international bank for reconstrucion...

RESTRICTED

Report No. PA-116a

This report is for ofricial use onl by the Bank Group and specificaly authorized orpnizationsor persons. It may not be published, quoted or cited without BDtk Group authorization. TheBank Group does not accept respondbility for the accuracy or completeness of the report.

INTERNATIONAL BANK FOR RECONSTRUCION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

MAHARASHTRA AGRICULTURAL CREDIT PROJECT

INDIA

February 14, 1972

Agriculture Projects Department

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CURRENCY EQUIVALENTS

US$1 - Rs 7.28Rs1 - US$ 0.14Rs 1,000 US$137.37Rs 1,000,000 - US$137,376

WEIGHT AND MEASURES

Hetric System

ABBREVIATIONS

ARC - Agricultural Refinance CorporationGOI - Government of IndiaGSDA - Maharashtra Groundwater and Development AgencyLDA - Maharashtra Land Development AgencyLDB - Maharashtra State Cooperative Land Development

BankRBI - Reserve Bank of India

FISCAL YEAR (ARC AND LDB)

July 1 - June 30

INDIA


TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ............... .. ..... ....... i-iii

I. INTRODUCTION ......................................... 1

II. BACKGROUND .... . . ..................................... 1

A. India ......................................... 1.. B. The State of Maharashtra ..... *.................. 2

General Description ..... ................... 2Agricultural Structure ..... ................. 3Agricultural Development Priorities ........ 3

Introduction .................... ........ 3Minor Irrigation .......... *............ 3Land Development ..... ................. 4Mechanization ..... .................. 5

Agricultural Inputs and Services ......... .. 5Credit Services ..... ................... 5

III. THE PROJECT .......................................... 6

A. Definition ....................................... 6B. Detailed Features ...... .................... 6

Minor Irrigation .................. ......... 6Land Development ..... ..................... 7Consultancy Services ................... .. ... 8

Groundwater ..... ................... 8C. Cost Estimates and Financing ..................... 8D. Procurement ....... .............................. 10E. Disbursements ....... ............................. 11

IV. ORGANIZATION AND MANAGEMENT ..... ..................... 11

Introduction ............................... 11Agricultural Refinance Corporation .... ..... 11

This appraisal report is based on the findings of a mission which visitedIndia in March/April 1971 and was composed of Messrs. C. H. Walton, G. Luhman,and P. K. Pohland (IDA) and D. I. Allen and J-M. Daniel (Consultants), allof whom contributed to this report.

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Page No.

Maharashtra State Cooperative Land DevelopmentBank .................................. 12

Organization and Management .... ......... 12Resources ...................... 12Operational Results ..... ................ 12Rehabilitation of LMB System .... ........ 13Lending Policies and Terms .... .......... 14Accounts and Auditing ..... .............. 15

Commercial Banks .... ......... .......... 15Groundwater Surveys and Development

Agency .................................. 16Land Development Agency ................... . 17

V. PRODUCTION, MARKETS, PRICES AND FARMERS' BENEFITS ... 17

Production . ............................... 17Markets .................................... 18Prices ............. *- ........ * ............ @ 18Farmers' Benefits .... ...................... 18

VI. BENEFITS AND JUSTIFICATION ..... ...................... 20

vII. RECOMMENDATIONS .................... . ................ 21

SCHEDULE A - Minor Irrigation: Appraisal Criteria and Procedures

SCHEDULE B - Project Lending Terms and Conditions

SCHEDULE C - Participating Primary Banks

ANNEXES

1. Minor Irrigation

Appendix 1-1 - Basins and Gaging Stations for Minor Irrigation DevelopmentAppendix 1-2 - Terms of Reference for Proposed Consultancy Services to

Groundwater Surveys and Development Agency

2. Land Development

Appendix 2-1 - Schemes in Land Development Program 1973 - 1975Appendix 2-2 - Land Development Cost PhasingAppendix 2-3 - Land Development Area and Cost Estimates by Activity

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3. The Agricultural Refinance Corporation

Appendix 3-1 - Condensed Statements of Net IncomeAppendix 3-2 - Projected Statements of Net IncomeAppendix 3-3 - Condensed Balance SheetsAppendix 3-4 - Projected Balance Sheets

4. Maharashtra State Cooperative Land Development Bank Ltd. and PrimaryLand Development Banks

Appendix 4-1 - Borrowers' Overdues to Primary BanksAppendix 4-2 - Overdues Collection ProgramAppendix 4-3 - Condensed Statements of Net IncomeAppendix 4-4 - Projected Statements of Net IncomeAppendix 4-5 - Condensed Balance SheetsAppendix 4-6 - Projected Balance Sheets

5. Commercial Banks Operating in Maharashtra

6. Project Cost and Disbursements

Appendix 6-1 - Details of Estimated Project CostAppendix 6-2 - Details of Project Equipment and Consultancy Services CostsAppendix 6-3 - Estimated Schedule of Disbursements

7. Present and Proposed Interest Rates for Project Institutions

8. Farm Incomes and Financial Rates of Return on Investments

Appendix 8-1 - Farm Models: FinancialAppendix 8-2 - Financial Rates of Return by Type of InvestmentAppendix 8-3 - Estimated Increases in Cropped Area and Production

9. Economic Rate of Return

Appendix 9-1 - Farm Models: EconomicAppendix 9-2 - Economic Rates of Return by Type of Investment

10. Comparison of Alternate Transport Means for Sugarcane

Appendix 10-1- Net Present Worth of Cost Streams for TransportAlternatives

MAP

INDIA


SUMMARY AND CONCLUSIONS

i. This report appraises an agricultural credit project in the Stateof Maharashtra for which an IDA credit of US$30 million is proposed. Itwould support a three-year lending program, primarily for investments inminor irrigation but also for land development, and would assist in financingequipment required for project implementation and consultancy services.

ii. Maharashtra is emphasizing agricultural development and is givingspecial attention to increasing production through the expansion of irri-gation facilities and the use of high-yielding varieties and fertilizers.Since the possibilities for the construction of additional large surface waterirrigation schemes are limited, efforts will be centered on the developmentof smaller units such as wells and lift schemes, and on land developmentoperations (levelling, grading, etc.) to permit the more efficient use ofwater from existing surface schemes. Maharashtra's groundwater resourcesare generally adequate to sustain a further program of exploitation, but itwould have to be accompanied by new techniques of analysis and appraisal by theState Groundwater Surveys and Development Agency (GSDA) and the bankingsystem in order to arrest the overinvestment and overexploitation which havealready occurred in some areas. Consultancy services would be included inthe Project to assist GSDA in fulfilling its role. Until such time asMaharashtra has introduced comprehensive groundwater legislation, now underconsideration, control over development will rest with the lending programand with administrative actions undertaken by the State.

iii. The Project would assist in financing farm investments, Projectequipment, and consultancy services estimated to cost US$51.9 millionequivalent: US$41.5 million for minor irrigation, US$4.8 million for landdevelopment, US$5.3 million for Project equipment (well-drilling, earth-moving and hydrological equipment), and US$0.3 million for consultancyservices. The foreign exchange component is estimated at US$9.2 millionequivalent or about 18% of total Project cost. IDA would finance US$30 millionequivalent, representing the foreign exchange component and about one-halfof the local currency costs.

iv. Farmers' contributions, in the case of loans from the MaharashtraState Cooperative Land Development Bank (LDB), would be 10% of the cost ofindividual investments, with the exception of small farmers as defined, whowould not be required to make a downpayment for special minor irrigationinvestments. However, in addition to the investment contribution, farmerswould make a share contribution to LDB capital equal to 10% of their loans.In the case of loans from commercial banks, farmers' contributions normallywould be 20% of the cost of individual investments, but 10% for small farmers.The IDA credit would cover 58% of total Project cost. The remainder of thefinancing would be provided by the LDB, participating commercial banks, andthe Agricultural Refinance Corporation (ARC). ARC would be the channel for

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IDA finance. ARC is already acting in this capacity for IDA-supportedagricultural credit projects in six other States of India. 1/ It would alsobe responsible for supervising Project operations.

v. Because of a serious overdue position faced by the Primary Banks,:Lnclusion of the LDB system in the Project, and thus implementation of theProject, would depend on a financial and managerial rehabilitation of thePrimaries according to a program agreed upon during negotiations. Thisprogram is expected to be completed by September 30, 1972, the proposed dateof credit effectiveness.

vri. The portion of the IDA credit corresponding to the lending programwould be made available to ARC by the Government of India (GOI) with the:Latter bearing the exchange risk. About 70% would be repayable by ARC to(OI after 9 years at an interest rate of 5-1/4% and the balance after 15rears at 5-3/4% per annum. ARC would refinance at 6-1/2% per annum thelending operations of LDB and such participating commercial banks as wouldmeet the criteria laid down by ARC. Loans to individual borrowers wouldbear interest per annum and would be repayable over periods up to 10 years,iLncluding two years of grace for land development loans, but extending insome cases to 15 years for small farmers as defined.

vii. Implementation would be by local contractors or hired labor int:he case of minor irrigation schemes, and by the State Land DevelopmentAgency (LDA), assisted by local contractors, in the case of land developmentfschemes, utilizing local materials. About 45,000 individual small and widely-iscattered farm investments would be made, and international competition

therefore would not be appropriate. Drilling rigs, earth-moving equipmentaLnd hydrological equipment would be procured under international competitionwith Indian manufacturers receiving a preference of 15% or the prevailingcustoms duty, whichever is lower.

viii. ARC is competently managed and financially sound, and would,t:ogether with LDB (assuming the Primary Banks are rehabilitated as indicatedin para v) and the commercial banks, provide a good framework for Projectlending. Financial returns to farmers are estimated at 40% to 73%. Therates of return to the economy are estimated at 33% to 55% for minor irri-gation and 39% for land development.

ix. Apart from difficulties which may be encountered in gaining farmers'scceptance and use of unproved production practices (including a full useof irrigation water), the principal issue affecting the soundness of theE'roject is that of the financial and managerial capabilities of the PrimaryBanks. As in the case of the recently approved Mysore agricultural creditproject, the weaknesses of the banking system in Maharashtra present greaterrisks than those encountered in the earlier credit projects. Providing,bLowever, the rehabilitation program can be carried through sucessfully andaL satisfactory collection record maintained in future, the Project would

1! Gujarat, Punjab, Anadhra Pradesh, Tamil Nadu, Haryana and Mysore.

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have made an important contribution to institutional development in Indiausing procedures which could later be followed in other states wheresimilar banking difficulties are expected. The undertakings received onthe rehabilitation program indicate that the Project can be fully implementedand with these and other assurances, the Project is suitable for an IDAcredit of US$30 million.

INDIA


I. INTRODUCTION

1.01 In 1968, an IDA mission, with assistance of the FAO/IBRDCooperative Program, reviewed agricultural credit institutions and farminvestment requirements in selected parts of India and identified highpriority agricultural credit projects. Projects in the six states ofGujarat, Punjab, Andhra Pradesh, Tamil Nadu, Haryana, and Mysore alreadyhave been approved by IDA: this proposed Project for Maharashtra would bethe seventh. Institutional credit, partly financed by IDA, would enablefarmers to make investments in minor irrigation and land development and thusobtain increased production and other benefits from the new high-yieldingseed varieties, fertilizer use, and surface water irrigation schemes.

1.02 Bank Group lending for India's agricultural sector (excluding US$23million for the Beas equipment project under the Indus Treaty) totals US$392million. While previous lending has concentrated on large irrigation schemes,the current series of credit projects supports the Government of India's(GOI) agricultural strategy of giving increased emphasis to farm investments.With the inclusion of this Project, credit project approvals would totalnearly US$217 million.

1.03 The Project is based on a proposal by the Maharashtra Governmentand follows the pattern of previous agricultural credit projects in India.It was appraised in March/April 1971 by Messrs. C.H. Walton, G. Luhman andP.K. Pohland (IDA), and D.I. Allen and J-M Daniel (consultants), and thisreport is based on the mission's findings. The mission could not howeverjustify the proposal for inclusion in the project of 1,000 tractors forutilization on sugar cooperatives.

II. BACKGROUND

I/A. INDIA-/

2.01 Since 1965, India has shifted the emphasis of its developmentefforts from industry to agriculture. As a result, priority has been givenin recent years to accelerating the introduction of modern agriculturaltechnology through increasing the availability of improved inputs such ashigh-yielding seed varieties and fertilizers, particularly in combinationwith irrigation, and by providing financial incentives to farmers.

2.02 Although 70% of India's labor force is engaged in agriculture(providing half of India's GDP), only a small proportion of farmers have

1/ A detailed discussion of the present situation and prospects of agri-culture in India is given in "Economic Situation and Prospects of India",report number SA-25a of May 11, 1971.

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benefited from the recent agricultural advance: primarily those withaccess to irrigation and to the knowledge and capital necessary to adoptmodern technology. However, a large number of additional farmers couldtake advantage of the new techniques if credit were made available to them.Thus an increased supply of credit for farm investment is important to thecontinued growth of agricultural production.

2.03 The Reserve Bank of India (RBI) estimates that credit institu-tions will require Rs 15,000 million (US$2,100 million) for agriculturalinvestment during the Fourth Plan (1969/70 - 1973/74), or an annualaverage of Rs 3,000 million, compared with about Rs 600 million invested inthe crop year 1966/67. The short-term credit requirements would increaseby an estimated 11% annually, rising to about Rs 20,000 million (US$2,700million) by 1973/74. Overall agricultural credit requirements. are expectedto increase five-fold from the mid-60's to the end of the Plan period. Ifthese substantial credit demands are to be met, India will neAdvto mobilizemore of its own, particularly rural, savings and increase external bor-rowings.

B. The State of Maharashtra

General Description

2.04 Maharashtra borders the Arabian Sea in the central part ofIndia's West Coast and has its capital at Bombay (see Map). It is thethird largest state in the country with an area of about 306,000 km2 andan estimated population (1971) of about 53 million (each about 10% of thetotal for India). Approximately 72% of the population depend on agricul-ture for their living, and this sector provides 39% of the State's income.Administratively, the State is divided into 26 districts which are sub-divided into 231 taluks.

2.05 The State has two main geographical regions: the coastal plain,about 50 km wide, which extends to the Western Ghats in the east, and theDeccan Plateau which has a mean altitude of 550 m and covers the remainderof the State to the east of the Western Ghats. The coastal plain containsmainly tropical red soils and receives an average annual rainfall of about2,500 mm while the Deccan Plateau is composed primarily of black soils onvolcanic rock formations, and has an annual rainfall which varies from about700 mm in the west to over 1,200 mm in the east. The Deccan Plateau contains:wo major river basins, the Tapi and Godavari, the former draining to the

west and the latter to the east. There are three seasons: the dry season,or early kharif, from March to May; the southwest monsoon, or kharif, fromJune to October; and the northeast monsoon, or rabi, from November toFebruary. About two-thirds of the total rainfall occurs during the south-west monsoon. Temperatures vary from a low of 8C in December to 45C inMay.

ALgricultural Structure

2.06 The net sown area is about 18.3 million ha (59% of total area)mnd, with an average cropping intensity of 105%, gross sown area is about

19.2 million ha. An additional 4.6 million ha (15% of total area) isclassified as pasture, fallow, or cultivable wasteland. About 1.2 millionha (6% of cultivable area) is irrigated, primarily by wells (58%) and partlyby canals (21%), tanks 1/ (17%) and lift irrigation schemes (4%).

2.07 Approximately 48% of holdings in Maharashtra are smaller than 2 ha

(8% of total farmland), 23% are between 2 and 6 ha (23% of farmland), andthe remaining 29% are larger than 6 ha (69% of farmland). Operational hold-ings are often larger than these statistics would imply, since land ownershipis often divided among several members of the same family and farmed as oneunit. This process has also limited the effectiveness of ceilings onindividual land ownership.

2.08 Foodgrains account for about 67% of gross sown area, while 18% isunder oil seeds, 14% is under cotton, and the rest (1%) is under other com-mercial and subsistence crops. Sorghum is the most important single crop

with 30% of gross sown area. The other foodgrains include millet (10% ofgross sown area), rice (7%), wheat (5%), and various pulses (15%). Currentproduction (1968/69 figures) is as follows: foodgrains 7.0 million tons,oil seeds (mainly groundnuts) 735,000 tons, cotton 243,000 tons, and sugarcane 12.6 million tons.

Agricultural Development Priorities

Introduction

2.09 The primary objectives of the State in the agricultural sectorare to contribute to India's attainment of self-sufficiency in foodgrainsand to expand the production of commercial crops. Since possibilities forextending the area under cultivation are limited, further increases inproduction will have to be achieved through improvements in land produc-tivity involving additional irrigation facilities and the introduction ofincreased amounts of improved current inputs, more efficient farm management,and improved implements. Since the scope for the development of additionallarge surface water schemes is limited, emphasis is being placed on minorirrigation and on land development (to permit more efficient use of watercurrently available from surface schemes). Special attention is beinggiven to small farmers, particularly with regard to assisting them inutilizing the benefits of the new technology.

Minor Irrigation (Annex 1)

2.10 Water availability in Maharashtra will enable only about 30% oftotal cultivable area to be irrigated at ultimate development. However,with present irrigated area about 6% of cultivable area, the scope for furtherdevelopment is substantial. Wells, presently the major source of irrigationwater, have accounted for about 80% of the increase in irrigated area overthe past 15 years. They now number approximately 750,000, about 35% of whichare supplied with electric or diesel pumpsets. Almost all the wells aredugwells, although a few tubewells are found in the Tapi/Purna basin to thenorth.

1/ Small reservoirs.

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2.11 While global water availability is adequate to support substantialiurther irrigation development, overinvestment and overexploitation inlocalized areas has resulted from an absence of controls over groundwaterdevelopment and a lack of appropriate water management. Model groundwaterlegislation has been prepared by the Government of India (GOI) and isuinder consideration in several states, including Maharashtra, but untilthis legislation is promulgated, control will have to depend on lendingcriteria of the banking system and administrative actions by the StateGovernment. Under the Project, new methods of investment appraisal wouldbye introduced which would be based on an analysis of hydrogeological unitsfrom river basins down to elementary watersheds, involving an investigationof total water inflow, present utilization, and availability for futuredlevelopment (para 3.03). The analysis would be undertaken by the GroundwaterSurveys and Development Agency (GSDA) which would establish regulations forminor irrigation development according to the criteria set forth in theProject and would participate in the appraisal of investment schemes. TheState is in the process of establishing GSDA within the Department of Indus-tries. It will comprise a nucleus of competent groundwater staff from theDiepartment of Agriculture, but additional staff appointments and specialistconsultancy services would be required (para 3.07).

2.12 The appraisal criteria would include a minimum distance betweenwells and a maximum density of wells per hydrogeological unit (Schedule A)in order to guard against overexploitation and the related problem of over-investment, particularly in dugwells, which has resulted in large part fromthe prevalence of small farms and the unwillingness of farmers to rely onwatersharing arrangements. It is estimated that the existing dugwells wouldbe sufficient, given the appropriate technical and managerial framework, toirrigate twice the present area (Annex 1) and despite the constraints, theState Government should give increased attention to the better use of theseexisting assets. In order to encourage an efficient use of capital, thelending criteria would stipulate a minimum irrigated area per well (ScheduleA).

2.13 Well construction is carried out primarily by hired labor orprivate contractors, and partly by GSDA. Prices are reasonable and imple-mentation capacity is generally adequate for present requirements, butadditional units would be needed to carry out the Project (para 3.04).

