India - Drought Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8145 PROJECT COMPLETION REPORT INDIA DROUGHT ASSISTANCE PROJECT (LOAN 2886-IN/CREDIT 1852-IN) OCTOBER 31, 1989 Country Operations Division Country Department IV Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Rupee (Rp) (Yearly Averages) Year Rupee/US$ 1987 (Project Appraised) 12.96 1988 (Project Completed) 14.60 ACRONYMS EOI - Bank of India GOI - Government of India _OC - Indian Oil Corporation MaTC - Minerals and Metals Trading Corporation SBI - State Bank of India STC - State Trading Corporation FISCAL YEAR Government of India: April 1 - March 31  FOII OFFICIAL USE ONLY THE WORLD SANKF Washington. DC 20433 USA. Oll co *s ostn c wl Opsuafm ivabMgn October 31, 1989 MEMORANDUM TO THE EYXCUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Drought Assistance Project (Loan 2886-IN/Credit 1852-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India - Drought Assistance Project (Loan 2886-IN/ Credit 1852-IN)" prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restried distribution and may be used by recipients only in the petormenoe of their official duties. Its contents may not otherwise be disclosed without World Bank authoiastion.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT INDIA DROUGHT ASSISTANCE PROJECT (LOAN 2886-IN/CREDIT 1852-IN) TABLE OF CONTENTS Page No. PREFACE ..................................................... . i EVALUATION SUMMARY ................................................ iii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity ......... .............................. .1 2. Background ................................................ .1 3. Project Objectives and Description ..... ................... . 3 4. Project Design and Organization ...... t.................i.n... 4 5. Project Implementation ......... ............................ 5 6. Project Results ........................................... . 6 Actual Impact of the Drought ...... ....................... 6 Achievement of Project Objectives ........................ 7 7. Project Sustainability ....... ............................ . 9 8. Bank and Borrower Performance .............................. 9 9. Financing of Edible Oils ....... ............................ 9 10. Findings and Lessons Learned ...... ......................... 10 PART III: STATISTICAL INFORMATION Project Data ............................................... 12 Project Timetable .......................................... 12 Loan/Credit Disbursements . . .................... ........... 12 Project Costs .............................................. 13 Staff Inputs ............................................... 13 Field Mission Dates .......... . ............... 13 Status of Covenants ........................................ 14 I ni.is 'document has a restricted distribution and may be used by recipients only in the perforMance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - i - PROJECT COMPLETION REPORT DROUGHT ASSISTANCE PROJEC', (LOAN 2886-IN/CREDIT 1852-IN) PREFACE This is the Project Cunpletion Report (PCR) for the Drought Assistance Project in India, for which Loan 2886-IN in the amount of US$150.0 million and Credit 1852-IN in the amount of SDR 156.3 million (US$200.0 mil- lion equivalent) were approved on Novciber 24, 1987. The loan-credit was closed on July 15, 1988, eight and a half months ahead of schedule. It was fully disbursed, and the last disbursement was on October 6, 1988. The PCR was prepared by the Country Operations Division of the India Department, Asia Regional Office (Preface, Evaluation Summary, Parts I and III), based on the President's Report, the loan/credit documents, and study of the project files. The draft PCR (Parts I and III) was sent to the Borrower, and the editorial comments submitted by the Borrower have been incorporated in the report. The Borrower chose not to submit an assessment for incorporation as Part II.  - iii - PROJECT COMPLETION PEPORT INIA DROUGHT ASSISTANCE PROJECT (LOAN 2886-INICREDIT 1852-IN) EVALUATION SUMKARY Objectives The project objectives were to: (a) assist India in meeting the costs and the reconstruction/rehabilitation requirements resulting from the drought; (b) help sustain and enhance the momentum of the economic reform process during the drought; and (c) support the Government's longer term strategy for increasing India's resilience to droughts. The loan/..redit was designed to provide fast-disbursing assistance, and financing imports of primarily agro-industrial inputs, petroleum products, non-ferrous metals, and other drought-related industrial intermediate inputs (paras. 3.2, 3.3, 4.1-4.3). Immlementation Exnerience Project implementation was excellent. Preparation and implementation of the project were completed under greatly accelerated timetables, with a high level of support and professionalism by the Borrower and its implementing agencies. The preparatory work during appraisal to approve and clarify procurement arrangements for the import of bulk commodities and other imported items financed by the project was instrumental in ensuring smooth and rapid disbursement of the loan/credit (para. 8.1). The use of loan/credit proceeds was in line with understandings reached during negotiations (para. 5.1-5.3). The financing of edible oil imports was dictated by the need for urgent replenishment of stocks as an integral component of the Government's recovery program (paras. 