India - Kadana Irrigation Project

RESTRICTED Report No. P-774 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 The report may not be published nor may it be quoted as representing their views.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 THE GOVERNMENT OF INDIA FOR THE KADANA IRRIGATION PROJECT January 21, 1970  REPORT AND RECOMMINENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OM A PROPOSED CREDIT TO INDIA FOR THE IADANA IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to $US35 million to India. PART I - Historical 2. Since 19b9 the Bank and the Association have made ten loans and credits totaling some $USllO million to finance agricultural projects in India, the last of wqhich was the Tarai Seeds Project, signed in June 1969. 3. The credit I am now proposing would complete a major on-going scheme to develop irrigated agriculture in two areas on the Mahi River in the State of Gujarat in Central India. 4. The project was appraised in May and August 1969, and negotia- tions for the proposed credit were completed in Wiashington on December 17, 1969. The Borrower was represented by: Igr. G. A. Narasimha Rao, Chair- man, Central r!ater and Power Commission; 'Mr. B. B. Vohra, Joint Secretary (Agriculture), iMinistry of Food and Agriculture; and Mr. G. V. Ramakrishna, Director, Ministry of Finance, Department of Economic Affairs. Mr. C. C. Patel, Chief Engineer, and MIr. G. A. Patel, Director of Agriculture, represented the Government of Gujarat.  5. The Bank has made 38 loans to India, 30 of which are fully dis- bursedc The hssociation has made 24 credits, including 18 which are fully disbursed. The following is a summary statement of Bank loans and IDA credits to India as at December 31, 1969: kmount ($US Million) Number Year Borrower Purpose Banki IDA Undisbursed 307 1961 IISCO Coal Mining 19.5 5.5 19 1962 India Durgapur Power 16.8 .4 24 1962 India Koyna Power II 17.5 2.L 27 1962 India Bombay Port 16.2 2.7 414 1965 ICICI Industry VI 50.0 20.4 416 1965 India Power Transmission 58.0 22.1; LL17 1965 India Nothagudem Power II 14.0 1.0 89 1966 India Beas Equipment 23.0 11.6 h56 1966 IIS00 Balancing Scheme 30.0 28 3 515 1967 ICICI Industry VTT 25.o 23,7 614 1969 India Tarai Seeds 13.0 13.0 615 1969 India Telecomm. III 27.5 27.5 153 1969 India Telecomm. III 27.5 2lh.5 162 1969 India Tenth Railway 55.0 55.0 Loans/Credits fully disbursed 810.7 936.6 Total (less cancellations) l,0h7.7 of w%Thich has been repaid to Bank 410.7 and others Total now outstanding 637.0 Amount sold 109.7 of which has been repaid 105.7 L.O Total now held by Bank and IDA 633.0 1,092.6 Total undisbursed 141.8 96.6 238.lh 6. Delays in disbursement of certain loans have continued. After considerable delay in the implementation of the Balancing Scheme Project of the Indian Iron and Steel Company, (Loan INlo. 456-IN), the Bank suspendeJ the right of the Company to make withdrawals from the loan account as of December 15, 1969. During the course of the next few months the situation with respect to this project TTill be reviewed. The Company has requested an extension of the Closing Date for its loan for the Collieries Project, (Loan. No. 307-IN), partly because of difficulties which have arisen in  sinking the mine shafts. A technical report by a consultant on the progress of this scheme is now under reviewr. The rate of disbursement under the 'ower Transmission Project (Loan IJo. 416-IN) which had earlier been unsatis- factory, has accelerated. It is expected that complete disbursement will be achieved by the revised Closing Date of December 31, 1970. Although the CJosing Date of the Beas Equipment Project is not until December 31, 1972, the rate of disbursement is slower than expected and a mission to reviewr the progress of the project is planned for later this year. The rate of dis- bursement under the outstanding loans to ICICI is expected to increase con- siderably in the light of recent large commitments thereunder. Loan No. 414-IN is fully committed and Loan No. 515-IN is more than 90 percent committed. 7. Since 1957 IFC has made twelve commitments in India totaling $36.5 million of which $27.6 million represent loans and $8.9 million equity. As of December 31, 1969, $14.5 million had been disbursed. The largest commit- ment 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 con- s-ideration. 