Land Development (Annex 2)

2.14 Land development (involving levelling, grading, ditching, andbunding) to permit the efficient utilization of irrigation water traditionallywas carried out by family labor. However, with the construction of severallarge surface water schemes in recent years commanding a total of 243,000ha, the magnitude of the work involved and the necessity of completing landdievelopment quickly to obtain maximum benefit from available irrigationwater necessitated different methods of implementation and the provisionof financing for farmers. Operations presently are carried out by hiredliabor, sometimes assisted by bullocks, or by earth-moving equipment.Nevertheless, Maharashtra has had great difficulty mobilizing sufficientlabor to perform this type of work in rural areas, and it does not have

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adequate earth-moving equipment. As a result, land development remains tobe completed on most of the area recently brought under command of largesurface water schemes, and substantial inputs of machinery will be necessaryif the work is to be finished expeditiously (para 3.06).

2.15 Because of the nature and conditions of land development work inMaharashtra, the State is establishing a Land Development Agency (LDA) withinthe Department of Agriculture to carry out the program with the assistance oflocal contractors (para 4.21). LDA will take over the Department of Agricul-ture staff now working on land development, but additional staff and specialistassistance would be needed (para 4.22). Since no comprehensive schedule ofland development charges exists at present, the State would establish ratessufficient to cover all costs (para 4.23). The program of land developmentcarried on outside the Project would be modified to conform to the proceduresand terms in effect under this Project (para 4.23).

Mechanization

2.16 As in the case of the other Indian states, tractor mechanizationhas begun in Maharashtra. Nevertheless, with irrigated area a small pro-portion of cultivable area (para 2.10), the tractor fleet now operating isonly about 5,000 units. Future demand is estimated at approximately 2,000-3,000 per annum and is expected to be met by Maharashtra's share of domesticproduction and imports under bilateral arrangements.

2.17 In addition to their use for general cultivation purposes,tractors are also utilized in the sugar industry, and the project proposalsubmitted by Maharashtra included a request for 1,000 tractors to beemployed on sugar cooperatives, primarily for haulage of sugar cane andsecondarily for tillage. However, the harvesting and crushing season forsugarcane covers most of the periods during which the tractors could be usedfor tillage, and therefore the benefits to be expected from this activityare minimal. With respect to their use for haulage, tractors were foundto be less efficient than trucks over the distances involved and consequentlywere deleted from the Project (Annex 10).

Agricultural Inputs and Services

2.18 The growth rate of agriculture projected under the State's FourthPlan (1969/70 - 1973/74) is 5% per annum, and about 38% of planned publicexpenditures (Rs 3,750 million) have been allocated to this sector. As of1965/66, improved seeds were utilized on about 15% of the gross sown area.By 1968/69, this figure had increased to 33%, and it is expected to reach52% in 1973/74. Consumption of nitrogenous fertilizers increased from about3 kg/ha per gross sown ha in 1965/66 to approximately 10 kg/ha in 1968/69and is expected to reach about 18 kg/ha in 1973/74. Use of phosphatic andpotassic fertilizers is expected to increase correspondingly.

Credit Services

2.19 The major portion of institutional agricultural credit is pro-vided by the cooperative movement. The State Cooperative Bank provides mainly

short-term loans, while LDB provides medium- and long-term financing. Com-mercial banks, which lend on terms up to 5 years, have played a limitedrole to date in agriculture but are now increasing their operations withthe encouragement of the Government.

2.20 Perhaps two thirds of the farmers' credit requirements are met byprivate money lenders who charge rates of 20% and more (in comparison withabout 9% from institutions). These figures suggest that institutions mustmake increased efforts to attract a larger proportion of rural savings.'Until they are able to make substantial progress in this direction, coopera-tive institutions, in particular, will continue to depend heavily on publicsector and external financing.

III. THE PROJECT

A. Definition

3.01 The Project would be part of a lending program of the LandDevelopment Bank (LDB) system and commercial banks in Maharashtra and, over aperiod of three years, would help finance farmers' investments in minorirrigation (87% of total farmers' investment) and land development (13%).It would also include the financing of some equipment required for projectexecution and consultancy services for GSDA. The investment program would beLmplemented through the Maaharashtra banking system under refinance arrange-

ments with ARC and would involve about 45,000 loans to farmers and coopera-itives. The total Project cost is estimated at Rs 377.6 (US$51.9 million),and IDA's contribution would be US$30.0 million.

B. Detailed Features

Minor Irrigation

3.02 Investments in minor irrigation would include the following:

(a) About 300 tubewells, at a cost of Rs 18 million (US$2.5million), in specifically defined areas of five districtsand approximately 175 lift irrigation schemes, at a costof Rs 84 million (US$11.5 million), on major riversthroughout the State (Annex 1). The tubewells wouldirrigate about 6,000 ha while the lift schemes wouldsupply about 40,000 ha. Since the lift irrigationschemes would involve substantial individual investments,any scheme having an investment cost greater than Rs 2,000,000(about five) would be submitted to IDA for prior approval(Schedule A).

(b) A sum of Rs 200 million (US$27.5 million) for dugwells,dugwell improvements, and electrification in major riverbasins encompassing 17 districts on the Deccan Plateau(Annex 1), resulting in the irrigation of about 60,000 ha.While the sum represents the estimated total cost of such

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investments likely to be justified in these areas (itwould finance the equivalent of about 11,000 new energizeddugwells), present information is inadequate to quantifyaccurately the respective numbers of each type of invest-ment. Identification of specific investments would thusdepend on individual field appraisals. Assurances wereobtained that the State Electricity Board would give priorityto the electrification of these wells, and the cost estimatesinclude a provision of Rs 2,500 for the connection.

3.03 Since Maharashtra does not yet have legislation controlling ground-water development (para 2.11), it is essential that the State undertakepragmatic measures to combat the problems of overexploitation and over-capitalization. As a large portion of minor irrigation development isfinanced through institutional loans, minimum standards can be introducedthrough specific lending criteria implemented through the banking systemand supported by the State. The basis would be by GSDA analysis of integralhydrogeological units from river basins down to elementary watersheds(para 2.11). Included would be requirements with regard to density,spacing and irrigated area, which would permit investment in minor irri-gation to proceed under reasonable control until such time as effectivelegislation were passed (Schedule A). Furthermore, the efficiency ofindividual investments would be increased through this analysis and throughimproved financial appraisal (para 4.11).

3.04 To complete the proposed program within a three-year period,additional drilling units would be required. Provision has, therefore,been made in the Project for 4 hammer drills with initial spare parts ata cost of Rs 3.6 million (US$0.5 million). They would be purchased bythe State Government or its agency.

Land Development

3.05 Investments in land development would involve levelling ofabout 9,000 ha, grading 1/ of 24,000 ha, bunding of 47,000 ha, and con-struction of water courses and field drains on 115,000 ha, 2/ on six majorirrigation schemes: Purna 3/, Bor, Ghod, Nalganga, Gangapur, and Girna(Annex 2). The total cost would be Rs 46.1 million (US$6.3 million).

3.06 Work is presently performed by manual labor, bullocks and somebulldozers, but the shortage of labor and equipment result in a very slow

1/ Removal of uneven features without altering the basic slope of the land.

2/ Since all activities are not carried out on every unit of land to bedeveloped, it is not possible to quote total figures for land develop-ment.

3/ Purna Irrigation Project, Credit 23-IN. This Purna River is a tributaryof the Godavari, not the tributary of the Tapi by the same name whichis included in the proposed Project area for tubewells.

mnd haphazard development (para 2.14 and Annex 2). In order to accomplisht:he land development program efficiently and expeditiously, the Projectprovides for the purchase of 48 self-loading scrapers, 20 land planes, and20 bulldozers for use in bunding, at a cost of Rs 34 million (US$4.7 million).]:nitial spare parts would be included. All equipment would be purchased bythe State Government or its agency.

C:onsultancy Services

Groundwater

3.07 The effective implementation of minor irrigation investmentsboth within the Project and outside of it, will depend in large measureon the capability of GSDA to gather and analyze pertinent data, and toprovide guidance to LDB regarding constraints imposed by water avail-ability on minor irrigation development. In order to assist with theimplementation of water availability investigations and the application ofappraisal criteria, the Project would include provision for the servicesof two qualified and experienced consultants over two years, at a cost ofRs 2.3 million (US$0.3 million). The consultants would comprise a hydro-logist and a specialist in water management. It was agreed during negotiationsthat these specialists would be appointed in consultation with IDA on termsand conditions satisfactory to IDA, as a condition of credit effectiveness(para 3.13).

C. Cost Estimates and Financing

3.08 Estimated Project cost, together with the foreign exchange require-ment, is detailed as follows:

Rs (millions) US$ (millions) ForeignLocal Foreign Total Local Foreign Total Exchange

1. Minor Irrigation 272.0 30.0 302.0 37.4 4.1 41.5 10/12. Land Development- 31.3 3.5 34.8 4.3 0.5 4.8 10

3. Project Equipment(a) Drilling Rigs 0.6 3.0 3.6 0.1 0.4 0.5 83'(b) Earth-moving

Machinery 5.7 28.3 34.0 0.8 3.9 4.7 83(c) Hydrological

Equipment 0.1 0.8 0.9 0.0 0.1 0.1 89

4. Consultancy Services 0.8 1.5 2.3 0.1 0.2 0.3 65

Total Project Cost 310.5 67.1 377.6 42.7 9.2 51.9 18

/11 Excludes depreciation on earth-moving machinery since total cost ofmachinery is included in Project cost.

Details of the cost estimates are shown in Appendices 6-1 and 6-2. Estimatesare based on present prices including a 10% allowance for cost increases.

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3.09 The total cost of Rs 377.6 million (US$51.9 million) would befinanced from the following sources:

Lending/i /2 Total IDAFarmers Banks ARC-- Financed Credit Funds

% of X of % of % ofRs M Total Rs M Total Rs M Total Rs M Rs M Total

1. Minor /3/4Irrigation 27.2 9/ 27.5 9 247.3 82 302.0 165.0 55

2. Land De- /3velopment 4.6 O-- 10.4 23 31.1 67 46.1k- 19.8 43

Total LendingProgram 31.8 9 37.9 11 278.4 80 348.1 184.8 53

3. ProjectEquipment

(a) Drilling /6Rigs 3.6 100 - 3.6 3.0 83

(b) Earth-moving /6Machinery - - - - 34.0 100-- 34.0 28.3 83

(c) Hydrological /6Equipment - - - - 0.9 1004- 0.9 0.8 89

4. Consultancy / 7Services - 2.3 l300 2.3 1.5 65

Total Fi-nanced 31.8 8 37.9 10 319.2 82 388.9 218.4 56

Depreciationon Earth-movingMachinery (11.3)

Total PProjectCost 377.6 218.4 58

/1 In the case of LDB, financed by the State Government.

/2 All items relate to ARC except as indicated.

/3 In addition, farmers are required to make an equity contribution tothe LDB system of 10% of the loan.

/4 Takes into consideration the lower contribution required from smallfarmers in certain investments (para 4.13).

/5 Includes depreciation on earth-moving machinery as a cost to thefarmer. The IDA contribution represents 57% of Project cost but only43% of total cost of this item.

/6 For purchase by State Government.

/7 GOI.

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3.10 The proposed IDA credit of US$30.0 million (Rs 218.4 million)would finance about 58% of total Project cost and its refinance of thelending program (Rs 184.8 million) would supply about 66% of ARC supportof the Project (Rs 278.4 million). IDA financing would be based on (a)the foreign exchange cost of Project equipment and consultancy services and(b) the foreign exchange cost plus one-half the local cost of minor irrigationtnd land development investments. IDA financing of foreign exchange itemswould amount to Rs 67.1 million (US$9.2 million) or 31% of its total contri-bution while local currency financing would total Rs 151.3 million (US$20.8million).

3.11 The IDA credit would be on standard terms to GOI. GOI would makethe proceeds relating to the lending program available to ARC on the basisof repayment at the end of 9 years with an interest rate of 5-1/4% per annumin the case of loans to ultimate borrowers not exceeding this period(estimated at about 707 of the total) and at the end of 15 years with in-terest gt 5-3/4% per annum in the case of the longer maturities (in eachcase this is after deducting 1/4% allowable for prompt payment). These arethe rates which since June 1971 have applied to GOI lending to ARC. GOIwrould bear the exchange risk. ARC would on-lend the proceeds to LDB andparticipating commercial banks (para 4.01) at an interest rate of 6-1/2% perannum on the outstanding balance, and these banks would in turn on-lend toultimate borrowers at 9%. ARC refinancing would be repayable in installmentsset to coincide approximately with collections from ultimate borrowers. Thebalance of the IDA credit, f-or Project equipment and consultancy services,would be made available by GOI to the Maharashtra State Government. Assur-ances on these arrangements were obtained during negotiations.

D. Procurement

3.12 Minor irrigation and land development investments involve generallysmall and labor intensive operations carried out seasonally on widelyscattered individual farms, for which international competition would not bea.ppropriate. They would be carried out primarily by hired labor or localcontractors and partly by GSDA, in the case of minor irrigation and by LDAwith the assistance of local contractors, in the case of land development,using local materials. Competition among contractors is satisfactory andsupplies are adequate. For tubewells and lift irrigation schemes, localcompetition would be adopted, while for dugwells, arrangements by individualfarmers with the advice of the Primary banks would be the rule.

3.13 The drilling rigs and earth-moving equipment included in theProject would enable Government agencies providing well drilling and landdevelopment services to reach the capacity necessary to execute the amountof work envisaged. Some drilling and earth-moving equipment is manufacturedin India and it was agreed that such procurement would be under internationalcompetition with Indian suppliers receiving a preference of 15% or theprevailing customs duty, whichever is lower. Bits for hammer drills andhydrological equipment would also be procured under international competition.Because of the rapid expansion of groundwater programs which has absorbedconsiderable manpower and the resultant shortage of groundwater specialistsin the co2lntry, the consultants for GSDA would have to come from outside India.

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E. Disbursements

3.14 IDA disbursements are expected to extend over about 3-1/2 years(Appendix 6-3). Against appropriate documentation, disbursements would be60% of loans for minor irrigation and 48% of loans for land development,the CIF cost of drilling and earth-moving machinery, and the foreign exchangecost of consultancy services. Any savings would be reallocated only on thebasis of agreement between the Government and IDA.

IV. ORGANIZATION AND MANAGEMENT

Introduction

4.01 Financing and organization arrangements would generally followthe pattern established under five existing IDA-supported agricultural creditprojects. The IDA credit to the Government of India (GOI) would, in respectof the lending program, be channelled to the Agricultural Refinance Corpora-tion (ARC) which would refinance part of the lending to ultimate borrowersof the Maharashtra State Cooperative Land Development Bank (LDB) and itsfederated Primary Banks, and of participating commercial banks. At present,most of the Primaries which would be involved in the project have financialdifficulties and some are encumbered with managerial problems. To rectifythis situation, the State Government and LDB in consultation with ARC arenow implementing a rehabilitation program acceptable to IDA and it isexpected that this program will be completed by September 30, 1972, the dateproposed for credit effectiveness (para 4.10).

Agricultural Refinance Corporation (ARC) (Annex 3)

4.02 ARC, a subsidiary of the Reserve Bank of India (RBI), is thechannel for the five existing agricultural credit projects and is thereforewell known to IDA. It is a competently-managed organization with a soundfinancial structure, and its role is important not only as a channel fordevelopment funds but also for its influence on the lending policies andoperational procedures of the agencies it assists. It is therefore a suitableinstitution for the overall supervision of the Project's implementation. Asin previous credits, assurance was obtained that ARC's accounts would con-tinue to be audited by auditors acceptable to IDA.

4.03 ARC would ensure that all lending banks follow the policies, termsand conditions agreed with IDA (Schedule B). The execution of a loan agree-ment between GOI and ARC on such terms and conditions would be a conditionof credit effectiveness and subsidiary loan agreements between ARC and lendingbanks would be subject to IDA approval. ARC would further ensure that lend-ing banks adhered to the appraisal criteria relating to minor irrigation asset forth in Schedule A. Assurances on these matters were obtained atnegotiations.

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Maharashtra State Cooperative Land Development Bank (LDB) (Annex 4)

4.04 Organization and Management. The LDB was registered in December11935 and, until the post-independence boundary revisions, its operations alsocovered parts of the present States of GuJarat and Mysore. With its fourdivisional offices, LDB is the apex organization for 26 federated Primaryflanks which are organized on a district basis. The Primary Banks in turn workthrough a total of 252 branches. Since LDB is the sole source of long-termfinancing for the Primary Banks, the relationship is similar to that of abank head office to its branches.

4.05 LDB 's operations are regulated by the Maharashtra CooperativeSocieties Act 1960. Its 30-member Board includes 20 representatives of thePrimary Banks, 5 representatives of non-borrowing shareholders, and 5 mem-bers ex-officio, including LDBts Managing Director (at present on secondmentfrom RBI). The Primary Banks, with a voting membership of about 750,000,also elect their own boards which control operations and appoint staff. Inorder to borrow, a farmer must hold shares in his Primary equal to 10% ofthe loan; this is the largest equity requirement of any land mortgage/devel-opment bank in India. The Primaries retain one-half of the equity contri-bution and invest the balance in LDB so that their equity holding in theapex bank is 5% of their borrowings therefrom. Loans, which may be grantedfor most medium- and long-term investments in agriculture, at present maynot exceed 50% of the developed value of land required as security. Thiscriterion could be an unreasonable constraint in the case of farmers withsmall landholdings, and an assurance was obtained during negotiationsthat the limit would be increased to 60% of the developed value of land.

4.06 Resources. LDB obtains its resources from share capital con-tributed by the Primary Banks and State Government, the issue of ordinary,rural and special debentures and short-term borrowings from the MaharashtraState Cooperative Bank. As of June 30, 1971 paid-up share capital was Rs 89million of which the members' contribution was Rs 78 million (88%) and theSitate Government's contribution Rs 11 million (12%). Ordinary debentures(subscribed mainly by RBI, the State Government and other institutions)outstanding at this date were Rs 1,320 million, rural debentures (subscribedby farmers and RBI in the ratio of 8 to 9) were Rs 44 million and specialdebentures (subscribed by ARC) were Rs 85 million. The relatively small amountoil special debentures is indicative of the limited influence which ARChitherto has exercised on LDB policies.

4.07 Operational Results. LDB has maintained an exceptionally highgrowth rate over recent years, its loan portfolio more than doubling (fromRs 563 million to Rs 1,156 million) over the four years from June 30, 1967to June 30, 1971. It now has the largest portfolio of any land mortgage/development bank in India. LDB is a generally sound institution, althoughprofits have been low compared with similar banks in other States. Itsprimary weakness, however, has been in the inadequate control it hasexercised over the Primary Banks.

4.08 The most serious aspect of the LDB system in Maharashtra is thecontinuing high level of overdues. As of June 30, 1971, farmers' arrears to

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Primary Banks at Rs 136 million represented about 53% of the total amountsdue, and of the 21 Primary Banks which would be involved in Project lending,only 1 had overdues of 25% or less (Appendix 4-1). Arrears to Primaries haddecreased from a high of 62% in 1961/62 to 24% in 1968/69 but then inlcreasedagain to 30% in 1969/70. In 1970/71, however, they jumped markedly to 53%,a situation partly attributable to the extensive drought conditions prevail-ing in the State during that year. Because the Primaries have substantialresources as a result of the retention of half the farmers' equity contri-butions (para 4.05), their repayment record to LDB had been maintained at ahigher level: as of June 30, 1970 arrears were 9% of payments due (havingdropped back from 7% the previous year) and amounted to Rs 14.6 million (LDBreserves at that date were Rs 13.2 million). However, the crop losses in1970/71 had important repercussions at the apex also, and the arrears atJune 30, 1971 were 34% of total amounts due.

4.09 The unsatisfactory condition of the Primaries, which was madecritical by the extraordinary weather conditions of 1970/71, resulted froma variety of factors including weak management (in some cases); loan ceilingswhich often led to the underfinancing of investments; inadequate technicalcriteria which resulted in investments in underproductive wells; financialanalysis based on total, rather than incremental, returns; insufficientemphasis on collections; and the granting of loans on the basis of political,instead of technical, financial, and economic considerations.