9.1-9.3). Re-sults Overall, the Indian economy withstood the impact of the drought particularly well. Agricultural value added declined much less than had been anticipated--only 1.0% compared with an initial estimate of between 5% and 8%. The kharif (summer) foodgrain crop declined by about 8%, but the rabi (winter) crop increased by 2% compared with 1986/87. The improved rabi crop was assisted by the spread of irrigation which has enlarged the sector's drought-proof base and by government actions to ensure the supply of inputs (para. 6.1). the industry and services sector also exhibited increased resilience to the agricultural shortfalls (para. 6.2). Nevertheless, the budgetary and balance of payments costs of the drought were substantial. Central Government allocations for drought- related relief and public works programs increased by US$1 billion and additional resources were also earmarked by the states. Edible oil imports increased from 1.3 mmt in 1986/87 to almost 2 m-t in 1987/88 and there were  - iv - further drought-related imports in 1988/89. Petroleum and petroleur product imports increased by 1.8% in 1987/88 to meet the drought-induced increase in demand for thermal power. T'his, together with a firming of world petroleum prices, led to an increase in the value of petroleum imports of US$l billion. In addition, about 2 mmt of wheat and 850,000 tons of rice were imported in 1988/89. These drought-related imports contributed to a loss of foreign exchange reserves of US$300 million in 1987/88 and a further loss of US$1.4 billion in 1988/89 (para. 6.3). In terms of its principal objective of helping to sustain and enhance the momentum of the economic reform process during the drought situation, the project must be considered a success: The project, together with support from other donors, played an important role in assisting the Government to manage the budgetary and balance of payments consequences of the drought without rolling back the reforms already underway and, in fact, with further progress in a number of important areas (para. 6.6). In particular, the industr_al reform process continued in 1987 and 1988 through a series of policy changes in the regulatory framework which should increase competition and facilitate the modernization process (para. 6.7). In addition, export policies and incentives were further expanded with lmproved access to restricted or canalized imports, extension of export incentives to indirect exporters, easier access to i-ported capital goods, and improved tax incentives (para. 6.8). Progress in import policy reform has been less impressive; nevertheless, the process has continued with easier access to imports by exporters and greater reliance on the exchange rate and tariffs than quantitative controls to limit imports (para. 6.9). SLignificantly, the project also contributed to an acceleration of efforts to tackle the problems of farming in rainfed areas as part of the Government's longer term strategy for increasing resilience to droughts. Increased efforts are being made to integrate the activities of extension and soil conservation agencies, at the Center and in the States. Stabilization of watersheds and upgrading of wastelands is being stepped up by acceleration of tree plarting programs and increased use of vegetative soil conservation. The initial stages of this process are being supported by ongoing Bank-assisted projects (paras. 6.10 and 6.11). Sustainabilti, Overall, the project effectively supported India's economic reform process and contributed to an acceleration of the development of programs designed to increase India's longer term resilience to drought in agriculture. The prospects for sustaining the initiatives supported by the project in agriculture, industry, and trade over the medium to longer term appear good in the face of a fairly broad consensus at the senior levels of the bureaucracy, an open and constructive dialogue with the Government, and a strong commitment by the Government to move ),head in these areas (paras. 6.10-6.11, 7.1). Findings and Lessons Learned The project was well conceived, was effectively implaminted, and achieved its stated objectives. The timely completion and success of the project can be ati bii to a I. ( n)-  (a) The Bank and the Government, in close collaboration, acted pzomptly to assess the overall economic, social and sectoral impact of the drought, and the extent of the required assistance. (b) Agreement with the Government on the strategy and scope of the overall recovery program was reached rapidly. (c) Implementation arrangements were simple, made use of existing institutions, and were commensurate with the country's implementation capacity. (d) The preparatory work to approve and clarify procurement arrangements was instrumental in ensuring smooth and rapid disbursement of the loan/credit. (e) The commitment of the Government to the recovery program, and the determined efforts and professionalism of the government officials and other agencies involved deserve special mention.  PROJECT COMPLETION REPORT INDIA DROUGHT ASSISTANCE PROJECT (LOAN 2886-INICREDIT 1852-IN) PART I 1. PROJECT IDENTITY Project Name: Drought Assistance Project Loan/Credit No.: Ln 2886-IN/Cr 1852-IN RVP Unit: Asia Country: India Sector: Emergency Assistance Operation 2. A&MUM 2.1 In 1987, India experienced a severe drought. The monsoons which normally last from June to September were generally late and deficient: 21 of the courtry's 35 meteorological zones had deficient or scanty rainfall, affecting 63% of the area of the country (President's Report, para. 37). For many regions of thLe country this was the third or fourth successive year of poor rainfall. Major rainfall deficit areas included some of the most importanr foodgrain producing areas--the Punjln, Western Uttar Pradesh, Eastern Madhya Pradesh and Orissa. Ironically, much of West Bengal and Bihar experienced torrential rains and suffered some of the worst flooding in decades (PR, para. 38). 