India - Oil and Gas Sector Development Project

D _tu.u ot The World Bnk FOR OMClAL USE ONLY i-~Lt!,AlEs J- . is,^l;l, l! 'RopstNo. ?-5594-IN REPORT AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA IN AN AMOUNT EQUIVALENT TO US$150 MILLION FOR OIL AND GAS SECTOR DEVELOPMENT JULY 12, 1991 This docmt bas a resticted distribution and may be osed by recipiens only in the performance of their offcial duties. Its contents may not otherwise be dislosed witbout World Bank authorization.  CURRENCY EQUIVALENTS (As of July St 1991) Currency Unit Rupees (Rs) Rs 1.00 = US$ 0.0385 (approx.) US$1.00 = Rs 25.95 WEIGHTS AND MEASURES 1 million cubic meters of gas 37 million cubic feet of gas 6,500 barrels of oil 1 ton of oil 7.3 barrels of oil ABBREVIATIONS BCM - billion cubic meters CCFF - Compensatory and Contingency Financing Facility GOI - Government of India GOR - Gas-oil ratio MMCMD - million cubic meters per day MW - megawatt OIL - Oil India Ltd ONGC - Oil and Natural Gas Commission FISCAL YEAR April 1 to March 31  FOR OFFICAL USE ONLY INDIA LOAN FOR OIL AND GAS SECTOR DEVELOPMENT Table of Contents Page No. * LOAN AND PROGRAM SUMMARY .... . . . . . . . . . . . . . . . . . . i PART I THE ECONOMY . . . . .1 Background and Recent Economic Performance . . . . . . . 1 Medium-Ternm Policies and Prospects . . . . . . . . . . . 3 Bank Group Operations . . . . . . . . . . . . . . . . . 5 Relations with the IMF and Donor Coordination . . . . . 5 PART II THEENERGY SECTOR . . . . . . . . . . . . . . . . . . . . 6 India's Limited Energy Resources . . . . . . . . . . . . 6 India's Emerging Oil Gap . . . . . . . . . . . . . . . . 6 The Government's Program . . * . . . . . . . . . . 7 PART III THE PROPOSED LOAN . . . . . . . . . . . . . . . . . . . . 9 Rationale for the Proposed Loan . . . . . . . . . . . . 9 Loan Amount . . . . . . . . .. . . . 9 Disbursement, Procurement and Auditing . . . . . . . . . 9 PART IV RECOMMENDATION . .. . . . . . . . 10 * ANNEXES 1. Key Macroeconomic Indicators . . . . . . . . . . . . . . . . . . 11 2. Letter to Mr. Conable . . . . . . . . . . . . . . * . . . . . 14 3. Letter to Mr. Qureshi.. . . . . . . . 15 This document has a restricted distribution and may be used b) recipiomnv only in the performance of their official duties. Its contents may not otherwise be disclmsd w'ti:c .t World Bank authorization.  - i - IIDIA LOAN FOR OIL AND GAS SECTOR DEVELOPMENT Loan and Program Summary Borrower: India, Acting by its President. Amount: US$150 million equivalent. Terms: 20 years, including five years of grace, at the Bank's standard variable interest rate. Description: The proposed loan would complement the financing provided under the Gas Flaring Reduction project (Ln. 3364-IN). It would allow India to meet part of the external financing needs caused by the increase in oil imports resulting from the closure of oil wells with exceedingly high gas- oil ratios (GOR) in the Bombay High oilfield. Project Benefits: The proposed loan would (i) support the Government's measures to attract private sector companies to participate in the accelerated development of India's oil and gas reserves; (ii) provide support to ONGC's ongoing efforts to improve the management of the reservoirs of India's largest oilfield, the Bombay High; these efforts will result in an increase of oil output in future years; Proiect Risks: General slippages in the implementation of the Government's emerging overall stabilization and reforms would pose major risks for the specific policy and program changes in the oil and gas sector supported by this loan. In addition, the implementation of the program changes is subject to the implementation risks set out in the Gas Flaring Reduction project. The intensity and quality of the ongoing policy dialogue with both Bank and Fund and the urgency and size of the Government's resource needs provide significant safeguards against policy slippages. Disbursements The proceeds of the loan would be available for disbursement in one tranche upon credit effectiveness. Staff Appraisal This is a combined Staff Appraisal and President's Report. Report. Map; IBRD No. 22892  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR OIL AND GAS SECTOR DEVELOPMENT 1. I submit the following report and recommendation on a proposed Loan to India for Oil and Gas Sector Development for the amount of US$150 million equivalent to complement the financing provided for the Gas Flaring Reduction Project (Ln. 3364-IN), which was approved by the Executive Directors on June * 25, 1991. The proposed loan amount would finance part of the increase of oil import requirements caused by the loss of oil production in the Bombay High oilfield as a result of ONGC's decision to close oil wells exceeding an acceptable level of associated gas output. This operation was originally conceived as an integral part of the Gas Flaring Reduction Project. However, India's caretaker government was not in a position to undertake the policy and program changes needed to promote private sector participation in oil exploration and development, in particular the announcement of an invitation to international oil companies to explore for oil and gas in India ("Fourth Round") and approval of a request by the Oil and Natural Gas Commission (ONGC) to