India - Fifth Industrial Imports Project

RESTRICTED COPY 1Xfi t IReport No. P-608 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR A FIFTH INDUSTRIAL IMPORTS PROJECT June 6, 1968  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO INDIA FOR A FIFTH INDUSTRIAL IMPORTS PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an amount in various currencies equivalent to US$125 million. PART I - HISTORICAL 2. The Association made four industrial imports credits to India totalling the equivalent of US$405 million during the period from June 1964 to December 1966. All four credits have been fully disbursed. The third and fourth of these credits, in an aggregate amount of US$125 million, were part of the US$900 million assistance which was mobilized by the members of the India Consortium in support of the import liberalization program initiated by the Government of India in 1966. As part of this program, it has been the Government's policy to meet in full the foreign exchange requirements of manufacturers in selected priority industries, as and when needed. The proposed credit of US$125 million would help the Government to maintain this policy. This is the first IDA credit proposed for India since December 1966. 3. The project was appraised in March/April 1968. Negotiations for the proposed credit took place in early June 1968. 4. The Association has made 21 credits to India, including 13 which are fully disbursed. The Bank has made 36 loans, including 29 which are fully disbursed. The status of Bank loans and IDA credits in India, as of May 31, 1968, is summarized on the follo:jing page:  -2- Active Amount (US $ Million) Loans/Credits (Less Cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 294 1961 Calcutta Equipment II 19.2 .9 Port 14 1961 India Salandi Irrigation 8.0 2.4 307 1961 IISCO Coal Mining 19.5 7.2 19 1962 India Durgapur Power 18.5 3.1 24 1962 India Koyna Power II 17.5 5.8 27 1962 India Bombay Port 16.3 6.0 37 1963 India Kothagudem Power I 20.0 1.5 414 1965 ICICI Industry VI 50.0 35.7 416 1965 India Power Transmission 58.0 39.4 417 1965 India Kothagudem Power II 14.0 3.2 88 1966 India Railways IX 68.o 11.3 89 1966 India Beas Equipment 23.0 14.4 456 1966 IISCo Balancing Scheme 30.0 29.6 515 1967 ICICI Industry VII 25.0 25.0 Loans/Credits fully disbursed 791.9 716.1 Total 1,007.6 887.4 of which has been repaid to Bank and others 367.0 Total now outstanding 640.6 Amount sold 109.3 of which has been repaid 103.5 5.8 Total now held by Bank and IDA 634.8 887.4 Total undisbursed 141.0 44.5 185.5 5. As of May 31, 1968, the Bank had deposited the equivalent of about US$45 million in four interest-bearing demand deposit accounts with the Reserve Bank of India. This amount was approximately equal to the  - 3 - principal repayments received by the Bank for its own account during the period April 1, 1967 to March 31, 1968, in respect of loans made by the Bank in India. It is expected that the amount outstanding will be reduced shortly to about US$30 million equivalent in connection with the debt relief action being taken by all members of the Consortium. The Bank in- tends to withdraw the remaining balance of these funds from time to time but not later than March 31, 1971. 6. Two new IDA projects have just been appraised, one for drainage of agricultural land in the States of Punjab and Haryana, and one in Uttar Pradesh for cultivation and distribution of high-yielding seed; they are expected to be ready for presentation to the Executive Directors in October. 7. A number of Bank and IDA projects in India continue to experience delays in disbursements; comments on some of these cases follow. Under the Calcutta Port Project (Loan No. 294-IN) final disbursements are expected to be made before the present Closing Date of the Loan on July 31, 1968. The revised Closing Date of the Third Indian Iron and Steel Project (Loan No. 307-IN) is June 30, 1970; a mission is presently in India to review the financial situation. A mission which reviewed the progress of the Power Transmission Project (Loan No. 416-IN) in February 1968 confirmed that all orders for equipment to be financed under the Loan had been placed in accordance with target dates established a year ago, except for an amount of $12 million which has been cancelled; the Government of India has re- quested a postponement of the Closing Date (June 30, 1968), and this request is presently under consideration. Disbursements under the Ninth Railway Project (C:edit No. 88-IN) have remained slow, primarily due to the reduced pace of the Railwzays' investment program; in February, the Executive Directors agreed to postpone the Closing Date to June 30, 1968, and no further postponement is contemplated. 8. IFC has made 11 commitments in India totalling $23.4 million, of which $18.3 million represent loans and $5.1 million equity. As of May 31, 1968, $12.0 million had been disbursed. The largest investment, amounting to $11.5 million, is in Indian Explosives Ltd., a company whose principal business is the manufacture of fertilizer. IFC presently has several pro- jects under consideration; the major ones, in the field of fertilizer production, may well involve some Bank lending as well as IFC investments. PART II - DESCRIPTION OF THE PROPOSED CREDIT 9. BORRO!IER: India, acting by its President. AMOUNT: Various currencies equivalent to US$125 million.  - 4 - PURPOSE: To enable selected priority industries in India to maintain and expand their production of capital goods and agricultural chemicals by supplying part of their requirements of foreign exchange for the import of materials, components, spare parts and miscellaneous items of manufacturing equipment. AMORTIZATION: The term of the credit would be 50 years with a grace period of 10 years. One-half of 1% of the principal amount would be repayable semi-annually beginning September 15, 1978, and 1-1/2% of such principal amount would be repayable semi-annually beginning September 15, 1988, and ending March 15, 2018. SERVICE CHARGE: 3/4 of 1% annually. PART III - THE PROJECT 10. A report entitled "Appraisal of a Fifth Industrial Imports Project - India" (AS-14Oa), dated June 6, 1968, on the proposed project is attached. It describes the general performance of the selected priority industries in 1967/68, their achievements and problems and. their outlook for 1968/69. 11. The purpose of this project would be the same as in the case of the previous industrial imports credits to India, namely, to help provide capital goods and agricultural chemicals to the Indian economy by financing imports of raw materials, components, spare parts and some balancing equip- ment required by manufacturers in the selected industries (commercial vehicles, machine tools, electrical equipment, fertilizers, pesticides and similar products). The industries which would benefit directly from the project account for most of the capital goods and agricultural chemicals production in India, and in view of the continuing acute shortage of foreign exchange in India, the amount of production which would be sustained and made possible by this credit would be a large multiple of the disburse- ments thereunder. 