India - Shetrunji Irrigation (State of Gujarat) Project

RESTRICTED Report No. P (IDA) 13 This report was prepared for use within the Association. It may not be pub- lished nor may it be quoted as representing the Association's views. The Association accepts no responsibility for the qccuracy 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 THE SHETRUNJI IRRIGATION PROJECT IN THE STATE OF GUJARAT November 7, 1961 INTERNATIONAL DEVELOB ENT ASSOCIATION REPORT AND RECOMMDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIPECTORtS OF A PROPOSED DEVELOE4ENT CREDIT TO THE GOVERI[24ELT OF INDIA FOR THE SHETRUNJI IRRLJGATION PROJECT IN THE STATE OF GUJARAT 1. I submit herewith the following report and recommendations on a proposed development credit to the Government of India in an amount -n various currencies equivalent to $4.5 million to assist in financing the completion of the Shetrunji project for irrigating an area of about 86,000 acres in the State of Gujarat. 2. The Association has made two previous credits to India - $60 million for the National Highway Program and $6 million for a Tubewell Irrigation Project in the State of Uttar Pradesh. If the three development cr;dits which are being considered together, i.e. $h.5 million for this project, $8 million for the Salandi Irrigation project in the State of Orissa, and $10 million for the Punjab Drainage project, are approved, the total of the Association's credits to India would amount to $38.' million. As T indicated previously, I expect to propose to the Executive Directors further credits for projects during the first two years of IndiaIs 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 Indiats economic development. During the decade of the First and Second Five-Year Plans, agricultural production rose by about 35 per cent. 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 twice as large. Since not much new land can be opened up, emphasis must be placed on irrigation and other means of intensifying production and increasing crop yields. In view of the import- ance of the agricultural program, an IDA mission which visited India early this year examined several agricultural projects, among them the Shetrunji irrigation project in the State of Gujarat. Negotiations with the reTre- sentatives of the Government of India and of the State of Gujarat commenced September 22 and were concluded October 17, 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 total cost to be incurred during the Third Plan of a project to irrigate about 86,000 acres of land from water impounded by a dam already constructed across the Shetrunji River in the State of Gujarat. Part of the proposed credit, equivalent to $340,000, would finance the import of equipment. The balance of $4,160,000 would be applied to the local currency cost of the canal system and ancillary works and would be disbursed on the basis of a percentage of total local currency expenditures as they are made over the period of the project's execution. Borrower: India, acting by its President. Amount: The equivalent in various currencies of $4.5 million. Term and Amortization: The term of the credit would be 50 years, with a grace period of 10 years. From April 15, 1972, one half of one per cent of the principal amount would be repayable semi-annually, and one and one half per cent would be repayable semi-annually commencing April 15, 1982 and ending October 15, 2011. Service Charge: 3/4 of 1 per cent per annum on the principal amount of the credit disbursed and outstanding. Payment Dates: April 15 and October 15 Project Agreement: The Association would enter into a Project Agreement with the State of Gujarat which will construct and operate the project. PART III - LEGAL INSTRUMENTS 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 Gujarat and the Association (No.2). -3 6. In Section 2.03 of the Project Agreement, Gujarat undertakes to recover from the users of the irrigation waters as much as practicable of its investment in the project and to set water rates and other similar * charges at levels which would cover all operating and maintenance costs of the project. A letter from Gujarat setting forth its policies with regard to periodic revision of rates is attached (No.3). 7. The recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association is attached (No.4), PART IV - APFRAISAL OF THE PROPOSED CREDIT The Project 8. A detailed appraisal of the project /T.O.(IDA)l5a7is attached (No.5). The Shetrunji irrigation scheme is part of the Borrowerts Third Five-Year Plan for Gujarat and would provide irrigation water to 86,000 acres of land in an extremely poor area at present under dry farming. Part of it has already been completed, including a dam across the Shetrunji River. The project to be financed is the construction of about 94 miles of main canals, distributory canals and other works such as houses, workshops, buildings and service roads, and is estimated to cost the equivalent of $9 million. 9. Gujarat would undertake to provide the technical services to farmers required to bring about the prompt utilization of the available water. A detailed soil survey is to be completed on the basis of which the lands most suitable for irrigation will be selected and the State Ministry of Agriculture is to organize two demonstration farms and carry out a program of extension service for improving techniques of irrigation fanning. As a consequence, Gujarat expects the irrigation water will be fully utilized eight years after completion of the project, whereas it is usual in India to allow about ten years before full utilization is achieved. 10. The benefits to the economy will be considerable. It is estimated that agricultural production will increase several times in value after full use is being made of the available water and will result in a substantial increase in the standard of living of the cultivators. 11. One-half of the funds for the project is being provided from the State Budget and the other half (corresponding to the amount of the proposed IDA credit) as a loan from the Central Government at 4 per cent interest with repayment in seven equal annual instalments after three years of grace. Present water rates would provide revenues sufficient to cover the cost of operation and maintenance (excluding interest), but they would have to be increased more than two and a half times to recover the entire capital ccst with interest at h during the useful life (60 years) of the irrigation works. It is not practical to increase water rates substantially until the farmers are receiving the benefits of irri- gation. Both water rates and the irrigation cess will be reviewed and revised from time to time so that in addition to covering operation and maintenance costs, a substantial portion of the monies invested, including interest, will ultimately be recovered from the farmers. 12. The project is being constructed and will be operated by the Irrigation Department of Gujarat. Small local contractors selected by competitive bidding would carry out most of the work. The Department would supply machinery and most of the materials. All imported equip- ment would be purchased on the basis of international competitive bidding. Economic Situation 13. Economic indicators suggest a continuance during the present year of the main trends noted in previous economic reports. Expanding indus- trial 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 outstanding features of the Indian economic situation. 1h. 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 cotton and jute textiles. 15. 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 million 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 Monetary Fund. During September the decline in reserves slowed down, and on October 13 the Reserve Bank's holdings amounted to $514 million. PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 16. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECCMENDATIONS 17. I recommend that the Association make available a Development Credit to India in an amount in various currencies equivalent to $4.5 million for a total term of 50 years with service charge of 3/4 of 1 per cent per annum 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). Washington, D.C. Eugene R. Black November 7, 1961 President