enter into joint ventures in order to accelerate the development of its existing oilfields. Moreover, the macroeconomic framework essential for dealing with the difficult balance of payments position of the country was not in place. However, since the formation of the new government several major initial stabilization and structural measures have been put in place in advance of the presentation of the budget on July 24, 1991, which will set forth in detail the Government's macroeconomic framework and outline further structural changes. These developments have made it now possible to proceed with this loan to complement the assistance provided under the Gas Flaring Reduction Project. The proposed loan would be at the Bank's standard variable interest rate with a maturity of 20 years including five years of grace. PART I - THE ECONOMY Background and Recent Economic Performance 2. Since Independence in 1947, India's governments havc faced the daunting task of forging a large population, sharply divided along ethnic, linguistic, and religious lines, into a modern, federated nation state. Driven by the need to build consensus in a highly diverse society, economic policies have been dominated by goals of interpersonal and interregional equity. The strategy for achieving these goals assigned a major role to the state, which either made or served as arbiter of virtually all economic decisions, and took substantial, sometimes exclusive, ownership positions in several sectors of the economy. 3. This strategy resulted in slow but steady progress toward many of India's development objectives. Growth performance, however, was modest in relation to India's relatively high saving and investment rates. Its manufacturing sector and exports, both large at Independence relative to other  - 2 - developing countries, stagnated. Population growth rates remained high, and indicators of the health and educational status of India's population, while showing some progress, were still among the world's lowest. By 1977, thirty years after Independence, more than 402 of the population remained in poverty. 4. A consensus began to build in the late 1970s that India would have to modernize and increase the efficiency of its economy if it were ever to improve materially the standard of living of its poor. This was reflected in gradual changes of its development strategy ia three important dimensions. First, and foremost, greater emphasis was given to growth as the primary motive force for poverty alleviation. To this end, the Government took a variety of policy initiatives to stimulate aggregate supply and demand. On the demand side, macroeconomic policy became more expansionary, financed by increased domestic and external borrowing. New financial instruments were developed to stimulate financial saving and facilitate public sector borrowing. On the supply side, significant initiatives were launched to improve infrastructure performance, and the scope for private initiative was gradually increased. Constraints on industrial investment, expansion, and diversification were partially relaxed. While the trade regime retained its overall bias toward import substitution, an increasingly active export promotion effort and (since the mid 1980s) flexible exchange rate policy were utilized to reduce the bias against industrial exports. Second, an effort was made to increase investment in human capital formation with the launching of national programs aimed at expanding services in health and education. Third, direct poverty interventions, based on credit and subsidies for self employment and publicly financed work schemes for the rural unemployed were initiated. S. Recent Economic Developments. Viewed in terms of India's historical growth, export, and poverty alleviation performance, the shift in economic policies served India well in the 1980s. GDP growth averaged 5.6? (up from 3.5? in previous decades) and, despite only modest success in reducing population growth, per capita income growth was three times its historical average. Growth rates increased across the board, but growth in industry, and more narrowly in manufacturing, was particularly strong. Productivity growth, stagnant from the mid 19608 to the mid 1970s, averaged 2.9?. In real terms, exports have grown at rates in excess of 10? p.a. since 1986/87. The incidence of poverty continued to trend downward, declining from over 402 of the population in 1977 to less than 30? at the end of the 1980s. Finally, although still low in relation to the rest of the low income developing world, there seemed to be some modest acceleration in the rate of improvement of social indicators. The foregoing successes notwithstanding, India's expansionary fiscal policies have also created unsustainable macroeconomic imbalances. Fiscal deficits have gradually risen from about 6t of GDP in the early 1980s to 9Z of GDP in the last three fiscal years. The current account deficit worsened as a consequence, and India's external debt increased from US$20.7 billion at the end of 1980/81 to US$71.5 billion at the end of 1990/91 that is, from 1.4 years of exports to 2.8 years of exports. The debt service ratio rose from less than 15? to about 28? over the same period.  - 'i . 