2.2 As the extent of the drought became apparent during August and September 1987, it was estimated that there would be a sharp reduction in foodgrain output from the kharif c.op1l/ Kharif foodgrain output was expected to fall to around 70 million tons, down from 80 million tons in 1986/87 (which was also below normal due to drought conditions) and the record 89 million tons in 1983/84. The major part of this loss was expected in rice production (the main kharif crop). There was also severe damage to the oilseeds crop. In particular, the groundnut crop in Gujarat, which accounts for about 15% of India's oilseed production, was totallv lost. In addition, there was serious damage to fodder, especially in Rajasthan and Gujarat, and shortages of water for livestock and human consumption were emerging in severely affected western states and in Orissa. In the flood-stricken areas of Eastern India there was some washout of the rice crop, especially in Northern Pihar (PR, para. 40). 2.3 Official estimates indicated that rice stocks (six million tons as of October 1, 1987) may not have been sufficient to meet desired consumption levels and that imports of cereals may also be needed to maintain minimum stocks as a buffer against future droughts (PR, para. 42). In addition, since India has no reserves of edible oils, imports were required to replenish the stocks in the private and public distribution systems and to sustain the local processing (vanaspati) industry (PR, para. 40). L/ Kharif is the summer crop usually grown from June/July to October/November.  - 2 - 2.4 The social impact of the drought was expected to be especially severe. It was estimated that nearly 285 million people would be affected in the rural areas in different states. Of these, more than 90 million belonged to the vulnerable stetions of society, consisting of small farmers and agricultural laborers. Drinking water shortages, aggravated by successive droughts in Rajasthan, Gujarat, Orissa and other states, were expected to affect more than 90,000 villages in these states (PR, para. 43). 2.5 Agricultural GDP was expected to decline by 5 to 8%. Lower agricultural demand and drought-induced power shortages were also expected to feed through into re.aced growth in the industrial and service sectors, leading to a reduction in growth of total GDP to no more than 2%, with the possibility of zero overall growth (PR, para. 44). The budgetary cost of the drought was also expected to be significant. The Government increased its allocation for drought-related relief and public works programs from Rs 6.5 billion (equivalent to US$500 million) to Rs 20 billion (US$1.5 billion), financed by cuts in other outlays and a package of additional taxes (PR, para. 45). Shortages of foodstuffs generated an acceleration of domestic inflation, with an increase in consumer prices approaching 10% expected (PR, para. 46). 2.6 The balai ,e of payments costs were estimated at a minimum of US$1.0 to US$1.2 billion for the remainder of the Indian fiscal year (to Hiarch 31, 1988) and more than US$1.5 billion over an eighteen month period. For the period to March 1988, agricultural commodity imports (including foodgrains and edible oils) were expected to increase by US$0.8 billion; additional petroleum and petroleum product imports of US$150 million and non-ferrous metal imports of US$50 million were also expected. Exports of agricultural products were expected to fall by ove- US$200 million (PR, para. 47). 2.7 As the severity of the drought became apparent during the summer months, the Government acted promptly to implement a comprehensive drought relief program. The main relief efforts were directed at minimizing crop losses, especially for the rabi crop (the winter crop, usually grown from October/November to February/April), and providing emergency relief for elements of the population severely affected by the drought. Measures taken to minimize crop losses were focussed on ensuring adequate supplies of major inputs (e.g., seeds, water, power and credit) and increasing the total area coverage under rabi crops and increasing the coverage of less water-inten3ive and alternative short-duration crops in water-deficient areas. The Center and State Governments have well-established machinery to meet the immediate needs of the population severely affected by drought, since India has a history of periodic droughts and one part of the country or another experiences drought almost every year. Key elements of the drought relief programs included: (a) rural employment programs; (b) provision of drinking water; (c) public distribution system for essential commodities; (d) supplementary nutrition programs; and (e) cattle preservation (PR, paras. 48-53).  3- 3. PROJECT OBJECTIVES AND DESCRIPTION 3.1 During the first three years of the Seventh Plan (which covers 1985-90), the Government undertook a series of important policy initiatives in industry, trade and public finance. These included significant deregulation of industry, easing some restrictions on imports, especially capital goods for the modernization of industry, the introduction of new export promotion measures and incentives and the introduction of a modified value added tax system (IIODVAT), covering more than one third of India's manufactured production (PR, paras. 