India - Sixth Industrial Imports Project

RESTRICTED FILE COPY Report No. p-79 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 The report may not be published nor may it be quoted as representing their views.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 CREDIT TO INDIA FOR THE SIXTH INDUSTRIAL IMPORTS PROJECT April 8, 1970  INTERNATIONAL DEVELOM ENT ASSOCIATION REPORT AND RECOIiEDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE SIXTH IDUSTRIAL LIPORTS PROJECT 1. I submit the following report and recommendation on a proposed credit to india for the Sixth Industrial Imports Project in an amount in various currencies equivalent to US$75 million. PART I - HISTORICAL 2. Since 1964, the Association has made five credits to India for industrial imports for a total of US$530 million. These credits have provided foreign exchange to pay for imported materials, components, spare parts and balancing equipment required by selected branches of India's industry. 3. In September 1969 the Government of India requested a further industrial imports credit of US$125 million. At a meeting on November 4, 1969, the Executive Directors approved the proposal, made in my memorandum of October 23, 1969 (IDA/R69-64), to send a mission to India to appraise a proposed Sixth Industrial Imports Credit to India of about US$75 million. 4. The appraisal mission completed its work in India during November/ December 1969, and negotiations for the proposed credit were completed on April 3, 1970. 5. The Bank has made 38 loans to India, including 30 which are fully disbursed. The Association has made 25 credits to India, including 18 which are fully disbursed. The following is a summary statement of Bank loans and IDA credits in India, as at February 28, 1970:  -2 Amount ($US kIillion) Number Year Borrower Purpose Bank IDA Undisbursed 307 1961 IISCO Coal Mining 19.5 5.0 19 1962 India Durgapur Power 16.8 .3 24 1962 India Koyna Power II 17.5 1.2 27 1962 India Bombay Port 16.2 2.7 414 1965 ICICI Industry VI 40.0 18.2 416 1965 India Power Transmission 58.0 19.6 417 1965 India Kothagudem Power II 14.0 .9 89 1966 India Beas Equipment 23.0 11.3 456 1966 IISCO Balancing Scheme 30.0 28.3 515 1967 ICICI Industry VII 25.0 20.1 614 1969 India Tarai Seeds 13.0 13.0 615 1969 India Telecom. III 27.5 27.5 153 1969 India Telecom. III 27.5 22.7 162 1969 India Tenth Railway 55.0 52.8 176 1970 India Kadana Irrigation 35.0 35.0 (not yet effective) Loans/Credits fully disbursed 810.7 936.6 Total (less cancellations) 1,0)47.7 of which has been repaid to Bank and others 417.5 Total now outstanding 630.2 Amount sold 109.7 of which has been repaid 106.0 3.7 Total now held by Bank and IDA 626.5 1,127.6 Total undisbursed 132.7 125.9 258.6 6. We continue to be concerned about delays in the execution of certain projects in India. Withdrawals under the Balancing Scheme Project of the Indian Iron and Steel Company (Loan No. 456-IN) were suspended in December, 1969. The situation will be reviewed within the Bank during the next few months, as soon as the Company  - 3 - has submitted the required information. Technical difficulties have delayed the Collieries Project (Loan No. 307-IN) as well; the Company's reaction to a consultants' report on the situation is now being reviewed by our staff. Although the Closing Date of the Beas Equipment Project (Credit No. 89-IN) is not until December 31, 1972, progress is behind schedule and a review mission is scheduled for the near future. Disbursements from the outstanding loans to ICICI have accelerated in recent months; Loan No. 414-IN is fully com- mitted and all but a very small amount of Loan No. 515-IN has also been committed. 7. Since 1959, IFC has made thirteen commitments in India totalling $42.3 million, of which $34.2 million represent loans and $8.1 million equity. As of February 28, 1970, $14.4 million of this total had been disbursed and $6.0 million cancelled. The largest commitment is a total of $18.9 million to Zuari Agro-Chemicals for a fertilizer plant in Goa. A number of other industrial schemes are currently under consideration. 8. Negotiations for the Gujarat Agricultural Credit Project have been substantially completed, and I expect to present the credit proposal at a meeting early next month. Appraisal reports have been or are being prepared for the Punjab Agricultural Credit Project, Cauvery Delta Irrigation Project, Pochampad Irrigation Project, Second Power Transmission project, and an Eighth ICICI Project. A number of other projects are at various stages of preparation. PART II - DESCRIPTION OF THE PROPOSED CREDIT 9. BORROIER: India, acting by its President. AMOUNT: Various currencies equivalent to US$75 million. 