6. The Gulf crisis accentuated India's macroeconomic imbalances. World oil price hikes Increased India's oil import bill by about $1200 million in 1990/91. Lost remittances ($290 million), debt repayments ($100 million), and receipts from exports to the Gulf region ($100 million), in addition to costs of repatriating Indian nationals working in Iraq and Kuwait ($250 million) cost India another $740 million. The current account deficit reached an estimated $9.9 billion (3.5T of GDP), up from $8.4 billion (3.22 of GDP) in 1989190. At the end of 1990/91, foreign exchange reserves had fallen to $2.3 billion (equivalent to one month of imports). The Gulf crisis, combined with political instability, led to a severe erosion of India's creditworthiness in the international capital markets, a development which has compounded the country's liquidity problems. 7. In response to the Gulf crisis, the Government introduced a number of stabilization measures. A surcharge of about 25Z was imposed on domestic petroleum product prices (on top of an 112 price increase in March 1990); this surcharge has remained in place despite the fall in international oil prices. In addition, selected taxes were increased and expenditure restraints effected. These measures are estimated to have reduced the fiscal deficit by about 1? of GDP in 1990191, in relation to what it would have been otherwise. On the monetary front, interest rates were increased and liquidity requirements tightened several times during the course of 1990/91 and a partial liberalization of interest rates was introduced in September 1990. On the external front, the Government sought to contain imports through an accelerated depreciation of the rupee and a cash margin scheme for imports. Under the scheme, banks were instructed to open letters of credit only against cash deposits varying between 50S and 200S of the letter of credit amount depending on the nature of the goods to be imported. 8. These measures have had some success. The fiscal deficit was contained at about 9.0S of GDP in 1990/91 (the same as in 1989/90) in spite of the pressures created by elections, the Gulf crisis, and the absence of a government with a mandate to implement a major program of economic adjustments. Broad money growth rate declined from 191 in 1989/90 to 162 in 1990/91. Annual inflation, after reaching almost 131 in the first months of 1991/92, fell to less than 11 in June. 9. India availed itself of the Fund's Compensatory and Contingency Financing Facility (CCFF) and a first tranche stand-by in January 1991. The total drawings amounted to SDR 1.8 billion. Despite this inflow and assistance from a number of bilateral donors, the country's foreign exchange reserves have continued to decline and were about $1.1 billion at end June 1991. Medium-Term Policies and Prospects 10. Redressing macroeconomic imbalances and continuing the liberalization and deregulation of the economy have been important priorities for every government in recent years, but political difficulties have slowed progress on both fronts. Despite three successive budgets calling for reductions in the central government's deficit, fiscal imbalances have worsened. Two governments have fallen since the general elections of November  - 4 - 1989, most recently in March 1991. The elections that followed were marred by considerable violence, and could not be completed until June 1991. The 1991192 budget, covering the period April 1991 to March 1992, had to be deferred until the completion of elections and is now scheduled to be presented to Parliament on July 24, five months later than normal. 11. India's future growth depends on a prompt resolution of the current liquidity crisis and restoration of macroeconomic equilibrium. Stabilization of the economy alone, while essential, will not, however, be sufficient for dealing with the current economic crisis. Broad-based structural reforms to improve the efficiency, productivity and competitiveness of the economy are essential to achieving the export growth required to strengthen India's creditworthiness and to support the future growth and development of the economy. 12. The new Government, which took office on June 21, 1991, clearly recognizes both the immediate stabilization problem and the more fundamental need for structural reform. It has already moved forcefully to initiate policy measures on both fronts. The Rupee was devalued by 23Z (measured in terms of the rupee cost of the US$) in the first week of July. Thus, since December 1990 the nominal exchange rate has been depreciated by about 40? in relation to the US Dollar and by about 30? in relation to the SDR. This compares with an inflation rate which in the last six months has been hovering around 121 p.s. Second, all regulated interest rates were increased by one percentage point. while lending rates were raised by 1.5 percentage points; this increase also applied to the Reserve Bank of India discount rate (from 10X). Thirdly, the Government has unified and increased to 30? (from 5-202) the share of export proceeds that exporters may use for their own import requirements or freely trade, while at the same time introducing significant accompanying procedural simplifications. Finally, it eliminated export subsidies discontinuing the Cash Compensatory Scheme. The latter was an important sc%irce of pressure on the budget which, if not discontinued, would have added about 0.5? of GDP to the budget deficit in 1991/92. The Government has also reiterated that the forthcoming budget would introduce a major fiscal adjustment, bringing the budget deficit down to 6.5? of GDP in 1991/92. 