10 to 12). Many of these initiatives represented radical departures from past practice. The associated adjustment costs (including budgetary and balance of payments costs) we,re also potentially significant, albeit manageable. The onset of severe drought in 1987, therefore, posed a considerable threat to the adjustment process as budgetary, balance of payments and other resources were pre- empted to meet the immediate needs of drought relief. As indicated (para. 2.6), the balance of payments costs of the drought were expected to exceed US$1.5 billion over an eighteen month period. Foreign exchange reserves had already fallen from US$5.4 billion in January 1987 to US$5.2 billion (excluding gold) in September 1987 (PR, para. 64). While reserves remained adequate to meet the expected import bill, the Government was understandably concerned that, if foreign exchange reserves continued to fall significantly there could be a crisis of confidence, especially among non-resident Indians, who account for substantial net inflows of foreign exchange (about US$1.3 billion in 1986/87), and who bold very large freely- convertible deposits (estimated at about US$7 billion in mid-1987). 3'.2 The objectives of the project were to: (a) assist India in meeting the costs and the reconstruction/rehabilitation requirements resulting from the drought; (b) help sustain and enhance the momentum of the economic reform process daring the drought; and (c) support the Government's longer term strategy for increasing India's resilience to droughts. The timely injection of fast-disbursing foreign exchange under the project was designed to assist the Government to manage the balance of payments consequences of the drought while w^intaining the momentum of the economic reform process. Without the proposed assistance from the Bank and from Japan and other donors (the total of which was expected to amount to around US$ 750 million over an eighteen month period), balance of payments pressures were considered likely to lead to irresistible demands on the Government to protect its reserves position by restricting imports, thereby slowing economic growth and delaying the process of industrial modernization and restructuring (PR, para. 64). 3.3 The loan of US$150 million and credit of SDR 156.3 million (US$200 million equivalent) was designed to finance imports of primarily agro- industrial inputs (including oilseeds, edible oils, pesticides, veterinary medicines and animal feed), petroleum and petroleum products, non-ferrous metals, and other drought-related industrial intermediate inputs (e.g., textile fibers and industrial components and spares). The bulk of the loan/credit was expected to finance: (a) petroleum and petrole "roducts to meet the increased demand for thermal power generation--especially for irrigation and drinking water pumping--and compensate for reduced hydro- power generation due to the drop in reservoir levels, and for incremental . ('I I - is  - 4 - the production of which was curtailed due to pre-emption of power supplies for agricultural and drinking water needs; and (c) edible oils to replenish stocks in the private and public distribution systems and ensure adequate supplies for the local processing industry (PR, para. 66). 3.4 In conjunction with the project, the Bank also introduced modifications to its existing portfolio to speed up the implementation of ongoing projects in drought-affected areas and, in selected cases, widened the scope of projects to make them more responsive to the critical constraints on agricultural production and village water supply arising from the drought (PR, para. 69). 4. PROJECT DESIGN AND ORGANIZATION 4.1 Consistent with the objectives outlined above, the project was designed to provide assistance in an amount and over a sufficiently short time period to have a discernible impact on the Government's ability to manage the heavy costs of its drought relief efforts while at the same time sustaining and enhancing the momentum of the economic reform process. The project was considered to be an appropriate response to the drought situatLon on the following grounds: (a) the drought was one of the worst of the century and followed two consecutive years of poor rainfall; 'b) India has in place an effective drought relief program; (c) it has sustained satLsfactory economic performance over time which has helped build resilience to droughts; (d) it has a satisfactory longer term drought amelioration program; and (e) it has an economic reform program under way which the Bank endorses, but which was placed in jeopardy because of the drought. 4.2 The project provided an important breakthrough in our policy dialogue with GOI. In the context of the project, the Government reaffirmed its commitment to continue the process of modernization and increased efficiency of the economy upon which it has embarked and outlined its program in a letter to the Bank (ref. Annex IV of the President's Report). This program includes deregulation of domestic industries and streamlined decision making on the revival or exit of sick industrial units. It also includes improvements in the support system for exporters and review of import regulations and tariffs to eliminate anomalies in the structure of nominal and effective protection. As noted (ref. para. 3.2), in the context of discussions of the project the Government also indicated its intentions to accelerate implementation of the Seventh Plan strategy for longer term drought amelioration and rehabilitation. Key elements include the adoption of a National Water Policy, with priority given to intensifying efforts to improve the effectiveness of existing irrigation schemes already underway and improve the planning and design of future projects. At the same time the strategy includes increased attention focussed on rainfed agriculture, with particular emphasis to be placed on accelerating the dissemination of technologies for soil and on-farm moisture conservation. 