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 and spare parts. AMORTIZATION: The term of the credit would be 50 years with a grace period of 10 years. One-half of one percent of the principal amount would be repayable semi-annually beginning August 15, 1980 through February 15, 1990 and one and one-half percent of such principal amount would be repayable semi-annually beginning August 15, 1990, and ending February 15, 2020. SERVICE CHARGE: 3/4 of 1% per annum.  - 4 - III. THE PROJECT 10. An appraisal report entitled "Appraisal of a Sixth Industrial Imports Project - India" (PI-2a) is attached. 11. India is a predominantly agricultural country, agriculture account- ing for about one-half of GDP and employing about 70% of the labor force. Industry, however, has been gaining in importance, its contribution to GDP having risen from about 13% in the early 1950's to about 16% in the mid- 1960's and to 18% in 1968/69. Indian industrial output now ranks tenth in the world. 12. Although per capita GNP in India, at about US$80, is among the lowest in the world, India's vast area and population provide a large market for manufactured goods. India possesses huge deposits of basic mineral resources and has over the years developed substantial managerial talent and industrial know-how as well as a sizeable skilled labor force. Thus India's potential for industrial development is good. 13. In the Second and Third Five Year Plans (1955/6-1965/6), the Govern- ment undertook an ambitious program for rapid industrialization, focused on import substitution. Large industrial investments, public and private, were undertaken, notably in engineering and chemicals. By the mid-1960's howqever, industry was running into difficulties. The rapid growth had been uneven. Moreover, industry was suffering from the slowdown in public sector investment and the slackening of growth in the economy generally, difficulties which were compounded by bad harvests in two successive drought years of 1965 and 1966. 14. In these circumstances the members of the India Consortium recognized that the provision of foreign exchange for the import of materials and com- ponents required to utilize idle manufacturing capacity and to improve industrial efficiency could be a particularly effective form of aid. Thus, under the proposed credit, for example, foreign exchange would be provided to manufacturers who are generally producers of capital goods; these goods, as they are produced and applied in the Indian economy,will serve further to expand productive capacity. 15. A substantial amount of non-project assistance for the import of industrial materials and components has been extended to India by the Consortium members, including the five industrial imports credits totaling US$530 million made by the Association since 1964. This Consortium assistance, together with the devaluation, made possible the far-reaching import liberalization policy adopted in 1966, which has substantially benefited the efforts of Indian industry towards greater industrial efficiency and improved international competitiveness.  16. Enhancing international competitiveness and expanding exports of Indian engineering goods has proved to be a difficult process. However, the promotion of engineering exports is a basic objective of the Govern- ment, to which industry is also attaching increasing importance, and in recent years significant efforts have been made, including the introduction by the Government of various export promotion rneasures. In the past few, years, exports of engineering goods have been rising very rapidly from about USh41 million in 1966/67 to US,t113 million in 1968/69 and an esti- mated $140 million in 1969/70. Although about one-quarter of these exports went to countries with which India has special bi-lateral agreements, the balance was exported to convertible-currency areas. The export of engineering goods now ranks fourth after jute products, tea and iron ore. The engineering industries are thus earning a substantial and increasing part of India's foreign exchange requirements. 