8. Negotiations will soon be held with India for IDA credits to finance ?.i agricultural credit project in Gujarat and a further industrial imports project. Appraisal reports are being prepared for the Punjab Agricultural Credit Project, Second Power Transmission Project, hormugao Port Project, Cauvery Delta Irrigation Project, and Pochampad Irrigation Project. A number of other projects are at various stages of preparation including a further loan to ICICI. PART II - Description of the Proposed Credit 9, Borrow,rer: Government of India. Beneficiary: Government of Gujarat. Purpose: Completion of a scheme to develop irrigated agriculture in two areas on the Mahi River in Gujarat State, including construction of a dam, completion of an irrigation system and all associated works, drainage and land leveling Tworks, and improvement and construction of project area roads. Amount: $35 million. Amortization: In 50 years including a 10-year period of grace, through semi-annual installments of one-half of 1O from February 15, 1980 through August 15, 1989, and of 1-1/2$ from February 15, 1990 through August 15, 2019. Service Charge: 3/4 of l1o per annum. Estimated Economic Rate of Return: 14e.  - 4 - PART III - The Proj ect 10. An appraisal report entitled "Kadana Irrigation Project - India" (PA-27) is attached. 11. Agriculture plays a dominant role in both the Indian economy and the economy of Gujarat. Since 1966 the Government of India has given special attention to the development of agriculture, -wjith emphasis on investment in modern inputs, As Dart of this strategy, in its fourth Fi-e-Year Plan (1969/70 to 1973/74) India is giving priority to the completion of on-going irrigation projects. Irrigation is essential to reduce the farmers' dependence on uncertain rainfall, and to help them achieve regularly higher yields from their lands. 12. IDiA assistance will accelerate the speed of completion of the Kadana Irrigation Project, which although started in 1954 has progressed slowly, partially because of a scarcity of funds. Fhrther, the project will be improved through the inclusion or e:.ansion of ancillary works and services, as well as by certain changes in organization and manage- ment. 13. The project now will be completed by mid-1975, at an estimated total cost of Rs. 735 million ($1US98 million). As of December 31, 1969 about ';US31.3 million of this amount had been spent. The credit now proposed, of the equivalent of $US35 million, would finance about 52 percent of the balance of the cost of the project (or 36 percent of the total cost). The remainder will be financed through the budget of the State of Gujarat, to which the Government of India annually con- tributes development assistance in the form of both grants and loans; these loans will include the on-lending of the Association's credit. 14r The project includes: (a) construction of the Kadana Dam on the Mahi River; (b) expansion of the existing irrigation system on the right bank from 143,COO ha to 263,000 ha; (c) construction of a new irrigation system on the left bank to serve about 20,000 ha; (d) construction of watercourses and field channels through- out the project area; (e) remodeling and expansion of the drainage systems; (f) land leveling of about 42,000 ha; and (g) upgrading of existing roads and construction of new dis- trict village and farm-to-market roads totaling abcut 3,200 krn.  It also includes groundwater investigations, a study of water charges, a trial land consolidation program and construction of trial-cum-demonstration farms. 15. Benefits from the project arise from increased agricultural pro- duction. Assured irrigation in the kharif (monsoon) season and increased cropping in the rabi (dry) season will lead to intensified cropping patterns and higher yields. Increased agricultural production will eventually reduce India's dependence on imports of food, cotton and other agricultural products, freeing foreign exchange for use on other purposes. At full development of the project area, the annual incremental net value of production attributable to project investment would be about Rs. 200 million ($US27 million), and the estimated economic rate of return on the project is at least 14 percent. 16. The project is being carried out by the Irrigation and Roads WTings of the Public ;Jorks Department, and the Department of Agriculture, of Gujarat. 17. In order to ensure coordination and timely execution of work on the project, the Government of India will maintain a Coordination Committee comprised of senior officials of the Central Water and Power Commission, the Department of Agriculture, the Planning Commission, and the Department of Economic Affairs, and provided with suitable full-time staff. Two further coordinating committees will be appointed by the Government of Gujarat - one at the state level to exercise overall budgetary control and coordinate the annual plan of operation, and another to be responsible for day-to-day coordination of project activities. 18. During negotiations, it was agreed that items of equipment with a total estimated cost of about .