4.3 In accordance with the urgency of the situation, the project was prepared and presented to the Board on a greatly accelerated timetable. Based on initial discussions with the Government in late August 1987, the -- - _ s , -  - 5 - the Board in November. Given the objective of providing fast-disbursing assistance, particular attention was focussed during appraisal on the procurement arrangements for items on the positive list of imports of drought-related products (including petroleum and petroleum products, edible oils, etc.), most of which had not previously been financed under Bank-assisted projects in India. The Regional Procurement Adviser visited India to reach agreement with each of the purchasing (importing) agencies on the products to be covered and the procurement arrangements to be followed. Many of the products included in the project are purchased under international tendering procedures. These procedures were reviewed and found to be generally consistent with Bank requirements and, where necessary, modifications were agreed. This approach proved to be highly successful in facilitating smooth and rapid project implementation and provided a model for the design of import financing components for other projects in India. 5. PROJECT IMPL9MTION 5.1 Implementation of the project, in terms of disbursement of the funds to finance imports of drought-related items, was excellent. The project was declared effective on December 16, 1987 with a Closing Date of March 31, 1989. The Loan was fully disbursed by June 1988 Z/ and closed 8 1/2 months ahead of schedule on July 15, 1988. 5.2 The use of loan/credit proceeds was in line with understandings reached during negotiations regardlng the coverage and composition of drought-related imports to be financed by the Bank/IDA, incluclng GOI's undertaking that no more than US$100 million would be used to finance imports of edible oils. More than 80% of the loan/credit was diLs-arsed against major contracts for which the Borrower submitted documentary evidence to the Bank for review. All such contracts were entered on Form 384s. The loan/credit was disbursed against the following imports: Petroleum and petroleum products US$ 189.7m Edible oils : US$ 90.1m Non-ferrous metals : US$ 27.7m Industrial spares & raw materials : US$ 57.7m _ ,...... TOTAL US$ 365.2m A/ A/ Includes currency adjustment equivalent to US$15.2 million 5.3 The excellent disbursement performance under the project was in large part due to the determined efforts of GOI and the purchasing agencies (comprising indian Oil Corporation, State Trading Corporation, Minerals and Metals Trading Corporation, Bank of India and State Bank of India), and to the close attention paid to procurement arrangements during project preparation (ref. para. 4.3 above). / An amount of US$2.1 milllon equivalent was disbursed on October 6, 1988 representing a small balar-e remaining in the Special Account due to currency fluctuations.  -6- 6. PROJECT RESUlTS Actual Impact of the Drought 6.1 Overall, the Indian economy withstood the impact of the drought particularly well. Agricultural value added declined much less than had been anticipated, recording a decline of only 1.0% compared with an initial estimate of between 5 and 8% (ref. para. 2.5). The kharif foodgrain crop declined by only about 8t and the rabi crop, which is largely irrigation- based, increased by 2% compared with 1986/87. This contrasts with the drought of 1979/80, for example, during which kharif and rabi foodgrain output declined by 19% and 14%, respectively. The smaller kharif foodgrains loss in 1987/88 is largely attributable to the above average rainfall in the Eastern rice region, which in fact experienced floods while the rest of the country was suffering drought conditions. The positive growth in rabi foodgrain production, despite moisture stress and other E growth retarding effects of monsoon failure which extended into the rabi season, was assisted by the spread of Irrigation that has enlarged the sector's drought-proof base and by Government actions to ensure the supply of inputs, especially steps to achieve improved management of available water resources. 6.2 In addition to the better-than-expected agricultural performance, the industry and services sectors also exhibited increased resilience to agricultural shortfalls. Industrial value added grew at 6.5%, down from 8.3% in 1986/87 but above the trend rate of growth over the previous 10 years of 5.3%; the services sector grew at 5.1%. Overall, GDP growth for 1987/88 is estimAted at 3.6%, compared with earlier projections of 1-2%. 