13. As the early steps noted above indicate, the Government has promptly embarked on devising and implementing a medium-term economic reform program. The details of the rest of this program, particularly with respect to fiscal adjustment, will be unveiled in the budget, and subsequently developed with greater specificity on the structural dimensions. As set out in the policy letter, the Government would continue to undertake further structural reforms covering the areas of industrial de-regulation, foreign investment, reforms of the financial and capital markets and more realistic policy in respect of public sector undertaking." The underlying intent will be to enhance the international competitiveness of the economy and to ensure that India's growth momentum is protected and strengthened. 14. The stabilization and structural measures being put in place should result in a decline in the current account deficit from a record $9.9 billion (3.5 of GDP) in 1990/91 to about $5.5 billion (2.3? of GDP) in 1991/92, stemming from a substantial reduction in the trade deficit. Despite this  - 5 - projected large reduction in the current account deficit, the overall balance of payments position would remain tight in 1991/92 unless there is an early resumption of access to private capital markets. India currently faces a potential financing gap of about $3-4 billion in 1991192, which could only be covered in the context of an adjustment program supported by concerted additional assietance from official creditors. Bank Group Operations 15. The Bank's assistance program gives the highest priority to supporting India's efforts aimed at restoring macroeconomic equilibrium, accelerating structural reforms in the areas of industry, trade, finance and public enterprises, and regaining access to private credit markets abroad. These reforms are essential to improving the efficiency, productivity and competitiveness of the economy, and to strengthen India's creditworthiness. Contingent on the implementation of a comprehensive economic reform program, the Bank will be prepared to assist India with policy-based lending, particularly in the key areas noted above. Specifically, a structural adjustment loan, a financial sector adjustment loan and an IDA credit, which would be designed to support programs providing social safety nets in the adjustment process, are under discussion with the Gover"nent. 16. The Bank's overall assistance strategy aims to strengthen support for efficiency-improving sectoral reforms and institutional development in agriculture, infrastructure, human resources and poverty alleviation through investment and sector lending operations. Agriculture, which provides the livelihood of most of India's poor, accounts for 30? of GDP. In the medium- term, agricultural growth will be essential for sustainable economic growth and the reduction of poverty. The Bank will seek to support projects for irrigation, rural roads, marketing, research and extension while encouraging changes in policies and institutions that could increase productivity. Lending for developing India's infrastructure will be directed towards projects in: (i) energy to develop India's gas resources and to support central power entities and those State Electricity Boards which, together with their respective governments, are committed to reform; (ii) transport to improve the efficiency of the existing network and finance needed additions; and (iii) urban areas to provide needed infrastructure and improve the management of urban areas. Lending for human resource development will focus on improving the delivery of educational and health services, particularly to * the most vulnerable groups. Nutritional programs for the poorest segments of society and family planning will be emphasized. Poverty alleviation will be an objective wherever applicable particularly in projects for the development of agriculture and human resources, but the Bank will also seek to support the Government's efforts to improve the efficiency and comprehensiveness of social safety nets. Relations with the IMF and Donor Coordination 17. The Bank and the IMF are making a carefully coordinated effort to support India's stabilization and adjustment program. The Fund is currently finalizing a further drawing of the CCFF, to be followed by a stand-by program. Negotiations for the stand-by are expected to begin after the announcement of the budget.  -6- 18. As noted earlier, India's external financing needs in the near and medium term will require substantial official assistance. In this context, the Bank will continue to play a key role as the Chairman of the Aid India Consortium in mobilizing support from other official donors and creditors. In support of a comprehensive stabilization and adjustment effort by India, the Bank will seck quick disbursing cofinancing from bilateral donors to supplement its own policy-based lending. PART II - THE ENERGY SECTOR India's Limited Energy Resources 19. Considering the size of its economy and its rapidly growing population, India is only modestly endowed with energy resources. Despite allocating almost a third of its public investment resources to the development of these resources, India depends heavily on oil imports to meet its domestic energy needs. India's energy resource base is dominated by coal. Total coal and lignite reserves are estimated at more than 170 billion tons. Although these coal reserves are mostly of low quality, they are India's most important commercial energy resource. India also has a sizeable potential for the generation of hydro-electric energy, estimated at 100,000 MW, of which up to now only about 13,000 MW have been developed. Environmental concerns, the high cost of, and growing resistance to, the resettlement of a large number of people, disputes about water rights and financial constraints have made hydro- electric power projects increasingly unattractive. Thus, the power sector prefers to invest in coal and gas-based thermal power ge-Qration. Compared to coal, India's oil and gas reserves are small. Proven an4 probable oil reserves amount to about 840 million tons. At projected consumption levels these reserves will last about two decades. Thus, unless exploration efforts succeed in raising the level of reserves, India will need to meet its demand for petroleum products lncreasingly through imports. Increased use of natural gas may provide some respite in the medium term. Natural gas reserves, which are estimated at 961 billion cubic meters (BCM), would permit India to reduce imports of oil products. Up to now this effort has been hampered by conflicting policies and insufficient financial resources. Finally, India also has modest reserves of uranium, which would be sufficient to support a nuclear power program of about 8000 megawatts (MW). India's Emerging Oil Gap 20. Oil production in India is in the hands of two public sector companies, the Oil and Natural Gas Commission (ONGC) and Oil India Ltd. (OIL). Production has increased dramatically over the past 15 years to reach 30.4 million tons in 1990/91, primarily due to the discovery of the Bombay High and its satellite fields in the early 1970s. As a result, India has been able to reduce its dependence on imported oil from about 80S in the early 1970s to less than 402 in the early 1980s. These fields now account for about 602 of indigenous oil production. After increasing at a rate of about 202 a year during the late 1970s and the first half of the 1980s, oil output from the Bombay High fields reached a plateau in 1984/85. Delays in the implementation of measures to maintain reservoir pressures (e.g. through water injection)  - 7 - have led to a sharp increase in the output of associated gas. To avoid permanent damage to the reserveirs ONGC has adopted a program under which oil wells whose output of associated gas exceeds a certain level will be closed. This will reduce oil production from the Bombay High oilfield by about 2.4 million tons a year. To restore optimum oil production levels and thus reduce the risk of a sharp increase of oil imports, ONGC will need to use capital- intensive enhanced oil recovery technology as well as substantial investments for the development of smaller satellite fields. 21. A field-by-field review of oil reserves concluded that indigenous oil production would reach a peak of 42 million tons in 1996/97, and then gradually decline to about 38 million tons in 2000/01. These projections are based on the assumption that ongoing exploration efforts will lead to no significant discoveries. Crude oil imports would then increase to 24 million tons (equivalent to US$4.1 billion) in 1996/97 and 36 million tons (equivalent to US$7.9 billion) in 2000/01. To maintain the present level of self sufficiency, indigenous oil production would have to reach 51 million tons in 1995/96 and 67 million tons in 2000/01. Such an increase would require substantial additional investments in enhanced oil recovery, the accelerated develoin'ent of undeveloped fields and a major increase in exploration activities. The total cost of the implementation of these measures over the next five years it estvmated at about US$10 Lllion of which about US$7 billion would be itn foreign exchange. The Government's sroAram 22. In order to keep the gap between indigenous oil production and demand within manageable limits, the Government is designing a medium term program for the oil and gas sector based on significant policy and program changes. The main thrust of this program is directed at improving the operational efficiency of the sectoral entities and market-based resource mobilization. Critical first steps include improvement of the management of the Bombay High reservoirs and opening the sector to foreign investment in exploration and development. 23. ONGC is relying increasingly on private sector companies for its operations. ONGC uses not only the services of existing domestic private and public sector companies, it also assists former emp3oyees in setting up companies which then provide services to ONGC's operations. At present, there are about 40 such privately owned companies, which provide charter hiring of drilling rigs; helicopter, marine and diving services; operation and maintenance of installations and vessels; soil investigation, surveys, well logging and production testing. Orders to local privately-owned companies have increased from US$71 million in 1980/81 to US$560 million in 1989/90. 