$US2.3 million would be procured by inter- national competitive bidding with a level of preference to domestic suppliers of 15 percent or the prevailing customs duty whichever is lower, and these would be financed out of the proceeds of the credit. Other goods with an estimated value of $USo.2 million, but wIhich are unsuitable for international competitive bidding, would also be imported and financed under the credit. The remaining items of equipment required for the project, with an estimated cost of $US0.7 million, will be reserved for local procurement but no items so procured will be financed out of the proceeds of the credit. 19. Apart from the $132.5 million of equipment financing described in the preceding paragraph, the remainder of the credit will finance about 50 percent of the local currency costs of the project. Agricultural pro- jects are of overriding importance in the development of the Indian economy, and I am convinced that Bank grcup lending strategy should give priority to financing in this sector. Because the requirement of finished capital goods and the direct import content of such projects is quite small, the Bank group can make a significant contribution in this vital sector only by covering a large proportion of local currency expenditures.  PART IV - Legal Instruments and Authority 20. The draft Development Credit Agreement between India and the Association, the draft Project Agreement between the State of Gujarat 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 Resolution approving the proposed credit are being distributed to the Executive Directors separately. 21. The draft Development Credit Agreement and draft Project Agree- ment contain provisions usual to agreements for irrigation projects. Two provisions of the draft Project Agreement are of special interest: (a) Section 2.08(iv) provides that within six months of the date of the Project Agreement, Gujarat will adopt and begin to implement a program to consolidate land holdings in part of the project area; and (b) Section 2.09(i) provides for the levying of water charges, cesses and land taxes in the project area ultimately realizing not less than Rs. 20,000,000 annually. PART V - The Economy 22, The last economic report, "Economic Situation and Prospects of India," (R69-75, distributed on April 28, 1969) pointed out the con- siderable achievements in fiscal year 1967/68, after the drought-recession- inflation period of 1965/66 and 1966/67. With favorable weather and improved farm practices, agricultural output reached an all-time record in 1967/68 with foodgrain production estirmated at 95.1 million tons, In- creased food supplies eased the strong inflationary pressures iwhich over the previous five years had raised the price level by about 65 percent. Moreover, the rapid increase of agricultural income stimulated the demand of rural households for consumer goods and for agricultural equipment and, after three years of near stagnation, industrial production picked up again. Gross national product increased by about 8.9 percent in real terms compared Twith the previous year. 23. The improvement *which took place in 1967/68 continued, on the whole, through 1968/69. Although the weather in 1968/69 was less favor- able, foodgrain production was only 1 percent below the previous year's record. Industrial production rose by 6 percent. Consumer prices recorded a small decline. One of the most favorable developments in 1968/69 was the recovery of exports, wxhich increased by 13.5 percent even though exports of some traditional items like tea and jute did not perform well. Exports of engineering goods doubled. This achievement reflected both the efforts of industrialists to find alternative outlets to the sluggish domestic marlket and the strong incentives and pressures provided by government policy. Exports of two other items, iron and steel and iron ore, increased by 30 and 20 percent respectively. Combined  with lower food imports, these export advances improved the trade balance, the d;e2i:,; t being reduced to $667 million or roughly half that of the previous year. 24. Growth prospects for 1969/70 look fairly good. This year's southwyest monsoon, which accounts for over three-quarters of the total yearly rainfall, was fairly satisfactory; however, post-monsoon rains so far are worse than Last year's, and the Goveirnment now estimates total foodgrain production at around 97 million tons, Groundnut, cotton, cane, and jute crops have fair prospects for increases. From April to July, 1969 the index of wholesale prices showed an upward trend, largely due to seasonal food price increases. In August, wholesale prices leveled off. 25. The most