6.3 The budgetary and balance of payments costs of the drought were substantial. As indicated (para. 2.5), the Central Government increased its allocation for drought-related relief and public works programs by US$1 billion. The overall cost would have beer much higher, however, after taking into account the States' outlays from their own resources on drought relief activities. On the balance of payments front, as expected (ref. para. 2.6), the costs were substantial and carried over into 1988/89. Edible oil imports increased from 1.3 mmt in 1986/87 to almost 2 mit in 1987/88 and there were further drought-related imports in 1988/89. Because of the severity of the drought, which also followed two years of poor monsoons, hydroelectric power generation declined by 12%. In response, petroleum and petroleum product (POL) imports increased by 18% in 1987/88 to meet the drought-induced increase in demand for thermal power. This, together with a firming of world petroleum prices, led to an increase in the value of POL imports of US$1 billion. In addition, about 2 mmt of wheat and 850,000 tons of rice were imported in 1988/89. These drought- related imports contributed to a loss of foreign exchange reserves of US$300 million in 1987/88 and a further loss of US$1.4 billion in 1988/89. 6.4 To ensure food supplies in the face of the drought, the Government increased sales through the Public Distribution System (PDS) and distribution through the relief network. Almost 23 mit of wheat and rice were provided from the Central Pool, versus 20 mit in 1986/87. Low procurement meant that much of this came from the buffer stocks that had been built up in earlier years; stocks fell from 19.5 mnt in March 1987 to  9.4 -mt in March 1988. Supplies of edlble oils, for which there were no buffer stocks, were augmented by a major increase in Government imports (ref. para. 6.3). Overall, the Government's efforts, supported by the Consortium members and channeled through the well-developed relief system, played a major role in mitigating the severe economic and social consequences of the drought. 6.5 The very good monsoon of 1988 3/ produced a strong recovery in agricultural production and overall economic growth, as well as vital replenishment of water resources. The drought-breaking rain even extended to areas of the country (e.g., Rajasthan and Gujarat) which had experienced three or four consecutive years of drought. Achievement of Project Obiectives 6.6 In terms of its principal objective of helping to sustain and enhance the momentum of the economic reform process during the drought situation, the project must be considered a success. The project, together with support from other donors, played an important role in assisting the Government to manage the budgetary and balance of payments consequences of the drought without rolling back the reforms already underway and, in fact, with further progress in a number of important areas. 6.7 In particular, the industrial reform process continued in 1987 and 1988. Among the major measures adopted during this period were: (a) automatic endorsement of licensed capacity at the maximum output reached in 1988, 1989, or 1990; (b) easing of licensing requirements, by raising the ceiling above which licenses are needed from 1981's Rs 50 million figure to Rs 150 million (nearly 100% in real terms) for investments outside urban areas and to Rs 500 million for investments in the most backward areas; (c) easing of licensing and entry restrictions facing large firms (firms subject to .he Monopoly and Restrictive Trade Practices Act (MRTP) and the Foreign Exchange Restriction Act (FERA)); and (d) reduction in the number of products legally reserved for small-scale production. These policy changes should increase domestic competition, at the same time making modernization easier. The Government has also strengthened its sick industry policy, resisting "bail-outs" of sick firms while using the recently-created Board for Industrial and Financial Reconstruction and the development banks to work out financial packages for viable firms and for closing non-viable ones. Private and public firms are increasingly using termination benefits to rationalize their workforce. 6.8 In addition, the considerable improvements in exMoit ]olicies and incentives introduced in recent years were further expanded. The 1988-91 Import Export 2olicy, announced in April 1988, enhanced the programs of imports for exporters. The types of manufactured exports entitled to REP licenses (transferable licenses that can be used to import restricted or canalized imports) were increased and rates of entitlement were raised for a number of products. Also, provisions for extending export incentives to indirect exporters were introduced. Exporters' access to imported capital goods was improved, by reducing restrictions on capital goods imports for / By the end of September, only 3 of 35 districts reported poor or scanty 1 7  -8- exporters and by reducing tariffs on some of them. The policy also improved the rules and facilities for export and trading houses, bonded warehouses, and free trade zones. In addition, the Budget for 1988/89 raised the export profit tax deduction to 100% of export profits, and the Reserve Bank of India (RBI) increased and liberalized its foreign exchange allowance for export marketing. Finally, the coverage of export incentives and import licensing for exports schemes was broadened and procedures were further streamlined. 