4.10 Rehabilitation of the LDB System. In order to provide the LDBsystem with a sound structure adequate to administer the Project and channelIDA funds, the State Government and LDB in consultation with ARC are imple-menting a financial and managerial rehabilitation program, satisfactory toIDA. The principal features of the program are as follows:

(a) Financial Rehabilitation

The main purpose is to reduce overdues to not more than25% of the June 30, 1971 demand after deducting overduesattributable to drought. To this end the State Governmenthas agreed to contribute capital to all 21 Project PrimaryBanks to the extent necessary to meet this criterion as atJune 30, 1972. In addition, however, the 25% maximum over-due position must also be met against the current year'sdemand and the State Government will similarly contributecapital to the extent necessary that at least 15 of thesePrimaries qualify (including specifically the Jalgaon,Nanded and Parbhani Banks through which much of the Projectlending will be concentrated). Based on the June 1971overdues, the State Government's contribution is estimatedat Rs 34 million (US$4.7 million) and in addition it willprovide guarantees of Rs 21 million (US$2.9 million) tocover half the amount of drought overdues (Appendix 4-1).The capital contributions will be redeemed and the guaranteesreduced as recoveries are made.

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(b) Collection Program

With the cooperation of the State Government including theprovision of additional recoveries staff and improved fore-closure procedures, the LDB system has started a collectioncampaign to recover past overdues in accordance withscheduled timetables (Appendix 4-2) and ensure satisfactoryrepayment levels in future. ARC will review the recoveryperformance of each Primary and, subject to IDA agreement,will withhold Project refinance from any Primary which failsto make satisfactory progress on recovering amounts overdueon June 30, 1971 or which incurs a default rate of more than25% of payments becoming due in any subsequent year.

(c) Managerial Rehabilitation

Where necessary, boards of directors would be reconstitutedand management would be replaced in Primaries according toa plan to be sent to the Association by April 30, 1972. LDBwould employ all managers and, as appropriate, other staffof Primaries. Training courses are being established formanagers and staff of the LDB system to introduce new appraisaland lending techniques. Those for senior executives of LDBand key officers of the Primaries would be completed by thedate of credit effectiveness.

The above measures, which were agreed at negotiations are expected to resultin a satisfactory rehabilitation of the LDB system by September 30, 1972, theproposed date of credit effectiveness. By that date all 21 of the ProjectPrimaries would in effect have had their overdues reduced to acceptablelevels and the proposed capital injections would have enabled thiem to reducethe amount of their overdues to the apex bank to not more than 19%. Improvedcollection methods described above should have resulted in all the 21 Pri-maries meeting the 25% criterion on current year's demand without furthercapital contributions from the State Government. However, in the event ofonly the minimum of 15 Banks qualifying, there would be sufficient bankingfacilities to permit the Project to proceed and with good prospects oftlne remaining Banks participating soon thereafter. The completion of theriehabilitation program as outlined above would be a condition of crediteffectiveness.

4.11 Lending Policies and Terms. Investments would be evaluated interms of incremental returns in accordance with methods developed by ARC,and loans would conform to the agreed appraisal criteria and terms as setoult in Schedule B. Minor irrigation investments would, in addition, conformto the technical criteria and areas specified in Schedule A. Assurances onthese matters were obtained at negotiations.

4.12 The primary modifications in lending terms (Schedule B) which wouldbe introduced under the Project involve interest rates, contributions fromborrowers, and loan maturities. With respect to the first, the rate fromLDB to the Primaries would be increased from 7-1/4% to 7-1/2%, raising LDB's

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margin on ARC approved schemes from 3/4% to 1% and decreasing the margin ofthe Primaries from 1-3/4% to 1-1/2%. This change is justified in view ofthe need for LDB to meet the cost of increasing staff requirements and thehigh margin of the Primaries in relation to their costs. The Primarieswould retain the proceeds of the 1/2% evaluation fee to be charged on thecost of individual investments.

4.13 The contributions required from Borrowers and the maturities ofloans would be set as follows:

MinimumBorrowers /1

Maximum Contribution/-Grace years of (% of Cost of

Investment Period Repayment Total Investment)

/2Minor Irrigation - 9 9 10Land Development 2 8 10 10

/1 Inncludes value of farmers' own labor. In addition, farmers wouldmake a contribution to LDB capital equal to 10% of the loan.

/2 Repayment would commence in year following completion of construction.

The maturity for minor irrigation, especially in the case of dugwells,represents some reduction over existing maturities but 9 years is well with-in the repayment capacity of borrowers, provided the investments conformto proper technical criteria. To help meet the needs of small farmers, definedin Schedule B, no investment contribution would be required (although farmerswould still make the contribution to LDB capital equal to 10% of the loan),and repayment periods would be extended to 15 years for minor irrigationinvestments costing less than Rs 10,000 (except in the case of pumpsets whererepayment periods would not exceed 7 years). Repayment periods also wouldbe extended to 15 years including two years grace for land developmentinvestments (Schedule B). Assurances were obtained on the above at nego-tiations and it was agreed that, except for schemes submitted under the aegisof the Small Farmers Development Agency, LDB and the Primary Banks wouldapply the same contribution and maturity requirements to all their similarlending operations, and the same interest rates, evaluation fee, andcollateral requirements to all their lending operations.

4.14 Accounts and Auditing. The LDB accounting system is adequate and,in accordance with the usual Indian practice, the accounts are audited byindependent auditors from the State Cooperative Department. Assuranceswere obtained that the accounts of LDB would be audited by independentauditors acceptable to IDA and would be submitted to IDA within 4 monthsof the close of the fiscal year.

Commercial Banks (Annex 5)

4.15 There are 50 commercial banks operating in Maharashtra, of which21 are nationalized. Together they provide nearly 1,350 branches, the mostimportant banks being the State Bank of India (221 branches), the Bank ofMaharashtra (179 branches) and the Central Bank of India (105 branches).

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f. The comnercial banks' participation in long-term agriculturallending in the State so far has been negligible. On the basis of their pre-sent. experience and organization they could not, in the near future, providea comprehensive banking alternative to LDB on any appreciable scale. A fewof -he commercial banks might, however, be in a position to undertake part of

the Project's lending program, thus supplementing the operations of the LDB

system and providing alternative banking facilities to farmers.

4.17 Commercial banks usually require farmer contributions of 25 to 40%

and charge interest ranging from 9 to 10 1/2% per annum. Commercial banksparticipating in Project lending would be required to conform to the same

lencling terms, conditions and criteria as applied to LDB (except in the case

of farmer contributions - see Schedule B). ARC would invite commercial banks

to participate in Project lending and subsequently would select the bankswhich would satisfy its criteria. Participating banks, assisted by ARC,;IouJLd carry out training courses for the staffs of their branches on theprocedures and criteria applying to the Project.

4.18 ARC would require participating commercial banks to maintainseparate accounts for Project lending and would ensure that such accountswere audited by auditors acceptable to IDA. In order to guard against over-investment in minor irrigation schemes in relation to known water resources,

ARC also would ensure that commercial banks would only lend for minorirr:Lgation investments where a certificate of nonobjection from GSDA had

been received and would adhere to the criteria of Schedule A (in the case

of Lending outside the Project areas, the criteria would apply from one year

after the date of credit effectiveness).

Groundwater Surveys and Development Agency (GSDA)

4.119 Maharashtra is establishing the Groundwater Surveys and DevelopmentAgency (para 2.11). It will have as its nucleus the competent groundwaterstaff from the Department of Agriculture, but additional personnel would be

needed under the Project (Annex 1), particularly senior personnel who wouldwork closely with the consultants to be obtained (para 3.07). A plan forcompleting the organization of GSDA, with clearly defined authority andadequate staffing, has been reviewed by IDA, and it was agreed during nego-tiations that the implementation of this plan would be a condition of credit

effectiveness.

4.20 GSDA would carry out water availability investigations on the basisof integral hydrogeological units and would specify regulations for invest-

ment in minor irrigation according to the criteria set out in Schedule A.It would also participate in the group appraisal of dugwells as well as the

individual appraisal of tubewells and lift schemes. In the case of eachinvestment, it would issue a certificate indicating that the loan applicationmet the specified criteria, and no loan would be granted without this cer-

tificate. During negotiations, the State Government agreed to apply thesame criteria (Schedule A) to all minor irrigation development under its

direct or indirect control (in the case of development outside the Project

areas, the criteria would apply from one year after the date of credit

effectiveness).

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Land Development Agency (LDA)

4.21 Maharashtra is establishing the Land Development Agency withinthe Department of Agriculture, utilizing the staff of that department whichis currently involved with land development work as the foundation for thenew unit (para 2.15 and Annex 2). Because of the problems of timing, coor-dination and control caused by the need to determine the participation offarmers prior to formulating the work programs, the necessity of implementingthe work in a short period of time, the maintenance of close tolerances onlevelling and grading operations, the seasonal and scattered nature of thework, and the need to protect standing crops, the main components of theland development program would be executed by LDA. Where necessary, however,LDA would subcontract selected parts of the work, particularly those whichwould be labor intensive, to be constructed under its supervision. Anassurance was obtained on this latter point.

4.22 In view of the magnitude of the work and the wide dispersion ofoperations throughout the State, it is essential that the establishment ofLDA be completed before the Project is undertaken. While the State Govern-ment has little experience in the planning of machine operations, thedeployment of machines and the implementation of work and maintenance schedulesfor a large fleet of earth-moving machines, this experience does existelsewhere in India and the State Government should obtain the services ofspecialists from this sector to assist in the execution of the land develop-ment program. It was agreed during negotiations that, as a condition ofcredit effectiveness, Maharashtra would complete implementation of a plan,acceptable to IDA, for the establishment of LDA with clearly delineatedpowers and adequate staffing, including the employment whenever necessary ofspecialists in land development.

4.23 There is at present no comprehensive schedule of charges for landdevelopment, and therefore the State Government would establish, as a condi-tion of credit effectiveness, rates sufficient to cover all costs. In thecase of work already performed, the Government would charge farmers for thecost of work and would make collections from farmers according to theprescribed repayment schedules. For future land development work outsidethe Project, Maharashtra would modify its program to conform substantiallyto the procedures and terms relating to the Project. Assurances to thiseffect were obtained at negotiations.

V. PRODUCTION, MARKETS, PRICES AND FARMERS' BENEFITS

Production

5.01 Indicative farm models have been developed which demonstrate thatProject investments would enable farmers to increase their productionthrough higher cropping intensities (increasing from a current range of100%-128% to 136%-153% at full development) and improved yields (Appendix8-1). The increase in cropped area resulting from the Project wouldbe about 61,000 ha of which about 40,000 ha would be attributable to minorirrigation and the remainder would come from land development withinexisting irrigation schemes (Appendix 8-3).

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5.02 Tn response to the prevailing price framework, which involves sup-port prices for certain crops, farmers are likely to expand their productionin the direction of foodgrains (mainly sorghum and wheat), cotton, sugarcane,and bananas (Appendix 8-3). The increase in production (at full development)would be about 247,000 tons of foodgrains, 50,000 tons of seed cotton,23,000 tons of groundnuts (unshelled), 400,000 tons of sugarcane, and 215,000tons of bananas. (The current state-wide production of these crops is asfollows: 7.0 million tons of foodgrains, 243,000 tons of cotton, 694,000tons of groundnuts, 12.6 million tons of sugarcane, and 875,000 tons ofbananas.) However, any alteration in the price framework, either as a resultof market forces or of administrative decision, would cause a change in theproduction response of farmers.

Markets

5.03 The State of Maharashtra is deficit in foodgrains, especially insorghum (jowar) - the staple food - and rice. It is therefore expected thatthe ProJect's incremental foodgrain production would be consumed within theState while part of the commercial crops would be retained and the balanceeither sold to other States or exported. Apart from sugar, India is not yetself-sufficient in the commodities to be produced under the Project. It isexpected that sugar refining capacities would be expanded to match estimatedproduction in Maharashtra.

5.04 A total of 346 regulated markets for agricultural productshave been established throughout the State to ensure that fair marketingpraLctices prevail. Investments to establish another 55 markets as well asstorage and grading facilities have been included in the State's currentDevelopment Plan. Most food crops and some commercial crops are marketedthrough the State's Cooperative Marketing Federation, which operates througha network of 316 primary marketing societies. The Federation acts as theState's purchasing agent for sorghum and rice.

Prices

5.05 Foodgrain prices are somewhat higher in Maharashtra than insurplus States and some general decline in price levels must be expectedas India progresses towards the aim of becoming self-sufficient in foodgrainsduring this decade. In addition, prices of various crops are considerablyabove world market levels (para 6.02). While it remains India's pol-icy to encourage the agricultural sector through price incentives, uncer-taiLnties over future food policies make price forecasting particularly dif-ficult and, therefore, the Project's financial and economic rates of returnhave been tested against percentage changes in prices (paras 5.06 and 6.02).

Fa_mers' Benefits

5.06 Farmers' estimated benefits have been based on five indicativetypes of farm enterprises that would be financed under the Project (Annex 8).Based on investment costs, estimated yields and present prices assumed forthese farm models, and after debt service on proposed lending terms (para4.13), increases in farm incomes would range from Rs 1,720 to Rs 7,332 perannum as follows:

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Model I II III IV VType of Improved New Lift- Land

Investment Dugwell Dugwell Tubewell irrigation Development

AreaCultivated 4 ha 5 ha 4 ha 5 ha 2.5 ha

Investment /1 /2Costs Rs 4,000 Rs 15,500 Rs 11,500-- Rs 10,500L-- Rs 4,500

Annual /3Net Income-

At Present:Family A 4,276 1,619 1,285 1,687 812Per Capita- 713 270 214 281 135

At Full Development:Family A 6,609 9,581 B,853 10,627 4,279Per Capita- 1,101 1,597 1,476 1,771 713

Increment 2,333 7,962 7,568 8,940 3,467Debt Service- 613 2,374 1,762 1,608 745Increment afterDebt Service 1,720 5,588 5,806 7,332 2,722

/1 Share of total tubewell investment cost of Rs 57,500./2 Share of total lift-irrigation investment cost of Rs 480,000./3 Family labor excluded from production costs./4 Assumes 6 members per family./5 On 90% of the investment cost.

These indicative types of farm enterprise show that substantial increasesin the net incomes of such farmers, or groups of farmers, would result fromthe proposed investments, and the financial rate of return on incrementalinvestment is estimated at present prices and costs to range from 40% to73% for minor irrigation investments and to be about 60% in the case of landdevelopment. However, it must be recognized that these rates of returnare dependent, in particular, upon assumptions made with respect to prices,cropping intensities, yields, the use of improved current inputs, the avail-ability of casual labor during peak periods, adequate farm management, andthe rate at which development would occur. In order to test the sensitivityof the returns against deficiencies in these factors, the gross productionvalue was decreased by 20%. The financial rates of return then would rangefrom 24% to 39% (Appendix 8-2), indicating that the investments would stillbe viable.

5.07 Farmers at income levels under Rs 36,000 (US$4,900) pay only aminimal fixed land revenue tax, education cess and local fund cess which arenot based on income. As it is not anticipated that farmers participating inthe Project would have incomes exceeding Rs 36,000, the Project would notgenerate any direct tax to be collected from incremental income. Revenuewould be derived from indirect taxes such as the purchase tax on sugarcaneand excise duties on refined sugar and, through corporation taxes payableby institutions involved in the Project.

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VI. BENEFITS AND JUSTIFICATION

6.01 The Project would benefit at least 45,000 Maharashtra farmersand their dependents, a total of about 270,000 persons, through investment inminor irrigation and land development. Direct benefits to the Indian econcmywould include: first, a higher cropping intensity, which would increase theproduction of foodgrains and other commercial crops (para 5.02); second, theassured availability of water; and third, higher yields, which would beobtained by applying irrigation facilities and timely cultivation practicesthus enabling better use of high-yielding seed varieties and fertilizers.Since yields would no longer depend on uncertain rainfall, production onparticipating farms would not fluctuate as widely as in the past. India isat present not self-sufficient in foodgrains, vegetable oil and cotton, andthus increased production of these commodities would result in foreignexchange savings. The value of annual crop production at full developmentwould increase by about US$23 million equivalent.

6.02 The rates of return to the economy would be higher if the valueof the incremental crops were calculated on present Maharashtra prices.Cot:ton, groundnut and wheat prices for example are some 35 to 45% aboveprojected world market prices. Making the appropriate adjustments inrespect of taxes, and using projected world market prices, the economicrates of return on incremental investment would range from 33 to 55% forminor irrigation and 39% for land development. As indicated in paragraph5.06, these returns are dependent upon assumptions made with respect tovarious essential factors. In order to test the sensitivity of the returnsagainst deficiencies of these factors, the gross production value wasdecreased by 20%, and the economic rates of return were then found to rangefrom 15 to 30%. Additional factors which would have an influence on theProject as a whole are the success of the financial and managerial rehabi-li:ation of the Primary Banks and rate of implementation of the land devel-opment program.

6.03 In calculating Project benefits, no account has been taken ofthe indirect benefits accruing from increased knowledge of groundwaterresources which, together with the new minor irrigation appraisal methodsand criteria to be introduced, would provide the framework for bettergroundwater use throughout Maharashtra. In addition, there would beother indirect benefits such as the domestic value added and employmentfrom product processing and marketing activities, demonstration effects onother farmers, and strengthening of lending institutions. Further,increased cropping intensity would make better use of family labor andwould mean more employment opportunities for farm workers. Though notqujntifiable, these factors would enhance the Project's already satisfactoryeconomic justification.

6.04 In order to improve future project appraisal, it is necessary tomeasure the financial and economic benefits which actually result from theinvestment. Consequently, an assurance was obtained at negotiations thatARC would establish a mechanism for monitoring and evaluating the financialandl economic benefits resulting from the agricultural credit projects.

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VII. RECOMMENDATIONS

7.01 During negotiations, the following main assurances were obtained:

(a) lending banks would follow agreed appraisal criteria andlending policies as set out in Schedules A and B (para 4.03);

(b) LDB would increase its loan limit to 60% of the developedvalue of land offered as security (para 4.05); and

(c) ARC would, subject to IDA agreement, withhold refinancingunder the Project from any Primary which fails to makesatisfactory progress on recovering amounts overdue as ofJune 30, 1971 or which incurs a default rate of more than25% of total payments due for any subsequent year (para4.10).

7.02 Conditions of effectiveness of the credit would be:

(a) the appointment of specialists for GSDA in consultationwith IDA and on terms and conditions satisfactory toIDA (para 3.07);

(b) the execution of a loan agreement between GOI and ARCacceptable to IDA (para 4.03);

(c) the completion of the rehabilitation program of the LDBsystem (para 4.10);

(d) the establishment of the Groundwater Surveys and Develop-ment Agency (GSDA) with well-defined authority, andstaffing acceptable to IDA (para 4.19);

(e) the establishment of the Land Development Administration(LDA) with clearly delineated powers and staffingacceptable to IDA, including the services of specialists(para 4.22); and

(f) the establishment of rates for land development worksufficient to cover all costs (para 4.23).