recent industrial production figure (the adjusted figure for H1ay) shows that for the first five months of calendar 1969, industrial output increased by nearly 7.5 percent over the performarnce in the same period of the previous vear, Recent signs of steel and raw materials shortages indicate that this trend is being maintained. The expected increase in agricultural incomes should help to maintain the demand for consumer goods, vehicles, and agricultural supplies and equipment. This industrial revival is by-passing some sectors of the capital goods in- dustries, however, (e.g. heavy industrial machinery, railroad and genera- ting equipment) with no upswing in sight, as the Government is not in a posi'tion to sustain a substantial expansion of demand in the public sector through budgetary expenditures. Taking all these factors into account, a real rate of growth of GTP for 1969/70 of the order of 4 percent may be expected, against 1.8 percent the previous year. 26. While imports have continued to decline, export growth also has slackened. Exports during the first seven months of 1969/70 were only 1.8 percent higher than during the same period last year. Exports if engineering goods are still performing well, but iron and steel exports are dovn substantially, mainly because of increasing internal demand. Export performance of traditional items is mixed. 27. In spite of recent improvements in the economy, India requires now and will require for some time to come, substantial inflows of net aid if a satisfactory growth pattern is to be sustained. Wiith present balance of payments prospects, and with the debt service position a cause of continuing concern, it is clear that this aid must be on concessionary terms, and IDA financing is fully justified. Since the direct import content of high priority projects is in general quite low, Association financing in most cases will have to include a portion of the local expenditures involved. 28, A basic data sheet, updating the information in the last ecoS- nomic report, is attached as an Annex.  - 8- PART VI-22n Jiance wjith Articles of Agreement 29. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - Recommendlation 30. I recommend that the Executive Directors approve the proposed credit. Robert S. MNcFTamara President Attachment January 21, 1970  - 9- ANNEX BASIC DATA Area: 1,262,000 sq. 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: 1.8%I/ Per capita 1967/68: $US76 Gross domestic product at current prices, 1967/68: Rs. 296 billion. Percentage breakdovm: Agriculture: 51 Mining: 1 Manufacturing: 18 Commerce & transport: 15 Government & other services: 15 Percent of GD? 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 (Centre & State) current revenues 12 13 11.5  AMNFX - 10 _ ioney arid credit: 1962/63 - 1966/67 Average Rate of Rs. billion M,arch 1969 Increase (5) Total money supply 57.79 10.1 Net banic credit to gov't sector 46.97 8.0 Net banak credit to pvt. sector 15.46 18.6 1967/68aY I-ate of increase in prices Consumer prices 3/: -0.551 10.2 WNholesale prices: +5.25l 10.7 Third Plan Period 1961/62 - 1965/66 Public Sector operations (Rs. billion): 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 borrorvings 0.65 6,58 Total external assistance to public sector 7.13 4.91 Tieficit financing 2.54 External public debt, excluding 1962/63 - 1968/69 suppliers' credits (v9US million): 1968/69 Annual Average Total debt outstanding 4/ 7,786 5,833 Total annual debt service 535 390 1964/65 - 1968/69 Average Bate of Balance of Payments (s3US million): 1968/69 Increase (,) Total exports 1,809 1.4 Total imports 2,476 - 3.0 Trade balance - 667 1964/65 - 1968/69 1968/69 Annual Avera-s Commodity concentration of exports 5/ 32% 40J Debt service ratio 6/ 29' 24- Gross foreign exchange reserves 7/ $769 million $688 million  AIN1EX - 11 - IBRD AND IDA OPERATIONS ($US million) A. Past operations 8/ Amount committed 9/ Amount disbursed IBIRD 1,047.7 902.0 IDAI 1,092.6 99_1_4 Total 2,1h0.3 1,896.h B. Terms of IBLD/ID[_opereations lWj'eighted average -Rate of Grace Repayment (January 1, 1961 - February 28, 1969) interest period period (pDa.) (years) (years) 2.16 8.7 41.3 ^/ Latest official estimate. / December 1967 to December 1963. 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 agreemenlts for some rupee area and where known; these were included in previous reports. g/ Jute, tea and cotton fabrics. 6/ Debt service does not include debt relief. Debt service payments for 1964/65 to 1966/67 include only part of service on suppliers' credits. Data for 1967/68 and 1968/69 are believed to be more complete. 7/ At the end of fiscal years. 8/ As of November, 1969. 9/ Net of cancellations, terminations and refundings.