6.9 While the progress in imgort policy reform has been less impressive than for industrial and export policy, the process of gradual reform has continued. The main recent improvements in import policy have been easier access to imports by exporters, easier application of existing restrictions and greater reliance on prices (the exchange rate and tariffs) to limit imports. The substitution of price rationing for quantitative controls has had the desirable effect of transferring to the Governmei,t (and exporters in the case of the exchange rate and REP licenses) the scarcity premia on foreign exchange that otherwise would go to recipients of import licenses. Increased imports of capital goods and intermediates have been an important factor in the higher growth of total factor productivity in manufacturing. However, protection remains high on basic inputs and many final products. 6.10 The project also contributed to an acceleration of efforts to tackle the problems of farming in rainfed areas as part of the Government's longer term strategy for increasing resilience to droughts. The severity of the drought and the Bank's close involvement in assisting the Government to manage its consequences provided an important opportunity to furthej. the dialogue on these issues and advance the preparation of Bank-assisted projects for the development of rainfed agriculture. The Government has given priority to accelerating the dissemination of technologies for soil and on-farm moisture conservation. In this context, increased efforts are being made to integrate the activities of extension and soil conservation agencies, at the Center and in the States. Stabilization of watersheds and upgrading of wastelands is being stepped up by acceleration of tree planting programs and increased use of vegetative soil conservation within the framework of the National Watershed Program for Rainfed Agriculture. The initial stages of this process are being supported by ongoing Bank- assisted projects (e.g., Pilot Project for Watershed Development in Rainfed Areas (Cr 1424-IN)), which have demonstrated very good results from the new technologies. 6.11 As part of the next stage of this process, which will take these results and introduce them to other suitable areas of the country, preparation of two Bank projects--Integrated Watershed Development Project (Hills) and Integrated Watershed Development Project (Plains)--is now well- advanced. These projects will focus on an additional number of sub- watersheds and seek to: (a) verify and demonstrate new technologies for soil and moisture conservation, based in part on the results of Bank- assisted pilot schemes in other parts of the country; (b) promote increased research attention to rainfed farming technologies applicable to local conditions, including the relatively neglected subjects of fodder production and pasture management; (c) promote an inter-disciplinary i I  - 9 - implementation of activities in the fields of soil and moisture conservation, forestry, crop and animal husbandry, which are presently the responsibility of four different Sta.e departments; and (d) promote improved management of common lands, including, importantly, active involvement of the local people in planning and implementation. 7. PROJECT SUSTAINAILITY 7.1 The project effectively supported India's economic reform process and contributed to an acceleration of the development of programs designed to increase India's longer term resilience to drought in agricu.lture. The sustainability of the latter is being addressed in the Bank's ongoing agricultural lending and economic and sector work programs and, as noted above (para. 6.11), there is encouraging evidence of a strong commitment by the Government to move ahead in these areas. With respect to the economic reform process, the prospects for continued reform over the medium ter% are generally good. There appears to be a fairly broad consensus at the senior levels of the bureaucracy--shared in academia and in the business community --that the reform process must continue. The Bank has an open and constructive dialogue with the Government on the reforms necessary to accelerate growth, thereby permitting more rapid progress towards poverty eradication, while holding current account deficits to prudent levels. The Bank is actively pursuing major policy issues in the context of its economic and sector work and in understandings being sought during preparation of individual sector and sub-sectoral operations on actions already taken and plans for further actions in those areas. 8. BANK AND BORROWER PERFORMANCE 8.1 As indicated above (ref. para. 4.3), the project was prepared within a very short time frame. Considerable flexibility was provided to the appraisal and negotiating teams to procers the project expeditiously while still paying due regard to project quality and consistency with Bank standards. Elapsed time from project identification to Board Presentation was only 12 weeks. At the same time the Borrower (GOI) gave priority attention to the project and the professionalism and helpfulness of its project team greatly enhanced the quality and timing of the project's preparation. Implementation of the project by the Ministry of Finance and the agencies responsible for managing the import programs (IOG, STC, M1TC, BOI, and SBI) was excellent. The loan/credit #as fully disbursed within six months of Signing. In this context, the preparatory work during appraisal to approve and clarify procurement arrangements for the import of bulk commodities and other imported items financed by the project was instrumental in ensuring smooth and rapid disbursement of the loan/credit. 