24. In the early 19809, the Government adopted a policy of inviting international oil companies to explore for oil on a sole risk basis. Under this arrangement oil companies commlted themselves to a program of exploration work in certain geographical areas. They were under an obligation to finance and carry out this program within a certain time frame, in exchange for a share of their output if hydrocarbons were found.  25. Up to now, there have been three "rounds of offerings of exploration acreage". The first two rounds met only with limited success. The industry felt that the terms of the production sharing contracts were r-ot competitive and the blocks offered were not sufficiently prospective. In the "First Round" (in 1980), the Government offered 15 onshore and 17 offshore blocks. Only four international ccapanies submitted bids for two blocks and only one contract was signed. In the "Second Round" in 1982, the Government offered eight onshore and 42 offshore blocks. No contracts were signed. For the "Third Round" (in 1986/87), the Government improved the terms of the contracts and offered more prospective areas. Of the 27 offshore blocks that were offered, seven international oil companies submitted 12 bids. A "Fourth Round" has been announced by the Government on July 10, 1991. While the contractual terms are similar to those of the "Third Round', and are in line with international practices, the Government has made a major effort to select highly prospective areas. Despite the lack of success of the three previous rounds, international oil companies appreciate that India is essentially still underexplored, particularly in techlically difficult areas such as the Bay of Cambay, Kutch and the possible western extension of Bombay High in deeper waters on the continental shelf and slope. With the general improvement in the environment for private investment which the Government has decided to establish and the selection of highly prospective areas, the "Fourth Round" should result in a substantial number of bids. 26. As indicated above the production of the Bombay High reservoir has reached a plateau in 1984/85. A preliminary report on the prospects of India's oil production, car.ied o4t by the Bdnk, recommended that ONGC close all oil wells with a GOR exceeding 400 vlv (on a volume for volume basis), in order to minimize further damage to the reservoirs of the Bombay High oilfield. A report by the Bombay High Review Committee confirmed the basic thrust of the Bank's findings. On the basis of these recommendations ONGC has adopted a program of shutting-in of wells with a high gas-oil ratio. This will result in a temporary reduction of ONGC's overall oil production by 3.9 million tons in 1991/92. A similar drop in production is expected to occur over the next three to four years. In the Bombay High oilfield alone the decl4'e in production would amount to 2.4 million tons per year. This program will, however, increase the total ultimately recoverable output from Bombay High. At current market prices, this loss of production would amount to about US$307 million. 27. The Gas Flaring Reduction Project contains a component designed to assist ONGC in its program to improve the management of the reservoirs of the Bombay High oilfield. In addition to a study of the current status of the reservoirs, this component would provide for the procurement of equipment and services to improve reservoir pressure and enhance the quantity of oil that can be ultimately recovered. 28. In addition to the important program changes described above, the Government has introduced the following policy changes: (a) implementation of a new gas pricing policy, which links domestic gas prices to fuel oil prices in international markets, thus making it more attractive for private sector companies to explore in gas prone areas and de-elop gas fields; and  - 9 - (b) adoption of a policy which would permit ONGC and OIL to enter into joint ventures with international oil companies for the development of existing oil fields in order to accelerate indigenous oil production. PART III - THE PROPOSED LOAN Rationale for the Proposed Loan 29. The proposed loan is a quick disbursing operation to complement the financing provided for the Gas Flaring investment operation approved by the Board on June 25, 1991. It is aimed at supnorting the policy and program changes the Government has undertaken, as explained above, in order to improve the management of the Bombay High reservoirs and promote private foreign investment. The policy context in which this loan has been formulated is described in para 28 (Refer to Annexes 2 and 3 for the Policy Letters]. As explained in the introduction, it could not be presented to the Board at the same time as the investment operation because India's caretaker government was not in a position to implement the required sectoral policy changes, in particular the announcement of an invitation to international oil companies to explore for oil and gas in India ("Fourth Round") and