7.03 The proposed Project is suitable for an IDA Credit of US$30 millionunder standard IDA terms.

February 11, 1972

SCHEDULE APage 1

INDIA


MINOR IRRIGATION: APPRAISAL CRITERIA AND PRDCEDURES

I. Investment Requirements

Tubewells

1. Area; Tapi/Puraa basin (sedimentaryareas) falling within the districtsof Dhulia - Jalgaon - Buldhana -Akola - Amravati

Investment: 300 tubewells

Pump: 10 hp submersible orturbine (guideline)

Minimum peak discharge: 15 1/sec

Minimum irrigated area: 20 ha

Minimum spacing (any otherenergized well): 1,000 m

Maximum density: 0.4 tubevell/km 2

Dugwells and Dugwell Improvements

2. Construction of new dugwells and the improvement of existingdugwells would involve an investment of Re 200 million in the followingregions:

(a) Area: Tapi/Purna basin falling withinthe districts of Nasik -Dhulia - Jalgaon - Buldhana -Akola - Amravati

(b) Area: Penganga basin falling withinthe districts of Yeotmal -Nanded - Akola - Parbhani

SCHEDULE APage 2

(c) Area: Godavari/Manjra basin fallingwithin the districts of Aurangabad -Ahmednagar - Bhir - Osmanabad -Parbhani - Nanded

(d) Area: Bhima Basin falling within the dis-tricts of Sholapur - Satara - Poona -

Osmanabad - Ahmednagar

(e) Area: Wardha/Wainganga basin falling withinthe district of Nagpur

Punp: 5 hp centrifugal (guideline)

KLnimum instant discharge: 10 1/sec

KLnimum discharge (December): 3Dugwell: 150 m3/dayDugwell improvement: 120 m /day

KiLnimum irrigated area:Dugwell: 5 haDugwell improvement: 4 ha

M,3ximum density of wells:

d - r x 100R x A x c

100

Where: d - density (wells/km )r - recharge in basin (mm)R - water requirement for the average cropping pattern (mm)c - cropping intensity (%)A - average area irrigated by a well (ha)

Minimum spacing of wells:

s - 1000 R x A x 100r x 100

where: s - spacing (i)Overall minimum spacing - 300 m

SCHEDULE APage 3

Lift Irrigation

3. Any scheme having an estimated investment cost greater thanRS 2,000,000 would be submitted to IDA for approval. A detailed appraisalwould be prepared for each individual scheme, with particular attentionbeing given to water availability, appropriate design, and installation of -

adequate pumping capacity.

II. General Lending Requirements

4. (a) If adequate irrigation and drainage channels did notalready exist on farms to benefit from the investment,the provision of such facilities would be a conditionof lending and could be included in the Project financing.

(b) All minor irrigation investments would include energi-zation by electricity as far as practicable.

(c) All minor irrigation investments would require acertificate of nonobjection from the Groundwater Surveysand Development Agency (GSDA) before a loan were made.

(d) All investments in land development would be preceded byloan approvals in respect of individual farmers.

III. Guidelines for Organization and Appraisal

Organization

5. (a) To the extent compatible with the responsibilities ofARC under the Project as the refinancing agency, GSDAwould advise on minor irrigation development.

(b) The field offices of GSDA would establish a census gridmap (1:8000) of their respective areas showing existingwells (with an indication of source of power), farms andarea served by each well, reservoirs, canals, lifts andelectricity lines. They would issue to the lending bankscopies of the grid map covering the banks' lending areas.They would guide and coordinate the activity of bankappraisal teams working in their areas.

Appraisal Procedures

6. (a) Primary Banks would advertise, seeking applications forloans and setting out lending terms and an explanation ofappraisal methods. Invitations for applications could bestaggered according to taluk or block.

SCHEDULE APage 4

(b) A bank appraisal team, normally consisting of a supervisorof the lending bank, a valuation officer and a technicalofficer (engineer or geologist), would visit applicants'farms on a group basis and in the course of appraisal wouldsketch the following on the grid map:

(i) the well sites proposed for installation or improvement;

(ii) farm(s) with owners' name(s) and area to be irrigated byproposed wells;

(iii) proposed irrigation channels or pipes to be installed/improved for distribution from proposed wells.

(c) In addition, dugwell appraisal would be assessed againstthe estimated groundwater resources of elementary water-sheds and these watersheds would be the basic unit of groupappraisal. Calculations of groundwater recharge would bebased on estimated rainfall, runoff, evapotranspiration andsoil moisture parameters supported by a qualitative analysisof factors such as gradients, soil structure, vegetationand surface water storage. Field offices of GSDA would beresponsible for demarcating the approximate limits of thesewatersheds and of groundwater reservoir boundaries. Inassessing groundwater resources, the appraisal team wouldconsider:

ti) the probability of obtaining an adequate Decemberdischarge from the proposed development (150 m3/dayin the case of new dugwells and 120 m3 /day in thecase of improved dugwells);

(ii) the probable existence of two or more basalt layersunder the groundwater level;

(iii) whether irrigation purposes would be better achievedby the installation of a new well, which should uotexceed an investment cost of Rs 18,000, or by theimprovement or an existing well, at a cost generallynot exceeding Rs 6,000, or by extending the use ofwater discharged from existing wells.

(d) Proposed tubewell and lift irrigation investments wouldbe subject to individual financial appraisal; proposeddugwell investments would be subject to standardized pro-forma financial appraisal. All appraisals would specifi-cally include proposals on whether:

(i) there would be a group loan to farmers who wouldreceive water from the proposed development;

SCHEDULE APage 5

(ii) the owner(s) would enter into an agreement to sellwater to farmers other than borrowers;

(iii) there would be other cooperative arrangements.

(e) Lending banks would submit to the appropriate fieldoffice of GSDA a copy of the appraisal map with relevantinformation and recouiendations. The division wouldenter the information on its census grid map.

(f) GSDA would physically check all doubtful cases and, inaddition, 10% of all recommended applications.

(g) On receipt of GSDA's certificate of nonobjection, lendingbanks would complete loan formalities in the usual wayand, where appropriate, documentation would include anagreement for the sale of water.

IV. Lending Criteria and Procedures Applying toSimilar Investments Outside the Project

7. Outside the Project areas, LDB, all commreial banks, andall agencies within the direct or indirect control of the State Governmentwould only lend for minor irrigation investments where:

(i) a certificate of non-objection had been receivedfrom GSDA and,

(ii) such lending conformed to the appraisal criteriaand procedures set out in this schedule, frou oneyear after the date of credit effectiveness.

February 11, 1972

SCHEDULE BPage 1

INDIA


PROJECT LENDING TERMS AND CONDITIONS

1. GOI to ARC

(a) In respect of ARC refinancing not exceeding 9 years:

(i) interest rate of not less than 5-1/2% per annum less1/4% per annum for prompt payment;

(ii) repayment at the end of 9 years;

(b) In respect of ARC refinancing for 10 years and abovebut not exceeding 15 years:

(i) interest rate of not less than 6% per annum less 1/4%per annum for prompt payment;

(ii) repayment at the end of 15 years;

(c) GOI to carry exchange risk.

2. ARC to Lending Banks (LDB and Commercial Banks)

(a) Interest rate not less than 6-1/2% per annum;

(b) Repayments in installments set to coincide approximatelywith collections from ultimate borrowers;

(c) Refinancing would be by way of purchase of debenturesor by loans at the rate of 90% of individual loans forminor irrigation and 75% of individual loans for landdevelopment;

(d) Repayments to ARC from LDB and participating commercialbanks to be deposited in a special account for refinancingARC - approved agricultural development schemes.

3. LDB to Primary Banks

(a) Interest rate not less than 7-1/2% per annum;

(b) Repayments in installments set to coincideapproximately with collections from ultimateborrowers;

SCHEDULE BPage 2

(c) Loans would cover the total amount of Primary Banks'lending to individuals.

4. Primary Banks and Commercial Banks Lending to Individuals

(a) Interest rate not less than 9% per annum;

(b) A once-and-for-all evaluation fee of 1/2% of the costof individual project costs;

(c) Loan Limit: 60% of the developed value of land offeredas eecurity;

(d) Farmers' contributions (Primary Banks):(i) for normal lending, a minimum of 10% of the

cost of Project investments;(ii) for lending to small farmers, 1/ no downpayment

in the case of minor irrigation investmentscosting less than Rs 10,000 each. 2/

In addition to the investment contribution, farmers wouldcontribute to LMB capital an amount equal to 10% of their loans.

(e) Farmers' contribution (Commercial Banks):

(i) for normal lending a minimum of 20% of the costof Project investments;

(ii) for lending to small farmers, 1/ a minimum of 10%of the cost of minor irrigation investmentscosting less than Rs 10,000 each.

(f) Maturities, which would not exceed the life of theasset financed, would be:

(i) for normal lending, a maximum of:

(1) 9 years on loans for tubewells, lift irrigationschemes, dugwells and dugwell improvements;

(2) 10 years for land development loans includinga two-year grace period in which interestonly would be payable;

1/ Small farmers have been defined, in accordance with criteria agreedwith IDA, as those farmers cultivating an amount of land whichprovides them with an annual net income (after cultivation costs butbefore debt service) of Rs 2400 or less but with sufficientland to permit an incremental income from the proposed investmentat least high enough to meet the principal and interest paymentson a loan for that investment. This formula is applied on anindividual scheme basis by ARC.

2/ The provisions for lending to small farmers for minor irrigation wouldalso apply to small farmers participating in joint investments wheretheir shares of the total investment cost did not exceed Rs 10,000each.

SCHEDULE BPage 3

(3) 7 years on loans for pumpsets, whether financedas individual loans or included in dugwell loans;

(ii) for lending to small farmers as defined, a maximum of:

(1) 15 years for minor irrigation loans where theinvestment cost was less than Rs 10,000 each, exceptfor pumpsets where the loan period would notexceed 7 years whether financed as individualloans or included in dugwell loans;

(2) 15 years including two-year grace period forland development.

In each case repayments would commence in the year followingthe completion of the investment.

5. Other LDB Lending Operations

LMB and Primary Banks would apply the same down payment andmaturity requirements to all their similar lending operations, and thesame interest rates, evaluation fee and collateral requirements to alltheir lending operations (except in the case of schemes submitted underthe aegis of the Small Farmers and Marginal Farmers Development Agenciesin Maharashtra).

February 11, 1972

SCHEDULE C

INDIA

MAHARASHTRA AGRICULTURAL CREDIT PROJECr

PARTICIPATING PRIMARY BANKS

AhmednagarAkolaAiravatiAurangabadBhandaraBhirBuldhanaDhuliaJalgaonKohlapurNagpurNandedNasikParbhaniPoonaSangliSataraShQlapurUdgirWardhaYeotmal

February 11, 1972

ANNEX 1Page 1

INDIA

MAHARASHTRA AGRICULTURAL CREDIT PROJECr

Minor Irrigation

Hydrogeological Conditions

1. The major part of Maharashtra is located on the plateau formed bythe massive volcanic formation known as the Deccan Trap. It is composed ofalternate layers of compact basalt and volcanic ashes, and is estimated tohave a thickness of several thousand meters. Near the surface, the basaltlayers are 3-10m thick, and 2-3 of them are found interbedded with thevolcanic ashes or clay in the first 30-50m. The main physiographic featuresof the region have been caused by the erosion of the trap resulting in longranges of basaltic hills dividing the main river basins. There are threegroups of river basins in the state:

(a) the narrow coastal region with small basins draining fromthe Western Ghats westward to the Arabian Sea;

(b) the Tapi/Purna basin at the northern edge of the DeccanPlateau which also drains to the west; and

(c) the Godavari system of the Deccan Plateau, draining to theeast.

2. Annual rainfall averages about 2,500 mm in the coastal region, butthe Western Ghats give rise to a meteorological shade, the effect of whichis to lower the amount of precipitation over the Deccan Plateau and theTapi basin. The average rainfall in the western part of the plateau is700 mm. In the central zone, average rainfall is about 900 mm and increasesto over 1,200 mm in the east. Temperature varies from a maximum of 45°Cin May to a low, in some areas, of 8C in December. For most of the state,about two-thirds of the rainfall occurs during the southwest monsoon, orkharif, from June to October, while the remainder occurs primarily duringthe northeast monsoon, or rabi, from November to February. March to May isthe dry season, or early kharif. Interannual variations in rainfall aregreater in the 700 mm zone where even the kharif rainfall is not assured.In the 900 mm region, kharif rainfall is sufficient for grains and otherfood crops, but rabi crops and perennial crops need irrigation supplements.

3. Following the rainfall distribution, run-off in the rivers isconcentrated in kharif: about 85% occurs from July to October. Small basins(100-500 km2) oll the western slopes of the Western Ghats2have a run-offof 1,000 to 1,600 mm. For large basins (about 10,000 km ) in the Deccan

ANNEX 1Page 2

Plateau, the run-off ranges from 110 to 560 mm. The base flow, or dischargeof the groundwater reservoir, has been estimated at 20 to 40% of the totalriver flow.

4. Groundwater recharge figures have been calculated for variousbasins. While they are based on limited data, they do indicate that thereare large variations from basin to basin and that recharge is not a constantpercentage of rainfall. Under these circumstances, recharge must be deter-mined on a local basis from historical data and field tests in representativebasins.

5. There are two types of groundwater reservoirs in the State: alluvialdeposits in the valleys (primarily the Tapi Puima) and the basalt layers inthe Deccan Plateau. Permeability of the sand and gravel beds in the alluvialformations is generally good (1.2 x 10-3 m/hec), and existing tubewells havespecific capacities ranging from 1 to 10 liters per second per meter draw-domn with an average of 5 1/sec/m. Although only a light exploratory prog-ran has been carried out, data is sufficient to indicate that there is scopefor further tubewell development, which would be accompanied by complementaryinvestigations such as geoelectrical surveys and additional exploratorydrillings, and dugwell construction.

6. Permeability of the basalt layers is related to the particulartypes of basalt involved (vesicular) and to the fissuration of this material.It is generally low: existing energized dugwells have a discharge of 80to 180 m3/day. However, the discharge of low-yielding wells normally can beimiproved often doubled - by drilling boreholes through the underlyingbasalt layers.

7. The hydrogeological conditions described above are not favorableto extensive two- or three-crop cultivation. The high concentration ofrainfall in kharif and the variability of rainfall in rabi make it necessaryto use every storage possibility for regulation of the outflow, but thetopography does not yield many opportunities for the construction of largedams and extended irrigation networks. Although groundwater storage providessubstantial capacity for regulation, the permeability of the aquifers doesnot permit the utilization of high-yielding wells. Therefore, regulationmust be achieved through a combination of large dams, small dams (tanks),lift irrigation schemes, and wells.

Present Water Use

8. The water resources of Maharashtra are extremely limited. TheGovernment estimates total availability at 74 billion m3 which it calculatesto be sufficient to irrigate only 6 million ha at full development (about30% of the total cultivable area of 21 million ha). It is thereforecritical that utilization of water be as efficient as possible and thatwastage be kept to an absolute minimum. At present, about 9 billion m3 ,(12X of total available) are being used for irrigation, 5 billion by wells

ANNEX 1Page 3

and 4 billion by surface water schemes (including lift irrigation). Thearea under irrigation is about 1.2 million ha (6% of total cultivable area),0.7 miUion from wells and 0.5 million from surface schemes.

9. Over the past 15 years, well irrigat:xon has accounted for about80% of the increase in irrigated area, and the current rate of developmentof 60,000 ha/year for wel irrigation and 20,000 ha/year for surfaceirrigation approximately continues this relationship. There are variousreasons for this pattern of development:

(a) Topographical conditions are not favorable for theimplementation of large surface water schemes, thus limitingthe possibilities and increasing the cost of constructionin the case of those that do exist;

(b) Government financing from budgetary resources has not beensufficient to meet the high costs involved in large surfacewater schemes;

(c) Large surface water schemes generally require agreementsbetween States which are not always forthcoming; and

(d) Irrigation development by wells corresponds to the managerialcapability of the farmer and, for any given farm unit, canbe implemented more rapidly than large surface schemes.

10. These factors have led to the more rapid development of ground-water, even though the unit investment cost is generally higher (2,500 to4,500 Rs/ha vs. 2,000 to 2,500 Rs/ha). Lift irrigation schemes combine someof the advantages of ground and large surface water projects. Their smallsize generally fits that of farmers' cooperatives, their unit investmentcost is lower than that of surface schemes, and their implementation period isrelatively short. Consequently it can be expected that there will beincreased development of lift schemes on rivers with a sustained base flowor with adequate storage capacity.

11. Present use of groundwater is quite inefficient. There arecurrently 743,000 wells (almost all are dugwells) which irrigate a total of713,000 ha, giving a command area per well of just under 1 ha. Since theaverage existing well could command an area of about 2 ha, it is apparentthat water is being wasted and that wells are not being utilized tocapacity. Furthermore, many wells give very low yields or are dry. Someof the principal reasons for this situation are the following:

(a) lack of knowledge of crop water requirements on the partof farmers, leading to over-watering of crops;

ANNEX 1Page 4

(b) over-exploitation of groundwater in specific areas,resulting in the poor performance of all wells in thoseareas;

(c) low technical criteria for individual wells with regardto siting and design;

(d) lack of endeavor to raise criteria for installation ofwells, on the basis that assured irrigation in rabi was notnecessary. (However, the farmer does not obtain a reasonablereturn and is not able to maintain loan repayments unlesshe gets assured water in rabi as well as in kharif.); and

(e) a limit on loans for wells which was imposed by LMB until1967, resulting in unfinished wells and wells of lowstandard.

While the situation in Hahrashtra is not critical, there are certain areaswhere exploitation of groundwater should be stopped and others where itshould be severely restricted. However, no legislation exists, at present,to control the exploitation of groundwater. Model legislation has beenprepared by the Central Government with a view to eventual enactment by theStates, but until such time as this legislation has been passed, theMaharashtra Government has agreed to implement various measures through thelending program and through administrative actions. In order to achieveithe widest control possible, the agreed criteria for investments in minor:Lrrigation would apply not only to Project investments but also to all minor:Lrrigation development within the direct or indirect control of the StateGovernment.

]'roposed Development

'12. The Project would include 300 tubewells irrigating a total of6,000 ha at a cost of Rs 18 million, 175 lift irrigation schemes commanding40,000 ha at a cost of Rs 84 million, and an investment in dugwells anddugwell improvements of the Rs 200 million (equivalent to about 11,100 newenergized dugwells) to irrigate about 60,000 ha. Although the proposalsubmitted by Maharashtra included 1,000 borewells for the Deccan trapregion, they have been excluded from the Project because the feasiblity ofthis type of well has not been established. It will be necessary for GSDAto carry out a program of experimentation in order to determine thetechnical and economic viability of such wells.

13. The water utilization involved in the Project would be 1.1 billionm3 (700 million m3 of groundwater and 400 million m3 of surface water),wrell within the global availabilities. The rate of implementation forgroundwater development of 22,000 ha/year compares with a current rate forthe State as a whole of 60,000 ha/year, while that of 13,000 ha/year forsurface schemes compares with a current level of 20,000 ha/year.

14. While there is over-exploitation of groundwater resources inlocalized areas, significant potential for further dugwell development

ANNEX 1Page 5

still exists in areas where the well density is relatively low. Evenin areas where the density is near the level of maximum utilization, someimprovement of dugwells may be warranted by local conditions. Thus, dugwelldevelopment would take place in several areas in the State, on the basis ofa watershed analysis (paras 20-22).

15. Tubewell development would be restricted to the Tapi/Purna basinand would provide for the installation of 50 in the first year, 100 in thesecond year, and 150 in the third year. This pattern of construction wouldbe influenced not only by the implementation capacity of the organizationsinvolved but also by the necessity of carrying out complementary investiga-tions during the early stages of the Project (para 24).

16. Lift irrigation schemes would be located in river basins throughoutmuch of the State. With the advantages of small organizational units andlow unit investment cost, they show particular promise for future irrigationdevelopment. However, particular attention would have to be given to wateravailability (especially the effect of upstream irrigation developmentsincluding wells), efficient water use, and appropriate design of pumpingand distribution systems (para 25).

