town sites, without provriding adequate drainage, has caused the water table to rise steadily. The water table has now reached so near the surface that severe water- logging has resulted over extensive areas of the State and this has reduced agricultural production. In many places the lands have turned saline anCL those so affected have now become useless for agricultural production. The high water table and the water-logged land have aggravated the serious prcb- lem of flooding in the Punjab, which occurs in years When the monsoon is heavy. For example, in 1955 almost 5 million acres were flooded, in 1958 almost 4 million, ard in 1960 more than 2 million. To the loss in agri- cultural production there must also be added the heavy damage caused by floods to buildings and other property, and in some cases, the loss of life. 8. The Punjab is tackling this problem in two phases. The first is to contain rivers by building embankments along them and to construct a system of adequate surface drainage. The second phase, which is now being studied and is to be undertaken at a much later date, includes the lining of irriga- tion canals, the installation of drainage tubewells, the digging of deep seepage drains, and changes in agricultural practices. The project under consideration is concerned only with the first phase and will consist in the construction of 17 miles of embankments along rivers, the enlargement of 300 miles of existing drains, and the excavation of 2,000 miles of new drains. 9. It is not possible to give with any accuracy the exact economic benefits which will result, though it is expected they will be very sub- stantial. However, one of the most important results will be that such works will prevent further good agricultural land from being taken out of production, which would be the inevitable result of any delay in carrying out the project. 10. The project would be financed in its entirety by loans from the Central Goverment to the State of Punjab, with a term of 30 years including a five year grace period, and interest at 41, per cent per annum. As wiLl be seen from the letter attached, addressed to the Association by the State of Punjab (No.5), the Punjab does not consider it practical to insti- tute a flood cess at this time. The completion of the works, however, should result in substantial savings for the State, which should no longer have to remit taxes and make relief payments to farmers stricken by floods  -h - in the area. It is estimated that these savings alone (without allowing for future increase in tax revenues resulting from expanding agricultural production) would more than cover the current operating and maintenance costs (though not the capital costs) of the project. 11. The project will be executed by the Irrigation Branch of the Public Works Department of the Punjab Government. Though assisted by some machinery operated by the Department, local contractors and village communities will execute most of the works. All imported equipment will be purchased on the basis of international competitive bidding. Economic Situation 12. Economic indicators suggest a continuance during the present year of the main trends noted in previous economic reports. Expanding indust- rial production, held back to some extent by shortages of fuel and power and imported materials; rising imports, unaccompanied by any corresponding increase in exports, resulting in persistent pressure on the external balance of payments; a fair measure of price stability as reflected in the official indices of consumer and wholesale prices; these are some of the outstandi-ng features of the Indian economic situation,. 13. The index of industrial. production for the first five months of 1961 was 9 per cent higher than for the same period of 1960, notwith- standing a decline in the output, of both cotten and jute textiles. 14. At the end. of August the gold and foreign exchange reserves of the Reserve Bank of India stood at the same level as at the end of last March, when the Third Plan began - namely $247 million of gold and $287 milli:on of foreign exchange, making a total of $534 million. During the inter- vening period India had in effect used up the whole of the additional foreign exchange resources of $122.5 million equivalent made available as a result of her net drawings on the International Yonetary Fund. During September the decline in reserves slowed down, and on October 13 the Reserve Bank' s holdings amounted to $514 mnillion. PART V - COPIPLIANCE W^JITH ARTICLES OF AGREE3!ENT 15. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMENDATIONS 16. I recommend that the Association make available a Development Credit to India in an amount in various currencies equivalent to $10 million for a total term of 50 years with service charge of 3/4 of 1 per cent per aminum  and on such other terms as are specified in the draft Development Credit Agreement and draft Project Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No.6). Vlashington, D.C. Eugene Ri Blaek November 9,, 1961 President