9. FINANCING OF EDIBLE OILS 9.1 Kharif oilseed production was seriously hit by the drought, especially groundnut production, which declined by 10% from the 1986/87 crop. As India has an inadequate stock of edible oils (which it imports even in normal years, with imports averaging about US$700 million per year (in real terms) over the period 1980/81-1986/87), this decline in production could, unless adequate supplies were maintained to the local processing industry, have had a severe adverse impact on the poorest  - 10 segments of the drought affected population. Hence, the Government strongly requested that proceeds of the Loan and Credit should be disbursed against imports of edible oils in addition to the other items proposed by the Bank. 9.2 The Bank's policy has consistently been to assist in emergencies by financing productive activities and investment rather than relief and consumption. This policy should normally have precluded the Bank from including edible oils in the list of items to be financed under the Credit and Loan. However, in view of the fact that imports to be financed were intended for the purposes of urgent replenishment of stocks as an integral component of the Government's recovery program (rather than for distribution through a relief operation) the Bank agreed to finance edible oil imports up to a total amount of US$100 million equivalent, which was considered appropriate to reflect the objective of urgent replenishment of edible oil stocks. In the event, only US$91 million was utilized for import of edible oils. 9.3 Typically, government response to an emergency will include both short-term relief as well as longer term recovery programs. The Bank's policy is, as stated above, to support recovery programs but not relief operations as the latter are well beyond its institutional competence and capabilities. The Indian Government's request for Bank financing of edible oil imports in this case, however, raised the issue whether food items (which are typically provided by other agencies in a relief operation) could be included for financing under a Bank supported recovery operation. After extensive discussions, both internal and with the Government, the Bank responded with flexibility to accommodate the needs of the situation and financed edible oils for the purpose of replenishing food stocks as an integral part of the recovery program. In this event, the Bank's response to the Government's request was adequate to achieve the objectives of the Project, including disbursement of the assistance within the intended time frame. 10. Findings and Lessons Learned 10.1 The project was well conceived, was effectively implemented, and achieved its stated objectives. The timely completion and success of the project can be attributed to a number of factors: (a) The Bank and the Government, in close collaboration, acted promptly to assess the overall economic, social and sectoral impact of the drought, and the extent of the required assistance. (b) Agreement with the Government on the strategy and scope of the overall recovery program was reached rapidly. (c) Implementation arrangements were simple, made use of existing institutions, and were commensurate with the country's implementation capacity. (d) The preparatory work to approve and clarify procurement arrangements was instrumental in ensuring smooth and rapid disbursement of the loan/credit.  - 11 - (e) The commitment of the Government to the recovery program, and the determined efforts and professionalism of the government officials and other agencies involved deserves special mention.  - 12 - PART III PROJECT DATA RVP Unit Asia Sector Emergency Assistance Operation Borrower Government of India Executing Agency Ministry of Finance Fiscal Year of Borrower April 1 - March 31 PROJECT TIMETABLE Item Date Planned ]Date Atual - Identification (EPS) 09/08/87 09/08/87 (Draft Issues Paper Review Meeting) - Preparation - Appraisal Mission 09/09/87 09/09/87 - Loan/Credit Negotiations 11/04/87 11/04/87 - Board Approval 11/24/87 11/24/87 - Loan/Credit Signature 11/25/87 11/25/87 - Loan/Credit Effectiveness 12/16/87 12/16/87 - Loan/Credit Completion 12/31/88 07/15/88 - Loan/Credit Closing 03/31/89 07/15/88 Related Bank Loans and/or Credits None Loan/Credit Disbursements Cumulative Estimated and Actual Disbursements (USS million) 1987/88 1988/89 Appraisal Estimate 300.0 350.0 Actual 363.2 365.2 Actual as % of Estimate 121.1% 104.4% Date of Final Disbursement 10/6/88 NOTE: Due to changes in US$/SDR exchange rate, actual amount disbursed on IDA credit was US$215.2 million equivalent (estimated at US$200 million at negotiations).  - 13 - Frolect Costs (US$ million) Appraisal Cost Estimates Actual ExDenditures Petroleum & petroleum products A/ 189.7 Edible oils / 90.1 Non-ferrous metals A/ 27.7 Industrial intermediates a/ 57.7 350.0 365.2 S/ n/ Separate estimates not made for each category. h/ Agreement reached at negotiations to limit edible oil imports financed under project to no more than US$100 million. / Includes currency adjustment equivalent to US$15.2 million. Staff Tnputs (Staff Weeks) EH81 fFY89 Total Appraisal 21.6 21.6 Negotiations 0.3 0.3 Supervision 4.6 0.6 5.2 Completion 5.8 (est.) _.8I (est.) Total 26.5 6.4 (est.) 32.9 (est.) Field Mission Dates Month/ No. of Days in Performance .xar Persons Field Rating Status Appraisal 09/87 2 8 -- Appraisal/Negotiations 10/87 4 7 -- Supervision 03/88 1 4 1 Project Completion 10/88 1 3 1  - 14 - Status of Covenants Deadline for Coveant Subjec-t 9Molsnce Statu Ln./Cr. Agreement Audit Reports Dec. 31, 1988 IOC & STC audit for Implementing reports submitted. Agencies, Awaiting receipt including audit of audit reports reports for Special for other importing Accounts and SOEs. agencies. (Expected by no later than October 1, 1989.)