Appraisal Criteria and Procedures

17. In order to avoid over-exploitation, to increase the efficiencyof irrigation, and to provide additional data on water resources, a newsystem of appraisal would be adopted which would be based on an analysisof river basins, sub-basins, and elementary watersheds. In this manner,utilization of water resources in a given hydrogeological unit can beplanned on a comprehensive basis with the necessary coordination of dugwells,tubewells, lift irrigation schemes, and other surface water schemes. Asindicated in Appendix 1-1, the present river gaging network covers basinsencompassing about 85% of planned Project investments. Particularly inthese basins, the data from the gaging stations and information from existingirrigation installations are sufficient to proceed immediately with a programof development. Even in basins without gaging stations, it would be possibleto begin a program based on other sources of data, although at a morecautious rate.

18. The first priority for data-gathering would be to install primarygaging stations in those basins currently without them and to add comple-mentary stations in all basins covered by the Project. They would providedifferential gaging of both run-off and base flow. One or more elementarywatersheds in each basin would be equipped to provide related data onrainfall, run-off and fluctuations of the groundwater level. They wouldbe selected on the basis of factors such as geology, topography, vegetationand agro-climatic conditions in order to give as representative a sample aspossible. Data collected from this network would permit a substantial

ANNEX 1Page 6

improvement in the quality of appraisals in the second and third years ofthe Project. Although the proposal submitted by the Maharashtra Governmentindicated that dugwell investments would be limited to specified taluks, itwould be preferable to include all areas of a district or districts whichfall within a given watershed, in order to permit a more integrated develop-me:nt.

19. In the regions upstream from the gaging stations, the existingdel2sity of wells would be determined out to the limits of the watershedboundaries and would be entered on a map of the basin. The maximum welldensity which the watershed could support then would be calculated accordingto the formulas given in para 20. A comparison of the actual density withthe maximum density for the basin would indicate the scope for further deve-lopment.

20. Dugwells would be appraised on a group basis following theframework analysis indicated above. General criteria to be observed wouldbe as follows:

(a) the areas chosen for installation or improvement of dugwellswould comprise at least two underlying basalt layers at adepth no greater than 50 m. Geophysical surveys and in somecases boreholes would be utilized to make this determination;

(b) priority would be given to areas where fluctuations of thegroundwater level are the smallest. Areas with large fluctua-tions are likely to have scarce groundwater resources with lowdependability;

(c) each dugwell would be designed to contain a minimum amount ofwater at the end of the dry season, even in years when thegroundwater level is lowest (100% dependability);

(d) all dugwells would be energized (by electricity as far as possible)with motor of about 5 hp (in any case sufficient to provide aninstant discharge of 10 1/sec) and would be provided with one ormore boreholes; and

(e) each new dugwell would irrigate a minimum commanded area of5 ha while each improved dugwell would have a minimumcommand area of 4 ha. If the size of holdings in an areawere smaller than these figures, appropriate arrangementswould be made to share water.

The performance of each dugwelL is related to its design, location, distancefrorm other wells (spacing), and the total number of wells within the hydro-geological unit. With proper siting, appropriate overall design, adequatestorage capacity and one or more boreholes (up to 50 m deep), tapping 2 andpossibly 3 strata of basalt, an energized dugwell in average conditions

ANNEX 1Page 7

in Maharashtra can sustain a discharge of 150 m /day. The spacing and thenumber of wells are determined from the elementary water balance which canbe written as follows:

water availability - potential utilization

r x a x 100 - R x A x c x n100

where: r - rate of recharge in m 2a - area of recharge (watershed) in kmR - water requirement for the average

cropping pattern in the basin in umA - average size of the area irrigated by

a dugwell in hac - average cropping intensity for the

basin in %n - number of dugwells which the watershed

could support

The number of dugwells which the watershed could support is calculated fromthe above equation by solving for n:

n - r x a x 100R x A x c

100

The maximum density of dugwells (d) for the watershed (in terms of dugwellsper km2) and the spacing (s) between dugwells (in m) are then calculatedas follows:

d - r x 100 -andR x A x c

100

a - 1000a/7s - 1000 xAxc

1 1~00r x 100

21. The maximum density of dugwells to be used in comparison withactual density would be determined on the basis of average values for theparameters r, R, A, and c. For Maharashtra as a whole, a representativemaximum density could be found by taking:

ANNEX 1Page 8

r - 80 m (average recharge)

R - 700 mm (medium irrigation)

c - 140% (semi-intensive cropping)

A - 4 ha (irrigated area for an improved dugwell)

With this data, the maximum density for the state is 2.0 dugwells/km2the existing density varies from 0.3 to 7.0 dugwells/km 2 .

22. Since it is unlikely that an average density of dugwells can bemaintained over the entire area of a watershed, it would be reasonable topermit somewhat narrower spacing in localized areas than would be indicatedby the use of average values in the formula for as long as the totalnumber of dugwells in the watershed did not exceed the number indicated bythe formula for n (using average values). Thus the minimum spacing allowablewould be calculated on the basis of a maximum value for r and minimum valuesfor R, c, and A. Taking

r - 125 mm (maximum recharge);

R 500 mm (light irrigation - supplementary);

c - 120% (extensive cropping); and

A _ 2 ha (irrigated area for an unimproved dugwell),

the formula gives a minimum spacing of s - 300 m.

23. In addition to determining, on a systematic basis, the areas witha favorable potential for further dugwell development and implementinginvestigations to obtain data for improving the quality of appraisals, GSDAwould undertake the training of appraisal teams from the LMB system. GSDAwould provide them with guidelines regarding density and spacing to befollowed in any given watershed and would also give them instructions onsiting and design, and on efficient utilization of irrigation water.

24. Tubewells would be located only in the Tapi/Purna basin. Someexploratory work has been performed, and available information indicate thata program for development of tubewells with a minimum discharge of 15 l/sec(sufficient to irrigate 20 ha under an intensive cropping pattern) at 5 to10 m drawdown is feasible. Care would be taken to locate them outside theareas of high dugwell intensity (over 10/km2) since dugwells often containboreholes and tap the same reservoir as a tubewell. Complementary investi-gations, including geoelectrical surveys, some additional exploratory tube-wells (to be installed by the groundwater unit of the Central Government),pumping tests, and hydro-chemical analyses, would be carried out in conjunc-tion with the first part of the exploitation program in order to provide data

ANNEX 1Page 9

for more intensified development in the second and third years of the Project.Spacing of tubewells eventually would be based on a Theiss-Jacob analysis,but until such time as GSDA is equipped2to perform this analysis, the densityof tubewells would be limited to 0.4/km (about 1/sq mi). Tubewells wouldbe located at least 2 km away from any saline water zone (over 2,500 ppm),detected by geoelectrical surveys and electrical logging. Appraisal of tube-wells would be performed on an individual basis, taking into considerationthe factors mentioned above and utilizing electrical logging techniques todetermine the final design of the assembly. Design features would includecement sealing of the upper part of the assembly and utilization of appro-priate strainers.

25. For lift irrigation schemes, analyses would be performed to establishthe basin-wide relationships between surface and groundwater, insuring thatadequate water supplies would be given to regulation capability on the river,present and planned well development in the basin and pumping from smallponds related to groundwater leakage. Care would be given to the properdesign of each scheme, and adequate pumping capacity would be installed toprovide an instant discharge of 1.6 times the average discharge needed tofulfill the crop water requirements. In general, this criterion would in-dicate an instant discharge capability of 75 1/sec for 100 ha (1.1 cusecfor 100 ac).

Organization and Management

26. The State Government is establishing the Groundwater Surveys andDevelopment Agency (GSDA) within the Department of Industries to carry outgroundwater investigations and drilling operations. It would have sevenfield offices throughout the State. The nucleus of the staff for the agencywould be the staff of the Agriculture Department's present Groundwater Wingwhich is well-qualified and headed by a capable and experienced seniorofficial. However, the field personnel have little experience, and it wouldbe necessary to appoint 3 or 4 senior specialists (hydrologists, geophysicists,water management engineers) to assist the head of the agency in planning andimplementing the GSDA program, and in providing guidance to the field staff.Since the functions of the present groundwater staff are now mainly explora-tory, they would be reoriented to provide more emphasis on guidance andcontrol. The main fields of activity would be as follows:

(a) Investigations of water availability on the basis ofhydrogeological units;

(b) the progressive application of sound water management onall irrigated areas to ensure the efficient utilizationof all water resources;

(c) the establishment of mapping units to prepare maps for theentire State and gradually to develop a global well census;and

(d) the training and supervision of appraisal teams which wouldbe staffed by the LDB system assisted by personnel of therelevant Government departments.

AN,i'_'X 1Pagr. 10

In Lhe case of each investment, GSDA would issue a certificate of non-objection that it complied with the criteria established for minor irrigationdevelopment (Schedule A). No loan would be granted without this certificate.

27. The well construction operations currently undertaken by theAgriculture Department involve primarily the drilling of boreholes in dug-wells and the operation of blasting units for deeping dugwells. Since nowork has been done on tubewells in sedimentary areas, tubewells would beinstalled by private contractors. Close coordination would be exercised withthe Water Resources Division of the Irrigation Department. Since groundwaterand surface water are inter-related factors in global water availability anduse, investigation and control of all water resources might usefully becombined in a single entity at some future date.

23. In order to provide GSDA with the benefit of substantial experiencein water management and program implementation, two consulting engineers(hydrologist, and water management specialist) over a period of two yearswould be included in the Project (Appendix 1-2). These specialists wouldhave high technical qualifications and considerable management experiencein the operation of programs similar to that proposed.

Eq1uipment

29. Four hammer drills would be included in the Project in order toenable GSDA to reach the capacity necessary for implementation of the dugwellprogram and to experiment with deep boreholes (150-300 m) which might yieldgood results for constant discharge wells on the Deccan Plateau. Inaidition, an amount of US$100,000 would be provided for the purchase ofgaging equipment such as river gages, level recorders, rain gages, currentmeters, etc. A detailed list of the equipment required would be preparedby the GSDA, assisted by its consultants, in cooperation with the WaterResources Divsion of the Irrigation Department.

February 11, 1972

ANNEX 1Appendix 1-1Page 1

INDIA


Basins and Gaging Stations for Minor Irrigation Development

The Project would involve minor irrigation development in thebasins listed below with the relevant gaging stations. These basins wouldencompass about 85% of minor irrigation investments. Some basins includedin the Project - Tapi, Wardha and Wainganga - do not have gaging stations andsuch stations would be established as a first priority. Sufficient datais available to undertake further development in all Project basins, butgreater care will need to be taken in those initially without gaging stationsin order to guard against over exploitation.

Krishna Basin (Panchganga, Tamrapani and Krishna Rivers)

Gaging Stations: Terwad, Rajgoli, ShirtiInvestment : Lift irrigationDistricts : Kholapur, Satara, Sangli

Bhima Basin: (Bhima River)

Gaging Station : DhondInvestment : Lift irrigationDistricts : Poona, Ahmednagar

Gaging Station : MingangaonInvestment : DugwellBDistricts : Poona, Satara, Sholapur

Gaging Station : SholapurInvestment : Dugwells and lift irrigationDistrict : Sholapur

Manjra Basin (Manjra River)

Gaging Station : DhanegaonInvestment : Dugwells and lift irrigationDistricts : Osmanabad, Bhir

Godavari Basin (Godavari River)

Gaging Station : NandedInvestment : Dugwells and lift irrigationDistricts : Nanded, Parbhani, Bhir


Gaging Station : MungiInvestment : DugwellsDistricts : Aurangabad, Ahmednagar

Penganga Basin (Penganga River)

Gaging Stations: Chikli, WardhaInvestment : Dugwells and lift irrigationDistricts : Yeotmal, Nanded, Akola

Purna Basin (Purna River)

Gaging Station : GhodasgaonInvestment : Dugwells, tubewells, lift irrigationDistricts : Akola, Amravati, Buldhana

February 11, 1972


INDIA


Terms of Reference for Proposed ConsultancyServices to Groundwater Surveys and

Development Agency

Terms of Reference

1. The responsibilities of experts hired to give technical andorganizational assistance to the Groundwater Surveys and Development Agency(GSDA) would be as follows:

(a) to review and advise on the work program, organization andstaffing of GSDA generally and specifically for the purposeof administering appraisal and recording procedures forproposed minor irrigation investments throughout Maharashtra;

(b) to assist in the establishment of map units and methods ofrecording of information arising from the area census ofwells and other relevant data;

(c) to assist in coordinating all technical data relating togroundwater exploitation including the results of the aerialsurvey covering Tamil Nadu, Andhra Pradesh, Maharashtra,and Mysore;

(d) to advise on the best methods of groundwater exploitationin trap areas and of well development generally in theState;

(e) to advise and assist in the training of staff both withinand outside GSDA concerned with the appraisal of minorirrigation investments;

(f) to advise on a work program to improve water management andcontrol;

(g) to give advice on research matters relevant to the proposedProject investment program;

(h) to advise and assist in any other matters relating to theimplementation of the Project and agreed criteria; and

(i) to select and analyze representative watersheds within theriver basins.


peicifications for and Duties of Posts

2. The qualifications and specific duties of the two groundwaterexperts, who would be engaged for two years, should be as follows:

(a) Chief Advisor

(i) Background should be in hydrology with at least 10years relevant experience. Most of his experienceshould be in groundwater development and planning.He should personally have conducted groundwater in-vestigations in the field and must have a goodorganizational ability. He should be competent toadvise on the mapping and recording of wells and datarelevant to groundwater development. If possible, heshould also have experience in water management andcontrol; and

(ii) He would be responsible for the overall direction ofthe advisory program, giving policy advice to SGD.He would also take an active part in field analysisaspects of the program.

(b) Assistant Advisor

(i) The assistant advisor should have a background inwater management. It is essential that he shouldhave had at least five years practical experience ingroundwater investigation and should be thoroughlyfamiliar with, and experienced in, the methods of re-charge determination and aquifer testing. It would bedesirable that he should have particular experiencewith crystalline rock conditions. He should becapable of advising on the organization of fieldappraisal work and the mapping and recording of data; and

(ii) The assistant advisor would be responsible for advisingfield personnel through normal line channels, in accord-ance with the terms of reference.

February 11, 1972

ANNEX 2Page 1

INDIA


Land Development

Background

1. Land development, involving activities such as construction ofwater courses and field drains, bunding, grading 1/ and levelling, to permitan efficient utilization of water, has been an integral part of irrigationdevelopment since early times. It was not until recently, however, thatland development came to be planned and implemented on a centralized basisin order to overcome the difficulties posed by the higher gradients beingencountered and to ensure the expeditious and effective utilization ofwater over large areas as it became available from the storage systems.Because of the magnitude of the work involved for each individual farmer -again as a result of the higher gradients - financing frequently was pro-vided, either directly or indirectly.

2. Land development operations are carried out either by hired labor,sometimes assisted by bullocks, or by earth moving machinery. However,progress in Maharashtra has been greatly hampered by the shortage of laborin rural areas and the lack of equipment. Consequently, the Projectcontemplates the use of machines for bunding, grading and levelling. Theconstruction of water courses and field drains would be carried out by labor.

Long-Term Land Development Program

3. Maharashtra's flow irrigation system presently commands an area ofabout 243,000 ha, and it is planned to increase this area to approximately526,000 ha by 1981 on a total of 15 irrigation schemes. While some landdevelopment work has been carried out on most of the area now under irri-gation, the shortage of labor and lack of equipment have been major con-straints, and it is estimated that one or more activities remain to becompleted on almost all of the area. Therefore the program for the nextten years is to finish the land development work on the 243,000 ha now undercommand and to undertake work on the additional 283,000 ha to be irrigated,in accordance with the schedule of water availability.

1/ Removal of uneven features without altering the basic slope of the land.

ANNEX 2Page 2

Prject Land Development

h4. The Project would encompass the first three years of the program(1973-1975) and would involve land development work on six irrigation:3chemes, commanding about 175,000 ha (Appendix 2-1). Activities wouldLnclude the levelling of 9,000 ha, grading of 24,000 ha, bunding of 47,000

ha, and construction of water courses and field drains on 115,000 ha 1/.

Components of Project Land Development

The basic components of land development which would be carriedout under the project are as follows:

(a) Water courses and field drains. Water courses would beconstructed to carry water from the 1-1/2 cusec outletsat the lower end of the major distribution system to theindividual farms in the command. The courses would havea cross - sectional area of 0.35 m2 and retaining banks0.3 m high and 0.15 m wide. Similarly, field drains wouldbe constructed to collect seepage and deliver it to thelowest collection point of the major drainage system.Concrete boxes, drops and crossings would be providedwhere required.

(b) Bunding. Graded bunds would be constructed on gradientsof 0.5% or more and would be provided with draw-off channelsand outlets. They would be spaced at distances of 45-85 m,depending on the gradient, and would have a cross - sectionalarea of 0.5 m 2.

(c) Grading. This operation would be limited mainly to removingknolls and filling up holes and gullies, thus leaving thebasic gradient of the land unchanged. The major part of thework would be with a slope of 1-2%. It is estimated that,on average, about 75 m3 of earth per ha would be moved overa distance of about 85 m.

(d) Levelling. This operation is proposed for those areas havingconditions suitable for paddy. It would be carried out onland having a maximum slope of 2% and would reduce the slopeto 0.1%. An average of about 600 m3 of earth per ha would bemoved over a distance of about 85 m.

1/ Since these activities will be implemented in various combinationson land to be developed, the sum of the areas exceeds the totalcommand area.

ANNEX 2Page 3

Equipment Requirements

6. The earth moving equipment proposed for the Project would compriseelevator scrapers (self-propelled) and land planes for the levelling andgrading work, and crawler tractors for bunding.

7. The elevator scrapers would be able to operate completely asself-contained units since the elevator loads soil into the carrying bowlof the machine, therefore avoiding the need for a crawler tractor which isoften required for use with a non-elevating scraper when operating in hard-soil conditions such as are found in Maharashtra. Also, the elevatorscrapers have rubber tires which would enable them to travel on very poorroads and would eliminate the need for a transporter to move them from onearea to another. The machines proposed for the Project would be of 135-160hp and have a carrying bowl of 7-9 m3 capacity, a net weight of 14,000 -18,000 kg, and a gross weight of 23,000 - 30,000 kg.

8. The land planes, with a small capacity bucket the full width ofthe machine, would be used to move earth from high spots to low ones inorder to obtain an even finish on fields that are being levelled or graded.Since they are not self-propelled, they would have to be drawn by tractors.

9. The crawler tractors, equipped with hydraulically - operatedtoolbars, bunding discs, and angledozer blades, would be used for theconstruction of bunds. The discs would be utilized for heaping earth inthe initial operations, and the angledozer blades would be used for compact-ing and finishing bunds.

10. Assuming an eight-month working season of 2,000 hr and work ratesof 0.1 ha/hr for levelling and 0.25 ha/hr for grading, 48 elevator scraperswould be required. Finishing of the levelling and grading operations wouldrequire 20 land planes working at 0.4 ha/hr each. For bunding, 20 crawlertractors operating at a rate of about 0.5 ha/hr each would be required.The total equipment needed for the Project would then be as follows:

Elevator scrapers 48

Land planes 20

Crawler tractors

Bunding 20

Planing 20

11. The Maharashtra Department of Agriculture presently has about 75usable crawler tractors (about 60 hp) of several different makes, over halfof which are lying idle for lack of implements (primarily angledozer blades).The reliability of this equipment is not high because of the spare partsand general maintenance problems posed by the number of makes. However, it

ANNEX 2Page 4

considered that, in addition to the non-land development work now beingjerformed by the machines in operation, they could be used to pull the landplanes. They would also be utilized as a complement to the elevator scrapesfor those areas too small for the efficient utilization of the moresophisticated equipment, assuming that angledozer blades are acquired forthe machines lacking them. Furthermore, they would serve as back-up equip-ment for the bunding work. Therefore all of the equipment indicated above,with the exception of the 20 crawler tractors for drawing the land planes,would have to be acquired under the Project. The rate of work to be under-taken by machines during the Project period is lower than that planned forthe later stages of the program and therefore the Project equipment wouldbe utilized fully throughout its useful life.