17. Despite this encouraging growth in exports of engineering goods, Indian industry is faced with many basic and difficult problems. A staff study entitled "India - A Review of Trends in Mianufacturing Industry" (Report No. SA-9a), which was distributed earlier this week, describes some of these problems. The attached appraisal report also discusses specific issues related to the industries proposed for IDA assistance, and certain suggestions on them have been conveyed to the Government for con- sideration. These suggestions included such possibilities as (i) the gradual introduction of meaningful international competition by permitting the import of "banned iteris" against increases in exports, and recognizing exports as an attractive alternative to the Government's import substitu- tion requirement; and (ii) encouragement to broaden licensing and know-how agreements. These and other aspects of Indian industry require action by the Government to enhance industrial efficiency and competitiveness. The Association will continue to discuss these matters with India in the context of India's general economic situation. 18. Investment opportunities in India are substantially greater than the financing available from domestic savings, which are severely constrained by the burden of domestic poverty. An acceleration of economic growth will basically depend on the inflow of additional resources from abroad. The transfer of such resources, on a scale adequate to meet India's needs, is not feasible in the form of finished capital equipment alone. The total import bill of India is about 6% of GNP, and only about one-quarter of that is for capital goods, not all of which is needed in large investment pro- jects. India already produces a large share of its own capital goods re- quirements. The amount of financing that can effectively be transferred to India for importing equipment for specific projects is thus limited, would be inadequate to assist a significant development program, and must be supplemented by other types of lending. Industrial import credits provide one such avenue.  - 6 - 19. The sectors to benefit from the proposed credit are commercial vehicles, agricultural tractors, automotive ancillaries, machine tools, cutting and small tools and abrasives, electric motors and the manufacture of fertilizers and pesticides. To preserve continuity, and to facilitate follow- up, these sectors were chosen from among a considerably larger number of sectors financed under the Fifth Industrial Imports Credit (No. 138-IN). 20. Tractors, fertilizers, pesticides, and electric motors (for irri- gation pumping) are essential inputs for Indian agriculture, and will complement other assistance from the Bank Group in that field. Assistance in the development of the commercial vehicle industry, and the related automotive ancillary industry, is a logical counterpart to the Bank Group's lending for other transport projects in India. The assistance for the machine and cutting tools sector and electric motors sector (for industrial use) will help furnish Indian industry, including the proposed IDA sector industries, with the "machines to make machines" and their motive power. 21. The beneficiary firms employ about 160,000 people and will be producing about Rs 8 billion (a little more than US$1 billion) of goods in 1970/71. The capital equipment provided by these firms of about Rs 3 billion would be equivalent to about 5% of total gross investment in the country. Exports of these sectors in 1970/71 are estimated to be about US$25-30 million. 22. The credit would be made to the Government. The Government would make the foreign exchange proceeds of the credit available through the Reserve Bank of India to the beneficiary enterprises against payment in rupees through authorized banks. As in the past, the beneficiary firms would not be required to follow any special procurement procedure. Past experience has indicated that the recipients of the foreign exchange disbursed from IDA industrial imports credits can be relied upon to make fully effective use of it. 23. Disbursement under the proposed credit would be for the foreign exchange cost of imports, paid for after signature of the credit agreement. It is expected that the credit will be fully disbursed by the end of March 1971. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 24. The draft Development Credit Agreement between India and the Association the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement, and the text of a draft Resolution approving the Credit, are being distributed to the Executive Directors separately. 25. The draft Development Credit Agreement conforms generally to the pattern of agreements for previous industrial imports credits to India.  - 7 - PART V - ECONOMIC SITUATION 26. Information on the Indian economy was included in my report recommend- ing a development credit for the Kadana Irrigation Project (P-774, distributed on January 22, 1970); I expect to distribute a new economic report later this month. 27. Economic developments during 1969/70 were on the whole favorable. Real GNP is estimated to have grown by 5.0 to 5.5 percent, reflecting an increase in agricultural output of about 4 to 5 percent, and in manufacturing of over 7 percent. Price increases were modest (i.e. only about 4-5% in 1969); the wholesale price index actually declined slightly in 1968. 28. Export growth slackened from the 13.5 percent attained in 1968/69 to h.5 percent in 1969/70, the fall occurring in traditional exports (particularly tea which declined absolutely) while industrial exports continued to rise. Imports declined even more sharply, however, and the trade deficit was reduced to about US$300 million, from US$670 million in 1968/69. 29. A basic data sheet is attached as an Annex. PART VI - COFPLIANCE WITH ARTICLES OF AGREEMENT 30. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 31. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President by J. Burke Knapp Attachments April 8, 1970  I DTIX BASIC DATA Area: 1,262,000 square miles Population, 1969: 543 million (end year estimate) Rate of growth, current estimate: 2.5% p.a. 1951 - 1961: 1.9% p.a. Gross national product at market prices, 1967/68: Rs 293 billion. Rate of growth 1955/56 - 1967/68: 3.5% p.a. at constant 1965/66: - 5.2% prices, 1966/67: * 1.3% 1967/68: 8.5% 1968/69: 2.0% 1/ 1969/70: 5.0 - 5.5% 1/ Per capita 1967/68: $US76 Gross domestic product at current_prices, 1967/68: Rs. 296 billion. Percentage breakdown: Agriculture: 51 Mining: 1 Manufacturing: 18 Commerce & transport: 15 Government & other services: 15 Percent of GDP at market prices: 1961/62 - 1965/66 1966/67 1967/68 Gross investment 18.0 17.0 16.0 Gross saving 15.6 13.8 13.4 Resource gap 2.4 3.2 2.6 Government (Center & State) current revenues 12.0 13.0 11.5  AINEX Page 2 Money and credit: 1965/66 - 1968/69 Average Rate of Rs billlion January 9,_1970 Increase (%) Total money supply 61.64 7.7 Net bank credit to gov't sector 47.60 6.4 Net bank credit to pvt. sector 15.39 12.0 1965/66 - 1968/69 Average Rate of 1968/69 2/ Increase (%) Rate of increase in prices: Consumer prices 3/ 4.0% 6.9 Wholesale prices 5.4% 6.9 Third Plan Period 1961/62 - 1965/66 Public Sector operations(Rs.bill.): 1969/70 (est.) Annual Average Public sector plan outlay 22.71 17.26 Balance from current revenues plus surpluses of public enterprises 12.39 5.77 Domestic borrowings 0.65 6.58 Total external assistance to public sector 7.13 4.91 Deficit financing 2.54 External public debt, excluding 1962/63 - 1968/69 suppliers' credits ($US million): 1968/69 Annual Average Total debt outstanding 4/ 7,786 5,833 Total annual debt service 535 390 1964/65 - 1968/69 Average Rate of Balance of_Payments ($us million): 1968/69 Increase (M Total exports 1,809 1.4 Total imports 2,476 - 3.0 Trade balance - 667 - 1964/65 - 1968/69 1968/69 Annual Average Commodity concentration of exports 5, 32.0% 40.0% Debt service ratio 6/ 29.0% 24.0% Gross foreign exchange reserves 7/ $769 million $688 million  ANNEX Page 3 IBRD AND IDA OPERJTONS ($US million) A. Past operations 8/ Amount committed 9/ Amount disbursed IBRD 1,047.7 915.0 IDA 1,127.6 1,001.7 Total 2,175.3 1,916.7 B. Terms of IBRD/IDA operations Weighted average Rate of Grace Repayment interest period period (p.a.) (years) (years) (January 1, 1961 - February 28, 1970) 2.16 8.8 41.6 1/ Latest official estimate. 2/ December 1968 to December 1969. 3/ Industrial workers consumer price index. Up until August, 1968, this was referred to as the working class consumer price index. 4/ Excludes unallocated portions of frame agreements for some rupee areas and where known; these were included in previous reports. 5/ Jute, tea and cotton fabrics. 6/ Debt service does not include debt relief. Debt service payments for 196h/65 to 1966/67 include only part of service on supp