approval of a request by ONGC to enter into joint ventures in order to accelerate the development of its existing oilfields. Loan Amount 30. One of the objectives of the proposed loan is to assist the Government in defraying the cost of additional oil imports due to production shortfalls in the Bombay High oilfield. The shortfalls result from the implementation of the shutting-in of oil wells as recommended by the Bank. A loan of US$150 million is proposed, which would finance roughly SOZ of the cost of additional oil imports required to compensate the shortfall in the oil output from the Bombay High oilfield in 1991/92. The loan would be disbursed upon loan effectiveness in a single tranche. The Gas Flaring Reduction Project (Ln. 3364-IN), has been declared effective on July 12, 1991. Disbursement, Procurement and Auditing 31. The proposed loan would finance 1002 of the CIF cost in foreign currency of crude oil and oil products imports. In view of the current foreign exchange shortage and in order to cover expenditures incurred under contracts awarded in a manner consistent with the guidelines, retroactive financing would be provided in an amount of US$30 million for items contracted after March 31, 1991, that is within four months of the expected date of loan signing. The closing date for the loan would be June 30, 1992. 32. Procurement will be car-.ed out in accordance with the Bank's Procurement Guidelines. Contracts for purchases of crude oil and oil products the cost of which is estimated at US$5 million equivalent or more will be procured following ICB procedures acceptable to the Bank or through organized international commodity markets. Contracts valued at less than US$5 million,  - 10 - would be procured following Government procurement practices acceptable to the Bank. The Ministry of Finance will be responsible for the collection of the required documentation and for preparing and submitting withdrawal applications under the proposed loan. Crude oil and petroleum products imported under existing contracts may be eligible for Bank financing provided that the contracts have been awarded through procedures and under terms acceptable to the Bank. For auditing purposes, a separate ac ount would be kept by the Ministry of Finance for all expenditures made under the loan. The account and statements of expenditure would be audited by independent uditors and the audit report would be submitted to the Bank no later than six months after the end of the Borrower's fiscal year. Risks 33. General slippage in the implementation of the Government's emerging overall stabilization and reforms would pose major risks for the specific policy and program changes in the oil and gas sector supported by this loan. In addition, the implementation of the program changes is subject to the implementation risks set out in the Gas Flaring Reduction project. The intensity and quality of the ongoing policy dialogue with both Bank and Fund and the urgency and size of the Government's resource needs provide significant safeguards against policy slippages. PART IV - RECOMMENDATION 34. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. July 12, 1991  - 11 - Annex 1 Page 1 of 3 Table It Kee Macroeconomic Indicators 1980-84 1984-88 1988/89 1989/90 1990/91 z z X S t GDP Growth Rate 5.3 6.2 9.4 5.0 4.7 GDY Growth Rate 5.5 6.3 9.5 4.9 4.4 6DYlCapita Growth Rate 3.3 3.9 7.0 2.5 2.0 Consumption/Capita Growth Rate 3.6 3.9 6.4 2.5 2.5 Debt Service/Esp. G. &. Serv. 15.0 28.6 30.3 27.4 28.3 Debt Service/GDP 1.2 2.1 2.3 2.4 2.5 Gross Investment/GDP 23.5 24.1 23.9 23.6 23.1 Domestic Savings/GDP 20.8 21.2 20.7 20.9 20.3 National Savings/GDP 21.7 21.3 20.6 20.5 19.6 Marginal National Savings Rate 19.6 21.2 22.1 19.8 14.6 Public Tnvestment/GDP 11.2 11.1 9.9 10-7 10.7 Public Savings/GDP 3.8 2.5 2.0 1.7 1.2 Private Investment/GDP 12.3 13.0 14.0 12.9 12.4 Private Savings/GDP 18.0 18.8 18.6 18.7 18.4 Ratio of Public/Private Tnvestment 94.6 85.5 68.7 79.5 86.5 Public Sector Revenues//GDP 20.6 23.4 23.7 24.6 24.4 Public Sector Current Expendituresb//GDP 16.8 20.9 21.8 22.9 23.2 Public InvestmentI/GDP 11.2 11.1 9.9 10.7 10.7 Deficitd//GDP 7.4 8.6 8.0 9.0 9.5 Export Growth Rate 4.5 6.1 11.0 12.1 3.8 Exports/GDP 6.4 6.2 6.7 7.9 8.0 Import Growth Rate 4.2 9.2 17.5 0.2 0.7 Imports/GDP 9.0 9.1 9.8 10.6 10.8 Current Account/GDP -1.7 -2.8 -3.3 -3.1 -3.5 a/ Includes tax and non-tax revenues of Central and State governments as well as the net income of consolidated non-financial enterprises. b/ Current expenditures of Central and State Governments. c/ Capital expenditures of Central and State Governments and non-financial public enterprises. d/ Consolidated public sector investment-saving gap.  - 12 - Annex 1 Page 2 of 3 Table 2: Balance of Panyents (USS Millions) 1980181 1984/85 1988189 1989/90 1990/91 Exports of Goods & NFS 11281 13216 18218 20913 22664 Merchandise Exports 8332 9769 14262 16850 18392 Non-factor Services 2949 3447 3956 4063 4272 Imports of Goods & NFS 17408 17774 26851 28123 30629 Merchandise Imports 15892 15424 23626 24785 27052 Non-Factor Services 1516 2350 3225 3338 3577 Resource Balance -6127 -4558 -8633 -7210 -7965 Net Factor Income 356 -1449 -2985 -3305 -4023 Factor Receipts 1083 493 397 395 199 Factor Payments 727 1942 3382 3700 4221 Net Current Transfers 2860 2496 2654 2256 2055 Current Receipts 2874 2509 2670 2271 2071 Workers Remittances 2786 2509 2225 2186 1986 Other Current Transfers 88 0 445 85 85 Current Payments 14 13 16 15 16 Current Account Balance -2911 -3511 -8964 -8259 -9933 Net Long-Term Capital Inflow 2414 4025 7712 7436 6233 Foreign Direct Investment 8 62 287 350 253 Official Capital Grants 643 453 406 500 524 Net LT Loans 1763 3510 7019 6586 5456 Disbursements 2519 4601 8969 8508 7816 Repayments 756 1090 1949 1921 2360 Total Other Items (net) -863 -319 1030 981 813 Net Short-Term Capital 228 220 253 917 813 Capital Flows NEI -891 -812 636 64 0 Errors and omissions -200 273 141 0 0 Change in Net Reserves -1360 -195 222 -158 2887 Net IMF Credit 1014 67 -1210 -1008 1106 Other Reserve Changes (excl. gold) 346 -263 1432 851 1781 i- indicates increase)  - 13 - Annex 1 Page 3 of 3 Table 3: Balance of Payments (US$ millions) 1980/81 1984/85 1988/89 1989/90 1990/91 Shares of GDP (current US$) Resource Balance -3.6% -2.3% -3.22 -2.7? -2.8Z Total Interest Payments 0.42 0.92 1.2Z 1.3Z 1.42 Current Account Balance -1.7Z -1.8Z -3.3% -3.1X -3.52 Net LT Capital Inflow 1.4S 2.1? 2.8Z 2.8% 2.22 Net Credit from the IMF 0.6% O.0Z -0.4Z -0.4Z 0.4Z Memorandum Item: GDP mp, (m. US$) 172074 194063 272848 265720 284340 Foreign Exchange Reserves: End-Year Reserves (m. US$) 6858 6110 4959 4108 2338 Gold (m. US$) 4289 2846 4073 4199 3879 Gross Reserves incl. Gold 11147 8955 9032 8307 6217 Gross Reserves in Months Imports 8.4 7.0 4.6 4.0 2.8 Exchange Rates (Rs. US$): Nominal Official Exchange Rate 7.9 11.9 14.5 16.7 17.9 Real Exchange Rate Index (1980/81=100) 100 98 128 133 140  - 14- IVYfqr #Vf -14 /i~~~~~~~q wvisf FINANCE MINISTER INDIA NEW DELHI July 12 ,1991. Dear K% ( 4 I write to you in continuation of my letter of 1st July, 1991 and to thank you for your statement expressing confidence in our policies designed to impart long-term dynamism to the Indian Economic System. Over the past two weeks you may have noticed the bold initiatives taken by Government for a more realistic realignment of the exchange rate which will instil confidence in our system, check the flight of capital, secure outstandiffg export receipts and contribute to a sound management of the balance of payments situation. You may have also seen the adoption of far- reaching measures in the area of "Trade Policy Reforms" which lend; greater transparency to our system by replacing a maze of regulation through a system of "EXIM Scrips" leading to a more open trade system. We would continue this process of policy reforms in other sectors covering the area of industri&l deregulation, foreign investment, reforms of the financial and capital market and more realistic policy in respect of public sector undertakings. 2. It is in this context that we greatly value your aupport by way of fast disbursing loans for various projects to meet out immediate needs. My senior officials are making a more specific request to the Bank in regard to a fast disbursing loan under ther, Gas Flaring Project in the nature of an 'Oil Adjustment-Loan'>and I hope that this request would be processed as quickly as-possible. With kind regards, Yours sincerely, (MANMOHAN SI Mr.en r B. Conable, World Bank, Washington.  15- /! .......~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ........ D.O. No: /F1/91 C 1-VE N ir .' iIN J ! z ~~~~~~~~~~~C.0'[RNI I (IF IND'iA MINISThM 01 PJNANCF. Departmehui v11 Lcotionlic Arfaits w rftt/Ncw Delhi FrNANCE S:.CK&iARY July 12, 1991 Dear Mr. Qureshi, We are grateful to the World Bank, and to you, for the understanding 5hown for enabling us to tide over the present transitional difficulties and to implement policies designed to achieve stabilisation and structural adjustment. 2. 1 am sure, you would have noticed the far-reaching measures for stabilisa- tion and growth which we have already initiated over the past few weeks covering the field of trade policy reforms including a more realistic alignment of our currency and other measures which will impart a long-term momentum to our export efforts. We do hope that in the near future further structural reforms measures would encompass other areas along with lines appended with this letter. 3. During the transitional period,. we greatly value fast-disbursing loan components frorm the World Bank, which would mitigate our present difficulties. In this context, a fast disbursing loan of US $ 150 million to compliment the assistance provided under the Gas Flaring Reduction Project would assume special significance. It would allow the oil industry to proceed with the implementation of its ongoing programme to increase the ultimate recovery of oil from the Bombay High oilfield by shutting-in oil wells whose gas output exceeds a certain maximum level. This results in a temporary decline in oil production, which exacerbates current balance of payments difficulties. As such, a fast disbursing loan in support of this prograni would ensure their continued implementation. In support of this program, we have also decided that ONGC and Oil India will take steps to enter into joint ventures with domestic and foreign private companies in order to accelerate the development of our oilflclds; in addition, we are implementing a rnore rational