Cost Estimates

12. Because various combinations of activities will be performedon any given unit of land, and the cost of a given activity will dependon the conditions existing on that particular unit (slope, etc.),umit costs for the area as a whole and covering all activities are notespecially meaningful. However, average unit costs for grading and level-Ling can be combined with those for the other activities in order to pro-

vide an indication of the principal composites involved. Thus for landwhich would be graded, bunded, and provided with water courses and fielddrains, the unit cost would be Rs 880/ha. Similarly, the unit cost fordevelopment which would include levelling, bunding, and the provision ofwater courses and field drains would be Rs 1780/ha. The total cost ofLand development would be Rs 46.1 million as indicated in Appendix 2-2 with;m analysis by Project year and in Appendix 2-3 with a division by activity.

Organization and Procedures

'13. Maharashtra is establishing the Land Development Agency (LDA) asa semi-autonomous body within the Department of Agriculture. It will beheaded by a senior administrative officer and will assimilate the SoilConservation Wing of the Department. Because of the problems of timing,coordination, and control caused by the need to determine the participationof farmers prior to formulating the work programs, the necessity ofimplementing the work in a short period of time, the maintenance of closetolerances on levelling and grading operations, the seasonal and scatterednature of the work, and the need to protect standing crops, the maincomponents of the land development program would be executed by LDA. Tothe extent feasible, however, LDA would sub-contract selected parts of thework to be constructed under its supervision.

114. LDA would draw up annual work programs detailing areas, operationsschedules, labor recruitment and machinery deployment. It would haveoffices in each of the Project areas to undertake detailed topographicalsurveys, prepare maps, determine the quantities of work involved by activity,calculate the machine and labor requirements, and prepare the cost estimates.]n cooperation with the appropriate extension and development field staff,

ANNEX 2Page 5

the offices would be responsible for informing farmers of the program andobtaining letters of consent from them. Once the costs for individual far-mers had been established, loans for farmers who needed them and could meetthe banking requirements would be arranged through the LDB Primariesaccording to the normal procedures. With the financing arranged, the LDAoffices would supervise the execution of the physical work program.

15. Under the provisions of the Land Improvement Schemes Act 1942,the State Government has the right to execute land development work andrequire repayment by farmers over a 15 year period. This program, in areasoutside the Project would be modified to conform substantially to theprocedures and terms in effect under the Project. Costs for land develop-ment work already carried out would be charged to farmers and would becollected according to the prescribed schedules.

Maintenance

16. Four workshops are located at strategic points throughout theState, but they would have difficulty servicing a larger fleet of earthmoving equipment, particularly one containing the more sophisticatedmachines contemplated under the Project. Therefore the suppliers would berequired to provide most of the maintenance for the equipment. In additionto a complement of spare parts, the suppliers would be directed to providethe specialized items of service equipment, mobile workshops for fieldrepairs, and personnel sufficient to supervise maintenance of the equipment.

Training

17. Efficient utilization of the earth moving equipment would requireshift operation with three operators per machine. In order to instruct theoperators involved on equipment which is in part new to Maharashtra (theelevator scrapers and land planes), the suppliers would be required toinstitute and run training programs utilizing the same models of equipmentwhich would be supplied for the land development work. The programs wouldcover operation and field maintenance of the equipment and would take placeprior to delivery of the equipment for the field work. Training for allthree types of machine (elevator scrapers, land planes and crawler tractors)would be given at the same location(s) in order that all operators wouldhave some familiarity with all machines, thus providing an additionalmeasure of flexibility in the field.

18. In addition to instruction for operators, training would beprovided (also by suppliers) to the personnel who would prepare maps,calculate the work quantities involved, and supervise the use of stakesto identify where cut and fill operations would take place.

19 . Some assistance also would be required for the management of theland development work, in view of the larger fleet and the more sophisticatedequipment involved. This assistance would consist of four specialists with

ANNEX 2Page 6

extensive experience in earth moving operations who would advise on thep:Lanning of machine operations, the deployment of machines, and the pre-paration of maintenance schedules. The advisors would spend most of theirtiLme in the field at the various Project areas. Since several local firmshave had considerable experience with earth-moving machinery, the advisorsshould be available from within the country.

February 11, 1972

ANNEX 2Appendix 2-1

INDIA


SCHEMES IN LAND DEVELOPMENT PROGRAM 1973 - 1975

CommandName of the Scheme District(s) Area

(ha)

Purna Nanded and Parbhani 61,538

Bor Wardha 13,360

Ghod Poona and Ahmednagar 25,263

Nalganga Buldhana 8,747

Gangapur Nasik 16,503

Girna Jalgaon 50,202

TOTAL 175,613

February 11, 1972

ANNEX 2Appendix 2-2

INDIA


Land Development Cost Phasing1/(RB '000)

1972 1973 1974 Total

Purna 706 9,696 9,696 20,098

Bor 347 3,848 3,848 8,043

Ghod 933 4,823 4,823 10,579

Nalganga 343 1,039 1,039 2,421

Gangapur 300 301 301 902

Girna 965 1,546 1,546 4,057

TOTAL 3 594 21 253 21,253 46,100

February 11, 1972

1 / Costs include depreciation on earth-moving equipment.

I li D I A

AMA-RASTRA AGRICULTURAL CREDIT PROJECT

LAND DEMLOPMENT AREA 1/ AND COST ESTIMIATES PY ACTIVITY

;Jater Coursesand Drains 2J BuPuding 2/ Grading Levelling TOTAL

Area Cost Area Cost Area Cost Area Cost Area Cost

(ha) (RsI 0) (ha) (Rs'IOO) (ha) (Rs)0'0) (ha) (Rs,000) (ha) (Rs'00O)

Purna [41,751 1,525 10,799 2,750 11,691 7,015 5,873 8,810 70,114 20,100

Bor 13,355 730 6,425 77T 3,892 2,335 2,802 4,203 26 ,474 8,042

Ghod 15,616 1,653 19,170 3,714 8,059 4,835 251 376 43,096 10,578

Nalganga 6,826 746 4,086 1,033 206 12h 3[5 518 11,[63 2,421

Gangapur 13,246 871 891 31 14,137 902

Girna 24,505 2,523 5,813 1,534 _ __ __ __ 30,318 4,057

TOTAL 115,299 8,048 47,184 9,836 23,848 14,309 9,271 13,907 195,602 46,100

1/ Since all activities are not implemented on every unit of land to be developed, the area totals are not related

to the command areas given in Appendix 2-1.2/ Category covers multiple activities, not all of which are inplemented on the total area indicated.

On-costs of 10% have been included

December 6, 1971 i x

' ._NA

ANNEX 3Page 1

INDIA


The Agricultural Refinance Corporation (ARC)

Organization and Management

1. The Agricultural Refinance Corporation (ARC) was established onJuly 1, 1963, with the objectives of providing medium- and long-term fi-nance to agricultural credit institutions and, at the same time, directingand guiding such institutions toward a development oriented approach intheir operations.

2. ARC's shareholders include the Reserve Bank of India (RBI),central and state-level land development and mortgage banks and coopera-tive banks and other institutions (scheduled banks, the Life InsuranceCorporation of India, insurance and investment companies, and others ap-proved by the Government of India). Of the initial 5,000 shares issued,the law provided that RBI shall subscribe to at least 50%, the centralland mortgage banks and state cooperative banks to no more than 30%, andother institutions to no more than 20% and future issues of shares wouldbe allocated in the same proportion. The initial shares issued wereguaranteed a dividend of 4-1/4% per annum.

3. ARC's management is vested in a Board of Directors of nine mem-bers, three of whom are elected and the rest nominated. Three directorsrepresent RBI (a Deputy-Governor is Chairman of the Board), three theGovernment of India (at present the Secretary, Department of Agriculture,and the Additional Secretary, Department of Cooperation of the Ministryof Agriculture and a Joint Secretary, Department of Banking of the Ministryof Finance), and three directors are elected one each by the central landdevelopment banks, by the state cooperative banks, and by the Life InsuranceCorporation of India, scheduled banks, and other insurance and financinginstitutions.

4. The Managing Director is the chief executive officer and isassisted by a managerial staff of nearly 90 (as of June 1971) of whom65 are based at ARC's head office. Until early 1970, ARC did not employany specialists, instead relying on a panel of consultants for technicaladvice in appraisal and supervision work. To supplement consultants'advice, ARC has established a Technical Division which, as of June 1971comprised three agricultural specialists and an agricultural economist andto which ARC proposes to make further appointments. With the increasingvolume of lending, ARC recognizes the need to build up its staff at alllevels and has prepared a staff development plan to cover the period tothe end of 1973.

ANNEX 3Page 2

ARC's head office is in Bombay. It has 13 regional offices.A½medabad, Bangalore, Bhopal, Bhubaneswar, Calcutta, Chandigarh,

Hyderabad, Jaipur, Kanpur, Madras, New Delhi, Patna, and Trivandrum) whichasEsist banks and State Governments in formulating agricultural developmentprojects for financing, clarify ARC's policies and procedures when required,undertake pre-appraisal of projects submitted and supervise general executionof projects under ARC financing. About 25 managerial staff are employed inthe Regional Offices. -

6. In general, ARC's charter provides that it shall be guided bysuch directions in matters of policy involving public interest as GOImay, after consulting RBI, give in writing. ARC can extend financial as-sistance only to central or state-level land development banks, state co-opoerative banks, and scheduled banks: in exceptional cases, and with RBIapproval, it can also lend directly to a primary cooperative at the farmlevfel. Refinance is provided through purchases of special debenturesfloated by central or state-level land development banks and through loansto state cooperative banks and scheduled banks.

7. Until June 1966, it was not normally ARC's policy to refinanceconstruction and energization of wells by individuals unless the outlayinlvolved was large and development was envisaged through a cooperativesociety organized for the purpose. In July 1966, however, ARC not onlyremoved this restriction, but also circulated a model scheme for minorirrigation development by farmers in compact areas. Thus, began ARC'spoLicy of financing individual farmers on the basis of project models.

8. At the beginning, ARC's policy was to finance no more than 75%of a project, leaving the balance to be contributed by State Governments.However, the generally strained resources position of most State Govern-ments considerably restricted the extent to which land development bankscould avail themselves of refinance facilities from ARC. Accordingly,to stimulate investments in minor irrigation especially, ARC increasedits support of such investments to 90%, beginning with all projects sanc-

tioned in 1967/68.

9. Special debentures purchased by ARC from central land developmentbanks must be guaranteed by the State Government concerned; in addition,debentures are backed by a charge on all mortgages resulting from loansrefinanced under the issue. In the case of debentures, ARC requires thatcollections from farmers be lodged in a sinking fund. The sinking fund isinvested in GOI securities and debentures of other land development banks.It may also be used to repurchase the land development bank's own debentures.Since from the view point of financial returns, the sinking fund arrangementsdo not benefit a land development bank as issuer of debentures, ARC hasdecided that repayments of its refinances under IDA supported projectsshould approximately match those of ultimate borrowers to lending banks.

ANNEX 3Page 3

10. ARC will refinance agricultural development schemes which aretechnically feasible, financially justified, and are within a reasonablycompact area for facility of loan evaluation and supervision. The schemecan involve just one farmer, a group of farmers, or an association offarmers. Preference, however, is given to schemes involving a large numberof farmers.

11. Technical evaluation of schemes is carried out by consultantsdrawn from a panel approved by the Government of India. Services of theCentral Ground Water Board (formerly the Exploratory Tubewells Organization),the Geological Survey of India and the various commodity boards are alsoused and ARC prescribes the terms of reference in every case. Some importantpoints examined in the case of schemes for minor irrigation include, anestimate of the quantum of water proposed to be tapped, annual water re-charge, annual water draft, taking into account the existing and proposedwells, and the type of pump sets needed. With the establishment of its ownTechnical Division, increasing back-up support is now available from ARC'sown specialist staff which will provide a foundation of technical expertisefor scheme appraisal and supervision throughout India.

12. Economic evaluation of schemes is performed by ARC staff. Someof the important aspects appraised include cost estimates, the suitabilityof the cropping pattern recommended, inputs available for development,farmer's repayment capacity, efficiency of the project executing agency, ar-rangements for the provision of short-term credits and marketing arrangements.Preappraisal is done generally by regional offices, but final evaluation ismade in Bombay.

13. Periods of refinance are determined after a study of the repaymentcapacity of farmers based on farm models. Refinance terms for medium-termprojects are 3 to 5 years and for long-term projects are noa generally 12to 15 years.

14. With effect from November 1970 ARC's general lending rate wasraised from 6 to 6-1/2% per annum. Scheduled banks are required to chargetheir borrowers no more than an additional 2-1/2% per annum and while landdevelopment (and mortgage) banks are not bound by the same restrIction,they nevertheless generally follow the same interest mark-up and noneexceeds it. ARC collects a commitment charge of 1/3 of 1% on the amountnot used in any one year according to a schedule of expected withdrawalsapproved for a scheme.

Lending (Refinancing) Operations

15. The following table shows the progress in ARC's lending (lesssubsequent cancellations) during the eight years of its existence:

ANNEX 3Page 4

Number ofSchemes Total Scheme ARC

Year Approved Costs CommitmentRs M Rs M

1963/64 3 27.20 24.501964/65 10 206.00 168.801965/66 24 179.60 141.801966/67 15 105.30 85.301967/68 89 681.60 586.401968/69 108 792.10 693.201969/70 142 927.80 709.201970/71 100 621.50 539.20

491 3,541.10 2,948.40

Less reductions orwithdrawals 33 611.10 461.80

458 2.930.00 2,486.60

16. During the initial years, ARC transacted very little businessduie to the need for laying the groundwork and bases for its operationsmid for building its staff. An important deterrent, however, was ARC'spolicy, at the time, of refinancing only projects in which developmentwas envisaged through a cooperative society organized for the purpose.In June 1966, this restriction was removed; furthermore, ARC agreed torefinance up to 90% of loans for minor irrigation, against 75% previously.Thus, during the last three years, projects approved for refinancing weremore than six times the number during the first four years.

17. As may be expected, most of the schemes sanctioned were forpirojects financed by land development or mortage banks:

ARC CommitmentRs M % of Total

(a) Land development banks 2,223.70 89.4

(b) State cooperative banks 114.00 4.6

(c) Scheduled commercial banks 148.90 6.0

Total 2,486.60 100.0

18. About 85% of the cost of schemes approved for refinance werefor minor irrigation and land development:

ANNEX 3Page 5

Total ARCSchemes Approved Commitment

x of % ofNumber Total RS M Total

(a) Minor irrigation 237 51.7 1,694.80 68.2(b) Land development 43 9.4 434.80 17.5(c) Tractor & Power Tillers 10 2.2 47.10 1.8(d) Soil conservation 2 .4 19.50 0.8(e) Plantations 138 30.1 189.70 7.6(f) Poultry 7 1.6 4.80 0.2(g) Fisheries 10 2.2 37.60 1.5(h) Dairying 5 1.1 13.80 0.6ti) Storage 6 1.3 45.10 1.8

Total 458 100.0 21486.60 100.0

Source of Funds

19. Apart from share capital, ARC can raise funds from the followingsources: (a) borrowings from GOI and from any entity approved by GOI; (b)issue and sale of debentures and bonds guaranteed by GOI; (c) borrowingsfrom RBI for periods not exceeding 18 months; and (d) deposits from GOI,the State Government, and local authorities for periods not less than 12months. Total borrowings and deposits received may not exceed 20 timesthe sum of ARC's capital and surplus reserves.

20. ARC's borrowings and receipts of deposits during the eight yearsof its existence are summarized as follows:

Borrowings DepositsYear GOI Market RBI Total Received

1963/64 50.00 50.00 -1964/65 - - 1.131965/66 - - - - 1.251966/67 - - 1.261967/68 30.00 - - 30.00 1.251968/69 177.50 - - 177.50 1.261969/70 190.00 109.38 - 299.38 1.251970/71 220.00 85.25 75.20 380.45 1.25

Total 667.50 194.63 75.20 937.33 8.65

Borrowings from GOI, none of which as of June 30, 1971 included IDA funds,have been on the following terms:

ANNEX 3Page 6

Rs M Interest P.A. Repayment

50.00 None 30 years with 15-year grace30.00 5-1/2 At end of 15 years

100.00 5-1/2 At end of 15 years487.50 5 At end of 9 years

With effect from June 1, 1971, GOI interest rates to ARC have been increasedby 1/2% per annum and are now therefore 5-1/2% on loans up to 10 years and6% on loans with longer maturities. Since August 1968, ARC has been alloweda rebate of 1/4% on timely payments of interest on GOI borrowings. The twomarket issues of ARC bonds are both dated 1982 and are at an interest rateof 5-3/4%. Short-term borrowings from RBI are at bank rate, presently 6%per annum. The special deposits represent dividends payable on ARC's sharesheld by RBI which, under the law, must be held by ARC as special deposits.No interest is paid on them.

21. A comparative statement of ARC's operating results since itsestablishment until 1970/71 is given in Appendix 3-1 and is summarizedbelow (in Rs million):

NetIncome Statutory Surplus

Gross Total Net Income Before Dividend orYear Income Expenses Income Tax Dividends Liability Deficit

1963/64 3.75 0.30 3.45 1.80 1.65 1.91 -0.261964/65 4.00 0.39 3.61 1.76 1.85 2.13 -0.281965/66 4.35 0.48 3.87 2.27 1.60 2.13 -0.531966/67 4.98 0.61 4.36 2.40 1.97 2.13 -0.161967/68 6.00 1.67 4.33 2.38 1.95 2.13 -0.181968/69 11.04 6.29 4.75 2.61 2.14 2.13 0.011969/70 27.28 20.55 6.75 3.70 3.05 2.13 0.921970/71 42.66 35.72 6.94 3.44 3.50 2.13 1.37

22. In the first three years of ARC's operations, income was derivedmostly from interest on investments. Beginning 1966/67, this patternchanged when ARC began to expand rapidly its refinancing operations (para.15). In 1970/71 interest received from loans and debentures represented94% of total income received.

23. Benefitting from cost-free funds available to it during thefirst four years of its existence, ARC's main items of expense at thetime was salaries and employee benefits. Needing more funds for its ex-panded operation, interest paid on borrowed money has since 1967/68 beenan important item of expenses. In 1970/71 interest paid on borrowingsand salaries and employee benefits were 86% and 10%, respectively, oftotal expenses.

ANNEX 3Page 7

24. Until 1968/69 net income after taxes had not been sufficientto meet the statutory dividend liability of 4-1/4% payable annually toARC's initial shareholders (para. 2) and the annual deficiency had tobe made good by GOI in accordance with its guarantee under the law. ARCwill have to reimburse these amounts out of future profits. In 1968/69however, profits were sufficient to meet the statutory dividend and leaveARC with a small surplus and this position has significantly improved inthe subsequent two years. The scale of future profits will largely dependon ARC's future borrowing rates and the extent to which it has to borrowfrom the market at higher rates than it has hitherto had to pay GOI. Tohelp offset this, steps are now being taken to enable ARC to borrow fromthe National Agricultural Credit (Long-term Operations) Fund of RBI atconcessional rates which, although not yet fixed, might be at about 4-1/4%per annum. This would broadly enable ARC to maintain its interest margin.For illustrative purposes, a five-year projection of ARC's future operatingresults (Appendix 3-2) assumes an overall lending rate of 6-1/2%; it doesnot take into account the probability of ARC borrowing at lower rates fromthe RBI Fund.

