India - Gujarat Agricultural Credit Project

K4z~g-,q,- ' NI RESTRICTED FILE CO Y Report No. P-798 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 The report may not be published nor may it be quoted as representing their views.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 GUJARAT AGRICULTURAL CREDIT PROJECT April 22, 1970  INITERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE GUJARAT AGRICULTUJRAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US$35 million to India. PART I - HISTORICAL 2. Since 1949 the Bank and the Association have made eleven lcans and credits totalling some US$145 million to finance agricultural pro- jects in India, the last of which was the Kadana Irrigation credit, signed on February 9, 1970. 3. The credit I am now proposing would help to finance a farmers' investment program in minor irrigation works and farm mechanization in the State of Gujarat in west-central India. 4. In November and December of 1968, a reconnaissance mission under the IBRD/FAO Cooperative Program reviewed the prospects for Bank/IDA participation in agricultural credit projects in several states in India. This mission recommended that projects in Gujarat and in Punjab could be suitable for Association financing with some further preparation, and that projects in Andhra Pradesh, Tamil Nadu and other states could be developed in the course of time. The Gujarat project is the first of this proposed series of credit schemes to be presented to Executive Directors; the Punjab project is about to be negotiated and should be ready for your consideration in a few weeks. 5. The project was appraised in June and July 1969, and nego- tiations for the proposed credit were completed on April 17. The BorroTer was represented by Mr. G.F. Ramakrishna, Director, Ministry of Finance, Department of Economic Affairs, and MIr. V.K. Malik, Deputy Secretary, Ministry of Food and Agriculture. The Agricultural Refinance Corpora- tion (ARC) was represented by its Chairman, the Deputy Governor of the Reserve Bank of India, Mr. P.N. Damry. Kr. K.G. Badlani, Secretary of Agriculture, represented the Government of Gujarat. The Gujarat State Cooperative Land Development Bank (LDB) was represented by Mr. H.H. Trivedi, its Chairman.  6. Details of undisbursed loans and credits and comments on delays in project execution 7Tere given in paragraphs 5 and 6 of my Report on the Sixth Industrial Imports Credit (P-79h, April 8, 1970). The folloi-ing is a statement of the totals as of Mlarch 31, 1970: 1/ BANK IDA UNDISBURSED Loans/Credits Active 237.0 174.2 Loans/Credits fully disbursed 810.7 953.2 Total (less cancellations) 1,047.7 1,127.4 253.3 of which has been repaid to Bank and others b18.6 Total now outstanding 629.1 Amount sold 110.0 of w-hich has been repaid 106.0 4.0 Total no-, held by Bank & IDA 625.1 1,127.4 Total undisbursed 131.5 121.8 253.3 7. Since 1957, IFC has made thirteen commitments in India totalling US$h2.3 million, of wihich US$34.2 million represent loans and US$8.1 million equity. As of March 31, 1970, US$15.4 million of this total had been disbursed and US$6.1 million cancelled. The largest commitment is a total of US$18.9 million to Zuari Agro-Chemicals for a fertilizer plant in Goa. A number of other industrial schemes are currently under consideration. 8. In addition to the Punjab Agricultural Credit Project an agricultural credit project in Andhra Pradesh is being appraised. Appraisal reports also are being prepared for an agricultural aviation project, a grain storage project, the Cauvery Delta and Pochampad irrigationprojects, an eighth loan to ICICI, and a second power transmission project. Several other projects are at various stages of consideration, including further irrigation and agricultural credit projects. PART II - DESCRIPTION OF THE PROPOSED CREDIT Borrower: Government of India. Beneficiaries: ARC and LDB for relending to farmers in Gujarat. 1/ Including Credit No. 176 IN (Kadana Irrigation) which is not yet effective.  Amount: US$35 million. Purpose: Financing of part of a program of on-farm investments for: installation of pump sets on existing wells; the construction of lift irrigation systems and new wells of various types; and tractors and farm implements. Amortization: In 50 years including a ten year period of grace, through semi-annual investments of one-half of 1 percent from May 15, 1980 through November 15, 1989, and of 1-1/2 percent from May 15, 1990 through November 15, 2019. Service Charge: 3/4 of 1 percent per annum. Estimated Economic Rate of Return: 17 percent. On-lending terms: From India to ARC: at 5 percent per annum with 1/4 percent rebate for prompt repayment of interest and principal, with lump sum repayment 9 years from drawal by ARC. India will bear the exchange risk. From ARC to LDB: at 6-1/2 percent with repay- ments set to correspond approximately with expected collections of loans granted by LDB under this project. From LDB to participating farmers: at 9 percent with maximum maturities of 7 years for farm mechanization loans and 9 years for minor irri- gation facilities. PART III - THE PROJECT 9. An appraisal report entitled "India - Gujarat Agricultural Credit Project" (PA-34a) is attached. 10. Agriculture occupies the same dominant position in Gujaratts economy as it does in India's. Recent programs to accelerate foodgrain production have centered around provision of modern inputs. An essential part of this strategy is an effort to make credit available to farmers to enable them to take advantage of the new technological advances. Credit for minor irrigation and mechanization is central to that effort.  -4 - 11. This project includes: (a) Provision of long-term finance (i) to farmers in the project area for investments in minor irrigation equipment and facilities, speci- fically: the installation of pump sets for existing wells; construction of new open wells complete with pump sets; installation of shallow and dug tubewells; construction of lift irrigation schemes; laying of pipelines; and lining of distributaries and field channels and electrification for installations financed as above; (ii) to farmers for the purchase of tractors, tractor implements and harvesters; and (iii) to contractors for the purchase of drilling rigs, including necessary ancillary equipment and spare parts; (b) A study of the general water resources and potential for development in the project area. 12. The proposed credit would finance about 52 percent of the estimated total cost of the project of US$67.0 million. The remainder would be financed by participating farmers and contractors, LDB, ARC (whose ordinary sources of funds include the Borrower) and the State of Gujarat. 13. Benefits from the project would arise from increased agri- cultural production. The gross cropped area would be expanded by some 93,000 hectares through increased double cropping and better farm practices. Assured water supplies through minor irrigation develop- ment also would permit dependable higher yields. It is estimated that foodgrain production would increase by over 60 percent on average on the lands of participating farmers. Farmers with holdings down to a minimum size of 5 hectares would be able to participate in the project, and project benefits would accrue to small and medium-sized farmers as well as to those with large holdings. The economic rate of return is estimated to be between 17 and 29 percent. In addition, the increased agricultural production should result in foreign exchange savings.  14. The lending program will be carried out by the LDB, with technical feasibility of minor irrigation developments approved by the Gujarat State Groundwater Directorate and Irrigation Department. The ARC would refinance LDB investments and prescribe appropriate evaluation methods to be used in LDB appraisals. Both ARC and LDB are strengthening their staffs with technical officers in order to carry out their obli- gations under the projects. 15. Imported tractors will account for the greater part of the estimated foreign exchange cost of the project. It was agreed during negotiations that procurement would follow a procedure based on farmers' choice, with an element of price competition introduced through bulk purchases at unit prices for various quantities indicated in advance by suppliers. Quotations would be sought by public invitation from suppliers in Bank member countries which have manufacturing facilities in India or which have received the Government's approval to establish such facilities. The current number of eligible foreign suppliers is five, and this number may grow to as many as nine during the disbursement period of the proposed credit-if manufacturing proposals currently being considered by the Government of India are all approved. This number would provide adequate competition, and help to ensure reasonably efficient provision of spare parts and after-sales service. The total cost of imported tractors and spare parts is estimated at US$7.7 million, of which US$6.8 million is the estimated foreign exchange cost. 16. Most tractor implements are produced locally in reasonable quantity and quality and would be purchased by farmers through existing commercial channels. However, discs and plough bottoms would be imported under the project by manufacturers of disc and mould ploughs and financed by IDA because of a shortage in India of high quality steel for these components. Self-propelled combine harvesters are not manufactured in India, and the small number of these required for the project will also be imported by suppliers selected by farmers. The total cost of farm implements and harvesters is estimated at US$3.3 million, including US$0.6 million in foreign exchange for imported items. 17. Drilling rigs, with an estimated cost of US$1.0 million will be purchased and financed locally. An amount of $300,000 for consultant services for the groundwater study has been provided, to cover the cost of any foreign experts who may be engaged. 18. The total estimated direct foreign exchange cost of the project is thus US$7.7 million. In addition, the Association will finance US$27.3 million (or about 46 percent) of the total local currency costs.  - 6 - 19. The reasons for financing substantial amounts of expenditures in local currency, in agricultural projects in India, was presented in paragraph 19 of my Report on the Kadana Irrigation Project (P-774.., January 21, 1970). I remain convinced that agriculture should receive the highest priority in our lending to India despite the relatively high percentage of finance of local currency expenditures in many agri- cultural projects. PART IV - LEGAL INSTRUIENTS AND AUTHORITY 20. The draft Development Credit Agreement between India and the Association, the draft Gujarat Agreement between the State of .Gujarat and the Association, the draft Project Agreement between the Association and ARC and LDB, 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. 21. The draft Agreements set forth the obligations of the respective parties to this transaction incorporating the relending terms and procure- ment provisions explained in Part II and paragraphs 15 - 17 above. Specific obligations of India regarding the import of equipment required for the Project and its maintenance are included in Section 4.01(b) of the draft Development Credit Agreement. PART V - THE ECONOiMY 22. A brief updating of the economic situation in India was included in my report recommending a development credit for the Sixth Industrial Imports Project (P-794, April 8, 1970); I expect to distribute a new economic report later this month. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECO1MiENDATION 24. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments April 22, 1970