12. Since the import liberalization policy was announced in the summer of 1966, licenses for "production" or "maintenance" imports have been issued to firms in priority industries as and when required by individual manu- facturers. The direct effect of this policy has been to enable these in- dustries to expand, or to maintain, production during the last few years. Furthermore, while the former system of limited foreign exchange allocation to each firm acted as a restrictive market-sharing mechanism, the import liberalization program and complementary measures of industrial decontrol  - 5 - have allowed - and even forced - firms in the priority industries to enter into effective competition with each other, often for the first time. More and more manufacturers are becoming aware of the importance of reducing their production costs and improving the quality and design of their products and are taking significant steps in these directions. For example, inven- tories of materials show a more satisfactory relationship to production volume than before. 13. The 1967/68 production record of industries benefiting from the IDA credits has been mixed. On the one hand the demand for agricultural inputs, such as tractors, small motors, engines, fertilizer and pesticides continued to increase at a rapid pace partly because government expenditures in this area have been increased and partly because farmers are realizing more and more that from these inputs large benefits can be derived. On the other hand, the impact of the droughts and the Government's general policy of fiscal restraint have led to a reduction in Government orders for many pro- ducts, and the cutback in Government purchases has been strongly felt through- out the capital goods industries, in which many manufacturers were accustomed to selling more than half (and in some cases as much as 75 percent) of their production to the Government and its agencies. Generally, the growth of in- dustrial production was less than had been expected; however, for 1968/69 most industries are expecting substantially increased demand. 14. It is desirable that in the long run a greater share of the foreign exchange requirements for industrial production imports be covered out of export earnings, and in order to step up exports, the Government of India has introduced a large number of export promotion schemes. Partly as a result of these efforts, there was a sizeable increase in exports of engineering goods in 1967/68, and the Government estimates that 1968/69 exports of such goods will be about 35 to 50 percent higher than in 1967/68. Nevertheless, for the next several years, India's development program, and especially the policies followed since 1966, can be successfully implemented only if there is a continuation of large-scale external assistance. For the current year, wihich began on April 1, 1968, Consortium members have agreed that India needs new non-project commitments in the order of US$1,000 million. The proposed credit would provide part of that aid. 15. Under the present import policy, the Government of India issues production import licenses on a continuous basis. After the license is issued, it takes some time to place orders and obtain delivery, so that it is usually many months before substantial payments to the foreign supplier are required. There is then a further time lag between payment by India and the presentation of requests for reimbursement to the aid source. Thus, the final disbursement under the Fourth Industrial Import Credit, which was made last month, covered imports which, on the average, had been licensed some time around early 1967 and for which payments were actually made - broadly speaking - around the end of 1967. Since I consider it of utmost  - 6 - importance that IDA financing in support of India's liberalized import pOliu-r continue without significant interruption, I propose that foreign exchange payments since January 1, 1968, if otherwise eligible, be reimbursed out of the proceeds of the proposed credit. On the basis of the rate at which with- drawal applications were submitted to the Association during the last few months (US$12 to 15 million equivalent per month), it is estimated that the credit would become fully disbursed some time during the first quarter of 1969. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Development CreditAgreement between India and the Associa- tionand the Recommendation of the Committee provided for in Article V, Sec- tion l(d) of the Articles of Agreement, are being distributed to the Executive Direc- tors separately. The provisions of the draft Development Credit Agreement follow substantially the pattern of the agreements for Credits Nos. 92-IN and 97-IN. 17. Section 2.02 of the draft Development Credit Agreement provides that the rate at which withdrawals shall be made shall be subject to further agree- ment between India and the Association. This provision is designed merely to protect the cash position of the Association during the period between the effective date of the second replenishment of the resources of the Association, following which the credit would be signed, and the date when the first in- stallment of the contributions becomes due. This latter date is November 8, 1968, or thirty days after the replenishment becomes effective, whichever is later. 18. Section 4.01(b) of the draft Development Credit Agreement contains commitments of the Borrower with respect to the issuance of licenses, the availability of foreign exchange and the allocation of local materials. These commitments are supplemented by a letter entitled "Foreign Exchange and Import Licenses" which is also being distributed separately, along with the other legal documents. PART V - THE ECONOMY 19. A note on the current economic situation in India was circulated to the Executive Directors on May 2, 1968 (R68-61). There have been no significant changes in the economic situation since the note was wqritten. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 20. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  - 7 - PART VII - RECOMMENDATION 21. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of a Development Credit to India (Fifth Industrial Imports Project) in an amount equivalent to US$125,000,000. RESOLVED: THAT the Association shall grant a development credit to India in an amount in various currencies equivalent to one hundred twenty-five million United States dollars (US$125,000,000) to mature on and prior to March 15, 2018, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1% per annum), and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of the Development Credit Agreement (Fifth Industrial Imports Project) between India and the Association, which has been presented to this meeting. Robert S. McNamara President Attachments By J. Burke Knapp Washington, D.C. June 6, 1968