25. ARC is in good financial condition (Appendix 3-3). Its equityposition as of June 30, 1971, is unimpaired by losses and its assets werein GOI securities and debentures of land development banks, which areguaranteed by State Governments. A five-year projection of ARC's financialcondition is given in Appendix 3-4.

26. In accordance with its charter, ARC's accounts are auditedannually by accountants duly qualified under the all India Companies Actof 1956 (the present auditors are Messrs. K. S. Aiyar and Co.). Under thesame Charter, GOI can appoint the Comptroller and Auditor General of Indiato examine and report on the accounts of ARC. To date, GOI has not foundthe need to exercise this power.

February 11, 1972

I N D I A


AGRICULTURAL REFINANCE CORPORATION

Condensed Statements of Net Income

1964/65 to 1970/71

1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71

Rs M % Of RsM % of Rs M % of Rs M % of Rs M % of Rs M % of Rs M % of

Total Total Total Total Total Total Total

Income Income Income Income Income Income Income

INCOME

Interest Received on Loans and

Debentures __ -- 1.09 25.1 3.06 61.3 4.83 80.5 10.20 92.4 24.09 88.31 40.12 94.1

Interest and Other Income on Investments3

.9 9

100.0 3.25 74.9 1.92 38.7 1.17 19.5 J9. 84 7.6 3.18 11.69 2.54 5.9

Total Income 3.99 100.0 4.34 100.0 4.98 100.0 6.00 100.0 11.04 100.0 27.27 100.00 42.66 100.0

EXPENSES

Interest Paid -- -- -- -- -- -- 0.46 7.8 4.42 40.0 17.07 62.60 30.80 72.2

Salaries, Allowances, Consultants'Fees, and Employee Benefits 0.27 770 0.36 8.4 0.47 9.5 0.91 15.2 1.43 13.0 2.04 7.48 3.40 8.0

General and Administrative Expenses 0.10 2.6 0.11 2.6 0.13 2.6 0.29 4.8 0.43 3.9 1.42 5.21 1.48 3.6

Depreciation of Assets 0.01 0.1 0.01 0.1 0.01 0.1 0.01 0.1 0.01 0.1 0.02 0.07 0.04 0.1

Total Expenses 0.38 9.7 0.48 11.1 0.61 12.2 1.67 27.9 6.29 57.0 20.55 75.36 35.72 83.7

NET INCOME BEFORE TAXES 3.61 90.3 3.86 88.9 4.37 87.8 4.33 72.0 4.75 43.0 6.72 24.64 6.94 16.3

Taxes Paid or Payable 1.76 44.1 2.27 52.2 2.40 48.3 2.38 39.6 2.61 23.7 3.70 13.56 3.44 8.1

NET INCOME AFTER TAXES 1.85 46.2 1.59 36.7 1.97 39.5 1.95 32.4 2.14 19.3 3.02 11.08 3.50 8.2

December 6, 1971

Wtm

INDIA

MAHIARASHTRA AGRICULTURAL CREDIT PROJECT


CONDENSED BALANCE SHEETS

At End of Fiscal Years Indicated

1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71

Rs M Change from Change from Change from Change from Change from Change from

RB M Previous Date Es M Previous Date Rs M Previous Date Rs M Previous Date Rs M Previous Date Rs M Previous Date

ASSETS

Cash on Rand and in Banks 0.16 0.02 (0.15) 0.06 0.04 0.09 0.03 0.06 (0.03) 0.04 (0.02) 100.01 99.97

Investments 99.09 55.21 (43.88) 35.79 (19.42) 8.40 (27.39) 5.14 (3.26) 24.99 19.85 00.20 (24.79)

Loans __ 1.47 1.47 3.03 1.56 7.35 4.32 25.49 18.14 42.93 17.44 76.95 34.02

Debentures Purchased 4.50 47.53 43.03 66.73 19.20 119.04 52.31 278.55 159.51 546.04 267.49 812.39 266.35

Other Assets 1.02 2.34 1.33 3.38 1.04 6.46 3.08 13.58 7.12 17.31 3.73 27.30 9.99

Total Assets 104.77 106.57 1.80 108.99 2.42 141.34 32.35 322.82 181.48 631.31 308.49 1,016.85 385.54

LIBILITIES AND CAPITAL EQUITY

Loans from Government ofIndia and Others 50.00 50.00 __ 50.00 80.00 30.00 257.50 177.50 556.88 299.38 1/ 862.13 305.25 2/

Special Deposits 1.13 2.39 1.26 3.64 1.26 4.90 1.26 6.15 1.25 7.40 1.25 8.65 1.25

Other Liabilities 3.64 4.18 0.54 5.35 1.16 6.44 1.09 9.16 2.72 16.94 7.78 93.77 77.64 3/

Total Liabilities 54.77 56.57 1.80 58.99 2.42 91.34 32.35 272.81 181.47 581.22 308.41 964.55 384.14

Capital - Paid-up 50.00 S0.00 __ 50.00 _ 50.00 50.00 50.00 50.00

Reserves and Surplus N N N N N N N 0.01 0.01 0.09 0.08 2.30 1.40

Total Capital Equity 50.00 50.00 N 50.00 N 50.00 N 50.01 0.01 50.09 0.08 52.30 1.40

Total Liabilities andCapital Equityies4.7 106.57 1.80 108.99 2.42 141.34 32.35 322.82 181.48 631.31 308.49 385.54

Note 1/ Includes Rs 110 million public bond issue

2/ Includes Rs 85 million public bond issue3/ Includes Rs 75 million short-tnr borrowings from RBI

N = Negligible

December 6, 1971

IND IA



PROJECTED BALANCE SHEETS

As of Dates Indicated

June 30, 1972 June 30. 1973 June 30. 1974 June 30. 1975Rs M Change from 1/ Rs M Change from Rs M Change from Rs M Change from

Previous Date Previous Date Previous Date Previous Date

ASSETS

Cash on hand and in Banks 0.10 (99.91) 0.15 0.05 0.15 -- 0.20 0.05Investments 5.00 4.80 5.00 -- 5.00 -- 5.00 --Loans to Commercial Banks:

IDA Projects 2/ 50.00 50.00 220.00 170.00 250.00 30.00 230.00 (20.00)Others 100.00 23.05 160.00 60.00 200.00 40.00 250.00 50.00

Lending to LMBs for IDA Projects 2/ 256.00 256.00 835.00 479.00 990.00 155.00 905.00 (85.00)LNB Debentures 1,090.00 277.61 1,100.00 110.00 1,400.00 300.00 1,900.00 500.00Other Assets 19.90 (7.40) 25.00 5.10 30.00 5.00 35.00 5.00

1,521.00 504.15 2,345.15 824.15 2,875.15 530.00 3,325.20 450.05

LIABILITIES AND EQUITY

Loans from GOI (IDA Funds) 2/ 262.00 262.00 871.00 509.00 1,020.00 149.00 1,120.00Other Loans from GOI and Other Sources 1,130.00 267.87 1,286.00 256.00 1,653.00 367.00 1,990.00 437.00Other Liabilities 24.78 (77.64) 30.10 5.32 33.47 3.37 35.89 2.42

1,416.78 452.23 2,187.10 770.32 2,706.47 519.37 3,145.89 439.42

Capital Paid-up 100.00 50.00 150.00 50.00 150.00 -- 150.00 --Reserves:

At Beginning of Year 2.30 -- 2.42 -- 8.05 -- 18.68 --Projected Net Income 6.17 -- 12.00 -- 17.00 -- 17.00 --Total Available 8.47 -- 14.42 -- 25.05 -- 35.68 --Mandatory Dividend Due 3/ 4.25 6.37 -- 6.37 -- 6.37 --At End of Year 4.22 1.92 8.05 3.83 18.68 10.63 29.31 10.63

Total Capital Equity 104.22 51.92 158.05 53.83 168.68 10.63 179.31 10.63

TOTAL LIABILITIES AND EQUITY 1,521.00 504.15 2 345.15 824.15 26875.15 530.00 3,325.20 450.05

1/ See Appendix 3-32/ Gujurat, Punjab, Andhra Pradesh, Haryana, Tamil Nadu, Mysore, and Maharashtra Projects. '3/ Although mandatory dividend of 4 1/4% only applies to the initial Rs 50 million equiity capital, this rate of dividend has been included on all issued equity capital

in the above table.

December 6, 1971

ANNEX 4Page 1

INDIA


Maharastra State Cooperative Land Development Bank Ltd.and Primary Land Development Banks

A. The Structure of the Maharashtra Land Development Bank System

1. The land development banking system in Maharashtra is federal incharacter with the Primary Banks, which operate at the district level,federated into Maharashtra State Cooperative Land Development Bank (LDB)at the apex level. Although each of the Primary Banks is theoreticallyindependent, LDB has the power to control their operations, as it is theonly permitted source of their borrowing and can withhold funds from anyPrimary which does not meet its requirements.

2. For all practical purposes, therefore, LDB and its federatedPrimary Banks can be considered as a single entity with an operationalrelationship similar to that of a bank head office to its branches. ThePrimaries (under LDB direction and guidance) are responsible for making loansto their members, such lending being wholly refinanced by LDB. As of June 30,1970 the 26 Primary Land Development Banks had a total membership of about570,000.

3. In the paragraphs immediately following, the operations of LDB andthe Primary Banks are considered separately in regard to their organization,management and resources. Their lending procedures and operations, beingclosely integrated, are considered together in the succeeding sections.

B. Maharashtra State Cooperative Land Development Bank Ltd (LDB)

Organization

4. LDB was registered in December 1935 and its operations originallycovered areas which now form parts of the States of Gujarat and Mysore.The remaining outstanding loans in Mysore were transferred to the MysoreCentral Cooperative Land Development Bank in 1970, and those in Gujaratto the Gujarat State Cooperative Land Development Bank in 1971.

5. LDB's head office is in Bombay, the State capital, and it alsocontrols Primary Bank operations through regional offices based in thedivisional headquarters of Bombay, Poona, Aurangabad and Nagpur.

ANNEX 4Page 2

Board and Management

6. LDB is regulated by the Maharashtra Cooperative Societies Act of1960. Under the General Body, with powers equivalent to an annual generalmeeting of shareholders in a joint stock company, LDB's affairs are directedby a board which may not exceed 40 and which, as of June 30, 1971 had 30members. These comprised 20 members elected by the Primary Banks, 5 repre-senting non-borrowing shareholders and 5 members ex-officio (the Commissioneraad the Joint Registrar of Cooperative Societies, the Joint Director ofAgriculture, the Managing Director of the State Cooperative Bank and theManaging Director of LDB itself). To facilitate administration, most of theBoard's power devolves to four committees.

7. The Managing Director is LDB's chief executive officer, the presentincumbent being on secondment from the Reserve Bank of India (RBI). Underhim is the Manager, on secondment from the State Cooperative Department, andthe Chief Technical Officer who recently assumed responsibility for thecontrol of technical staff. While the three appointments were made fromoutside specifically to strengthen LDB's management, it would be desirablefor staff continuity and morale that consideration in future be given totraining members of LDB's own staff to fill at least one of these seniorpositions in due course. LDB has a total staff of 450 of whom 40 are ofmanagerial status; 18 are qualified in engineering or agriculture and theseform the technical cell. In addition, the Primary Banks together employ afurther 32 qualified technical staff.

8. As in the case of similar banks elsewhere in India, LDB hasresponded quickly to the idea that it should have sufficient qualifiedtechnical staff to help prepare development schemes, to assess the reliabilityof appraisals made by consultants or staff of Government's technical depart-ments and generally advise management on technical matters. Now there is adanger that such technical staff will become too large and, with ill-definedobjectives, will tend to become involved in basic technical appraisal workwhich properly should remain the responsibility of the State Government. Atthe same time it is evident that too many of the schemes submitted by thePrimaries to LDB for approval (i.e. for loans of over Rs 10,000 each) areformally approved without technical review. It is therefore important thatLDB should give careful attention to the functions of both its own and thePrimaries' technical staff and organize their activities in such a mannerthat duplication is avoided and that sound technical advice can be given onschemes which have to be approved by LDB.

Source of Funds

9.. As an apex organization, LDB's share capital is contributed by thePrimary Banks (at the rate of 5% of borrowings from LDB) and the StateGovernment, the proportions being subject to periodic review by RBI. As ofJime 30, 1971 LDB's total subscribed capital was Rs 89 million (againstRs 100 million authorized), of which the State Government's contribution wasRs 11 million or about 12%.

ANNEX 4Page 3

10. In addition to the short-term finance provided by the MaharashtraState Cooperative Bank (which is essentially a short-term lending institution),LDB's borrowings derive from the issue of debentures. These are guaranteedby the State Government as to the payment of interest and repayment ofprincipal and are secured by the mortgages financed from the proceeds of aparticular debenture issue. As in the case of similar banks elsewhere inIndia, LDB floats three types of debentures:

(a) Ordinary or Regular Debentures. These debentures area purchasedmainly by various institutions such as the RII, the Life InsuranceCorporation in India, the State Bank of India, land developmentbanks in other states (from their sinking funds) and the StateGovernment, the balance being sold on the open market. In 1969/70the average cost of borrowing on ten- and fifteen-year debentureswas 6.1% per annum and the interest rate on such governmentguaranteed borrowings was expected to increase by 1/4% during1970/71.

(b) Rural Debentures These are sold only to individuals sincetheir purpose is to encourage the mobilization of local savings.To stimulate their sale, RBI subscribes in the ratio of eight toevery seven rural debentures sold to private persons and receivesinterest at 1% less than the regular rate. Hitherto, asgovernment guaranteed securities, the interest rate was limitedto a maximum of 6-1/4% per annum but early in 1971 the RBI agreedto permit land mortgage/development banks to issue bonds ontheir own security (i.e. without Government guarantee) withoutinterest rate restriction. At the same time the RBI hasannounced that in future land mortgage/development banks mustissue rural debentures to the extent of a prescribed proportionof their ordinary debenture programs or forfeit a part of theofficial support for these programs. In 1970/71 the prescribedamount of rural debentures is 2-1/2% of the ordinary program,increasing to 5% in 1971/72.

(c) Special Debentures. These debentures are issued for financingagricultural projects approved by the Agricultural RefinanceCorporation (ARC). They are subscribed by ARC and the StateGovernment in proportions determined by ARC which are currently9:1 for minor irrigation schemes and 3:1 for other schemes.Interest paid on these debentures is also decided by ARC and thepresent rate is 6-1/2% per annum.

LDB's borrowing may not exceed 20 times paid-up share capital and reserves.

11. The following table shows the growth of LDB's outstanding debentureborrowings as of the dates shown (Rs million):

ANNEX 4Page 4

June 30, 1969 June 30, 1970 June 30, 1971

Ordinary Debentures 924.9 1,126.0 1,319.6

]Rural Debentures 43.9 45.4 43.9

Special Debentures 21.1 59.8 84.9

Total 989.9 1,231.2 1,448.4

Significant in the above table are the relatively small amounts raised throughrural debentures (LDB's quota in 1970-71 is Rs 5.9 million). It is estimated1:hat as of June 30, 1971, farmers' direct contribution to the LDB systeml:hrough rural debentures and share-holdings was about Rs 177 million. Theabove table also shows that ARC's contribution to LDB financing (throught:he special debentures) has not been significant to date, and it has there-iore had relatively little influence on LDB policies and procedures.

C. Primary Land Development Banks

Clrganization and Management

12. Unlike most other land development bank systems in India, theP'rimary Banks in Maharashtra are organized on a district basis and not on thesmaller administrative unit of a taluk (tehsil). There are thus only 27 PrimaryBanks in the State and, although they operate through branches in the taluks(as of June 30, 1970 there were a total of 252 branches), the large operatingunit has helped develop a stronger financial base at the Primary level.

13. Membership in the Primaries is of two types. First, the borrowing(or A Class) membership is open to individuals and cooperatives (who must belandowners) and second, the associate (or B Class) membership which existsto provide support for the movement without borrowing rights. As of June 30,1970 total membership was 568,000 of which 500,000 comprised A class members.

14. The direction and management of eacb Irimary follows the LDB patternulth overall control vested in the general meeting, and direction exercisedby a board of elected members. The manager of each Primary is appointed bythe Board and their quality is variable. As part of the general need toimprove the quality of management, it would be desirable that the LDB systemin Maharashtra follow the practice adopted in other states of requiring themanagers of Primaries to be on the regular staff of the apex bank andtherefore acceptable to it.

ANNEX 4Page 5

15. The Primaries main independent functions are the approval of loans(of up to Rs 10,000 without further authority), the appointment of staff andthe declaration of dividends. Their main activities are the appraisal ofloan applications, disbursement of approved loans and control of utilization.

16. Three categories of staff are involved in the Primaries' work.First there is the Bank's own supervisory staff who are mainly concerned withthe processing of loan applications and the administration of disbursements.Second is the staff of the State Government's technical departments (e.g.agriculture and public works) who carry out the technical evaluation ofindividual schemes. Third is the Government's Cooperative Department staffwho exercise the statutory audit and other regulatory functions and are tosome extent concerned with land titles. Because of the close involvement ofGovernment staff, the District Collector is concerned with coordinating thevarious activities of the Primary Bank.

Sources of Funds

17. The Primaries' main sources of funds are members' share capital,undistributed profits and loans from LDB. Each Primary Bank has its ownshare capital and borrowers are required to hold share capital to the extentof 10% of the value of their loans. Similarly, Primaries must invest inLDB shares to the extent of 5% of their borrowings therefrom. The sharecapital contribution required from members and the 5% retained by the PrimaryBanks constitute the highest levels existing among the land mortgage/develop-ment banks in India, the more usual practice being a total 5 or 6% sharecapital requirement of which all but 1% is usually re-invested in the apexbank. As a result of the equity arrangements in Maharashtra, the PrimaryBanks have relatively large resources of their own and this in turn has madethem more independent of LDB. It has also enabled the Primaries to maintaina a higher level of repayments to the apex bank than that of ultimateborrowers to them (para 26).

D. Overall Lending Procedures and Operations

Loan Purposes

18. The Primary Banks lend for a wide range of agricultural purposeson a medium- and long-term basis. These purposes include:

(a) The construction, improvement and major repair ofminor irrigation works.

(b) Land drainage, reclamation and improvement.

(c) Construction of farm buildings (excluding housing).

(d) Purchase of farm machinery including tractors and implements.

ANNEX 4Page 6

(e) Purchase of land occupancy rights and redemption of mortgages.

(f) Such other purposes as the Board may determine to be for landimprovement or agricultural production.

19. Because of the shortage of funds, LDB has laid down a maximum loanlimit of Rs 20,000 for a well and Rs 45,000 for farm mechanization. In thecase of well investments, however, the maximum amount can be increased withoutlimit providing the appraising technical officer certifies that this wouldbe justified.

I.ending Procedures

20. Applications for a loan have to be made to the Primary Bank ofwhich the applicant is a member and are registered in chronological order.Apart from the technical feasibility of the proposed investment, the loanaippraisal consists essentially of an assessment of the prospective borrower'srepayment capacity, a valuation of his land and an examination of his landtitle (the latter is established by a public inquiry conducted by an officerof the State Cooperative Department).

21. Land is required as security on all loans and, hitherto, LDB hasestablished the land value on the traditional basis of taking a multiple ofthe annual land revenue payable. In the case of investments in minorirrigation and farm mechanization, the multiple is five hundred and, inaddition, the cost of the proposed investment is added; for other investmentpurposes the multiple is 300. Because the system is complicated and isbased on an outdated land revenue assessment, ARC is, as a matter of generalpolicy, requiring land mortgage/development banks to value land at itspost-development worth which can be done by taking the sale price of com-parable land in the area. It is recommended that this procedure be adoptedin Maharashtra. At present the loan limit is 50% of the value of landoffered as security, but this criterion could be an unreasonable constraintin the case of farmers with small holdings. Therefore, consideration shouldbe given to increasing the limit to 75% of the developed value of land.

22. On completion of the appraisal procedures, the application issubmitted to the managing committee of the Primary Bank which may approve1oDans up to Rs 10,000 without further reference; above this amount but belowRs 20,000 loans have to be authorized by LDB 's regional committee and forRs 20,000 and above by LDB's head office. When a loan has been appraised,d isbursements are made to the third parties concerned in the case of the pur-chlase of land, tractors or machinery or of expenditures for land developmentor well drilling by contractors; loans for other purposes are disbursedin installments after confirmation of proper utilization has been obtained.ALL payments are made by checks drawn on the bankers of the Primaries, andborrowers' investments are inspected after disbursement. LDB subsequently

ANNEX 4Page 7

advances loans to the Primaries against the security of mortgages collectedby them, LDB's loan terms matching those of the Primaries' lending to theirmembers.

Lending Terms and Interest Rates

23. As for similar banks elsewhere in India, a borrower's share contrib-ution to his Primary in effect represents his down payment against a loan.With the equity contribution at 10%, farmers in Maharashtra are thus in thisrespect making a greater contribution to the mobilization of local resourcesthan elsewhere in India. Loan terms are a maximum of 15 years for soilconservation and land development schemes, 13 years for lift irrigationschemes and 12 years for dugwells. The relatively low discharge from manydugwells has been advanced as an argument in favor of long maturities on loansfor this type of investment. However, adherence to sound technical criteriawould eliminate the need for long repayment terms and would reduce therisk of LDB financing sub-economic wells.

24. In January 1967, the State Government discontinued the payment ofinterest subsidies on various types of loans amounting to about 3% per annum,though the subsidy is still paid to LDB on loans made before that date. Thepresent lending rate from the Primaries to individual farmers is 9% perannum on all investments. LDB refinances the Primaries at 7-1/4% per annumproviding them with a substantial margin of 1-3/4% and leaving LDB with amargin of just over 1%. The latter is inadequate to meet the cost of anincreasing staff and also provide reasonable profits. Furthermore, thelending rate of 9% does not, in the present India conditions, permit aworthwhile mobilization of rural savings.

Lending Operations

25. LDB's loan portfolio has risen sharply over the last three years,from Rs 672 million as at June 30, 1967 to Rs 850 million the following yearand Rs. 1,042 million as at June 30, 1970, giving it the largest portfolioof any land mortgage/development bank in India. About 85% of LDB's lendinghas been for minor irrigation investments or connected purposes; lendingfor farm mechanization has been small and represents only 2% of the total.The Primary Banks are currently making about 90,000 loans annually.

E. Overall Operational Results

Repayment Arrears

26. The Maharashtra LDB system has for many years had a poor recordof loan repayments. The following table shows the arrears by amount and alsoas a percentage of total collections due (principal and interest) fromultimate borrowers to the Primary Banks and from the Primary Banks to LDBover the last 10 years.

ANNEX 4Page 8

Arrears to Primaries Arrears to LDB

Year Rs M % of total due Rs M % of total due

1960-61 n.a. n.a. 2.4 30

1961-62 6.1 62 3.2 30

1962-63 8.1 48 3.0 19

1963-64 14.0 43 5.0 19

1964-65 19.9 48 5.3 13

1965-66 35.2 45 12.5 21

1966-67 48.4 45 20.9 25

1967-68 38.7 28 9.6 9

1968-69 38.1 24 8.9 7

1969-70 57.0 30 14.6 9

1970-71 145.5 53 68.3 34

27. The above table shows the following:

(a) Although there had been a general improvement in recent years,the position deteriorated again from 1969/70 and in 1970/71 overduesassumed serious propertions. In part this situation is attributableto severe drought conditions which prevailed in Maharashtra during1970/71 (see Appendix 4-1) but other arrears bave continued to rise.

(b) Primary Banks hitherto have been able to achieve a much higherlevel of repayments to LDB than their own recoveries from ul-timate borrowers. This has been possible because of the mag-nitude of the Primaries' own resources which they have in partutilized to meet obligations to LDB. However, the crop lossesin 1970-71 had a strong effect at this level also, resultingin overdues of 34%.

28. Within the 53% average arrears position of the Primary Banks atJute 30, 1971, 14 of the 26 Banks had overdues of more than 50%, and all butone of the 21 Banks which fall within areas of proposed Project lending hadoverdues of more than 25%. A number of reasons have been given for thissituation, and although it is not possible to attribute varying degreesof responsibility, the following have all contributed to some extent:

ANNEX 4Page 9

(a) Inadequate lending practices in the past based on low technicalcriteria and weak appraisals. This has applied particularly todugwells with the result that many wells have failed todischarge adequate water to provide the expected incrementalincome. It has to be emphasized that for such wells to bebankable they must be based on criteria which will ensure asufficient discharge to meet irrigation requirements throughboth kharif and rabi seasons annually. The proposal widelydiscussed in Maharashtra that such wells should have a lowdischarge adequate only as an insurance against inadequaterainfall in kharif and providing sufficient water for rabiin perhaps 7 years out of 10 is not an acceptable propositionfor a credit project. If adopted it would also result inover-investment in wells.

(b) Until 1967 LDB imposed loan limits on well investments whichresulted in many investments remaining unfinished.

(c) Droughts particularly in 1970/71, and heavy rainfall in late1970 which damaged several crops.

(d) The Primary Banks' failure to pursue an activecollections policy. To some extent this may have beenencouraged by their relatively large resources whichreduced the pressure to collect. Also, the expandinglending program probably diverted staff from collections.Some political pressures may have discouraged repayments,particularly at election times.

(e) Lack of support from the district administrations ininitiating foreclosure proceedings against long-outstandingoffenders. Although local conditions often make itdifficult to sell all land acquired in this way, it isessential that Primary Banks make an example of at least theworst offenders.

29. Because of their overdues, five of the 21 Primary Banks which wouldbe involved in Project lending had overdues as of June 30, 1971 in excess oftheir paid up capital and reserves (which taken together usually amount toabout 6% of total borrowings). This did not necessarily mean, however, thatthese Primaries were insolvent because all loans are secured by mortgagesand are therefore technically recoverable. Nonetheless, Primary Banks haveexperienced some difficulty in obtaining realistic market prices on landwhere they have had to foreclose and with an increasing volume of foreclosedloans this problem could become more acute. Therefore not only are presentoverdue levels unacceptable high to justify a major lending program under anIDA Project but some new capital injection is essential. This is necessaryboth to strengthen the Bank's financial position and also to ensure a suffi-cient capital base to permit the required future borrowing in the event ofsome existing equity having to be written off against irrecoverable loans.Although the State Government is only a minority shareholder in LDB, LDB'soperations are intermixed with it and the State Government is also a

ANNEX 4Page 10

guarantor of most of its debenture issues. It is therefore appropriate thatthe State Government should assist LDB at the present time.

Rehabilitation of the LDB System

30. In order to provide the LDB system with a sound structure adequateto administer the Project and channel IDA funds, the State Government and LDBin consultation with ARC are therefore implementing a financial and managerialrehabilitation program, which has been agreed upon after discussions with IDA.The principal features of the program are as follows:

(a) Financial Rehabilitation

The main purposes is to reduce overdues to not more than25% of the June 30, 1971 demand after deducting overduesattributable to drought. To this end the State Governmenthas agreed to contribute capital to all 21 Project PrimaryBanks to the extent necessary to meet this criterion as atJune 30, 1972. In addition however, the 25% maximum over-due position must also be met against the current year'sdemand and the State Government will similarly contributecapital to the extent necessary so that at least 15 of thesePrimaries qualify (including specifically the Jalgaon, Nandedand Parbhani Banks through which much of the Project lendingwill be concentrated). Based on the June 1971 overdues, theState Government's contribution is estimated at Rs 34 million(US$4.7 million) and in addition it will provide guaranteesof Rs 21 million (US$2.9 million) to cover half the amount ofdrought overdues (Appendix 4-1). The capital contributionswill be redeemed and the guarantees reduced as recoveriesare made.

(b) Collection Program

With the cooperation of the State Government including theprovision of additional recoveries staff and improved fore-closure procedures, the LDB system has started a collectioncampaign to recover past overdues in accordance with scheduledtimetables (Appendix 4-2) and ensure satisfactory repaymentlevels in future. ARC will review the recovery performanceof each Primary and, subject to IDA agreement, will withholdProject refinance from any Primary which fails to makesatisfactory progress on recovering amounts overdue onJune 30, 1971 or which incurs a default rate of more than 25%of payments becoming due in any subsequent year.

(c) Managerial Rehabilitation

Where necessary, boards of directors will be reconstitutedand management replaced in Primaries according to a planto be sent to the Association by April 30, 1972. LDB will

ANNEX 4Page 1 1

eventually employ all managers and, as appropriate, otherstaff of Primaries. Training courses are being establishedfor managers and staff of the LDB system to introduce newappraisal and lending techniques. Those for sernior executivesof LDB and key officers of the Primaries would be completed bythe date of credit effectiveness.

31. The above measures, which were agreed at negotiations are expectedto result in a satisfactory rehabilitation of the LDB system by September 30,1972, the proposed date of credit effectiveness. By that date all 21 ofthe Project Primaries would in effect have had their overdues reduced toacceptable levels and the proposed capital injections would have enabledthem to reduce the amount of their overdues to the apex bank to not morethan 19%. Improved collection methods described above should have resultedin all the 21 Primaries meeting the 25% criterion on current year's demandwithout further capital contributions from the State Government. At thesame time the financial position of the Project Primaries will have beenstrengthened and each will have an adequate capital base to permit the furtherborrowing required under the Project. These measures for the 21 Banks willalso be sufficient to ensure an adequate strengthening of the whole LDBsystem though the State Government has also agreed to take early andsimilar measures for the five banks which would not be involved in Projectlending.

Profits

32. LDB's accounts show that until 1970/71 interest payments from thePrimary Banks (as against repayments of principal) have been maintained ata high level and until that year LDB has not therefore suffered a significantloss of income. Its profits have however been low when compared with similarbanks elsewhere in India, mainly because of its low interest margin at about1.1% per annum (in 1970/71). The following table shows LDB's expenditures,income and profits, also expressed as a percentage of average funds employed,during the three years to June 30, 1971:

1970/71 1968/69 1969/70Average Funds Rs 1,061 million Rs 1.326 million Rs 1,580 millionEmployed % of aver- % of aver- % of aver-

Rs M age funds Rs M age funds Rs M age funds

Expenditures:Interest 54.9 5.17 63.3 4.77 95.5 6.04

Other 4.8 0.45 6.0 0.45 8.2 0.52

Total Expenditures 59.7 5.62 69.3 5.22 103.7 6.56

Profit 4.6 0.44 5.1 0.39 5.6 0.35

Total Income 64.3 6.06 74.4 5.61 109.3 6.91

ANNEX 4Page 12

LDB's profits, which have declined as a percentage of capital employed overeach of these years, have been sufficient to maintain a 4% dividend (but in1970/71 with only a small margin after making the statutory transfers toreserves). In 1970/71 profits at 0.35% of average funds employed comparedwith 0.42% for the Tamil Nadu LDB and 0.87% for the Andhra Pradesh LMB. Itis important that LDB increase its profits, and to do this it will benecessary to increase its interest margin. Appendixes 4-2 and 4-4 givesummarized statements of LDB's net income and balance sheets, and indicativeprojections of its future financial position are given at Appendixes 4-3 and4-5.

33. At present, the LDB system obtains a margin of 2.5% (borrowingfrom ARC at 6.5% and lending to farmers at 9%) on lending similar to thatproposed under the Project. As part of a general review of the agriculturalinterest rate structure, consideration is now being given in India as towhether this margin is likely to be adequate in future to meet the expensesof LDB's and provide them with sufficient profits and reserves. For thetime being therefore, it is not intended that the 9% lending rate to ultimateborrowers be increased. Within the 2-1/2% margin however, the apex bank atpresent retains only 3/4% and this should be increased to at least 1% to meethigher costs and assist in enhancing the present inadequate profit levels.

34. The accounts of LDB and the Primary Banks are audited by independentaccountants of the State Cooperation Department in accordance with thepractice which is common throughout India. Apart from the delay in preparinga Eull analysis of the arrears position, LDB's records and accounts appearc.omplete and well maintained.

February 11, 1972

INDIA


MAHARASHTRA STATE COOPERATIVE LAND DEVELOPMENT BANK LTD

Analvsis of Overdues and Capital Contribution for Primary Banks as of June 30, 1971

(Rs '000)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

O v e r d u e s State Government Participation

A Prolect Total Foreclosed Drought Under Three Three Years % Overdue Capital Guarantee on Residual Residual Overdues

Primary Bank Demand Loans Induced Years and Over Total to Demand Contribution Drought Overdues Overdues as Percent Demand(8)-(4)-.25(2) (8)-(4)-(9) (11)/(2)

Nasik 15,031 624 566 3,702 2,493 7,403 50 3,080 283 3,757 25

Ahmednagar 18,598 1,783 2,341 3,679 521 8,324 45 1,383 1,170 4,600 25

Satara 13,095 1,293 664 1,866 369 4,192 32 228 332 3,300 25

Sangli 20,382 1,056 832 5,145 672 7,705 38 1,778 416 5,095 25

Kolhapur 14,959 49 -- 3,740 1,082 4,871 32 1,131 -- 3,740 25

Sholapur 15,094 666 4,564 1,154 942 7,326 49 -- 2,282 2,762 18

Poona 11,008 929 728 864 689 3,210 29 -- 364 2,482 23

Bhandara 3,834 350 -- 419 187 956 25 18 -- 938 25

Nagpur 5,447 261 1,760 78 290 2,389 44 -- 880 629 12

Amravati 8,842 622 3,800 62 466 4,950 56 -- 1,900 1,150 13

Parbhani 7,440 280 1,702 1,374 1,399 4,755 64 1,193 851 1,860 25

Jalgaon 16,377 1,400 1,312 3,569 4,221 10,502 64 5,096 656 4,094 25

Nanded 12,069 4,993 1,467 2,556 1,305 10,321 85 5,837 734 3,017 25

Wardha 4,341 456 1,215 420 554 2,645 62 348 607 1,082 25

Dhulia 18,357 4,044 1,627 2,857 2,940 11,468 62 5,252 813 4,589 25

Akola 11,059 3,335 1,071 2,642 1,157 8,205 74 4,369 535 2,765 25

Buldana 7,897 1,505 2,950 198 687 5,340 68 416 1,475 1,974 25

Yeotmal 8,700 1,209 2,116 1,317 1,082 5,724 64 1,433 1,058 2,175 25

Aurangabad 22,532 3,018 7,157 3,387 742 14,304 64 1,504 3,578 .5,643 25

Bhir 8,683 883 4,522 314 617 6,336 73 -- 2,261 1,814 21

Udgir 7,365 302 1,894 1,751 965 4,912 66 1,177 947 1,841 25

Subtotal 251110 29058 4,288 45 16,247 135,838 54 34243 21142 592307 3

B OtherPrimary Banks

Osmanabad 10,810 4,513 5,934 50 1,421 12

Ratnagiri 446 -- 200 45 200 45

Rolaba 2,021 5 943 47 938 47

Thana 846 -- 496 58 496 59

Chandrapur 3,779 749 2,127 56 1,378 36

Subtotal 18,902 na 5,267 na n 51 4433 23

Total 270,012 na na 53 34,243 21,142 63.740 24

February 10, 1972

INDIA

M6AIRARSlTRA AGRICULTURAL CREDIT PROJECT

M&JAhA_hTRA STATE COOPEPATIVE LND DEVELOPlfENT BANK LTD

Schedule of Recovery of Overdoes for Pri-ary Banks Involved in the PrO-ect

Primary Rack Recovery Pro-ra for Foreclosed Loans Recovery Progra- for Drought Overdues Recovery Program fec Other Overd-esTotal

Overdoeson After After Afte

6/30/71 1971/72 1972/73 1973/74 1974/75 6/30/75 Total 1971/72 1972/73 1973/74 1974/75 6/30/75 Total 1971/72 1972/73 1973/74 1974/75 6/30/75 Tstal

Nasik 7,403 50 200 200 35 139 624 200 200 100 10 56 566 200 1,300 1,300 1,400 2,013 6,213Ahueduagar 8,324 110 400 400 475 358 1,783 500 500 500 610 231 2,341 500 1,000 1,000 500 1,200 4,200Satara 4,192 150 350 350 350 93 1,293 200 200 200 14 50 664 500 500 500 500 235 2,235Sangli 7,705 150 250 250 250 156 1,056 250 250 250 -- 82 B32 1,50D 1,500 1,500 500 817 5,817Kolhp-r 4,871 10 15 15 9 -- 49 -- -- -- -- -- -- 500 1.250 1,250 1,250 572 4,822Sholapur 7,326 60 250 200 50 106 666 1,000 1,000 1,000 1,100 464 4,564 300 400 400 400 596 2.096P.o.. 3,210 100 250 250 200 129 929 300 300 55 -- 73 728 200 300 300 300 453 1,553Bhaudar- 956 50 75 l00 75 50 350 -- -- -- -- -- -- 50 150 150 100 156 606Nagpur 2,389 30 70 75 75 11 261 500 500 500 84 176 1,760 50 75 75 so 88 368Asuravati 4.950 30 70 200 200 122 622 1,000 1,000 1,000 420 380 3,800 100 100 100 100 128 528P-rbhani 4,755 40 100 50 50 40 280 400 400 400 332 170 1,702 200 400 400 400 1,373 2,773Jalg.on 10,502 100 350 350 400 200 1,400 300 300 300 300 112 1,312 500 1,500 1,500 1,000 3,290 7,790Nanded 10,321 200 1,200 1,200 900 1,493 4,993 325 325 325 325 167 1,467 300 500 600 600 1,861 3,861Wardha 2,645 65 500 100 100 91 456 400 400 300 -- 115 1,215 100 200 150 150 374 974Dhulin 11,460 200 800 0,100 1,100 844 4,044 500 500 500 -- 127 1,627 500 1,000 1,000 1,000 2,297 5,797Akoln 8,205 100 1,000 1,000 600 635 3,335 300 300 300 64 107 1,071 400 700 700 700 1,299 3,799Buldhana 5,340 100 350 350 400 305 1,505 800 800 800 255 295 2,950 50 150 150 200 335 885Yeotusal 5,724 100 350 350 200 209 1,209 600 600 600 104 212 2,116 300 500 S00 500 599 2,399Aura-gabad 14,304 200 750 750 700 618 3,018 1,600 1,600 1,600 1.640 717 7,157 600 700 700 700 1,429 4,129 *oi6Bhir 6,336 100 200 200 200 183 883 1,000 1,000 1,000 1,070 452 4,522 30 200 200 200 301 931 1 Udgir 4.912 40 75 75 50 62 302 450 450 400 400 194 1,894 500 500 500 500 716 2,716

Total 135.838 2_025 7.205 7565 6419 544 10.625 10.625 10130 6_728 4.180 42,288 7.380 12,925 12,975 11,080 20.132 64,492

February 10, 1972

INDIA



CONDENSED STATEMENTS OF NET INCOME

1966/67 1967/68 1968/69 1969/70 1970/71

X of % of % of % of % of

Total Total Total Total Total

Rs M Income Rs M Income Rs M Income Rs M Income Rs M Income

INCOME

Interest and Dividends Received 39.1 99.5 46.6 99.6 64.0 99.5 74.0- 99.5 108.9 99.6

Miscellaneous 0.2 0.5 0.2 0.4 0.3 0.5 0.4 0.5 0.4 0.4

Total Income 39.3 100.0 46.8 100.0 64.3 100.0 74.4 100.0 109.3 100.0

EXPENSES

Interest Paid on Debentures and Loans 32.6 82.9 38.3 81.8 54.9 85.4 63.3 85.0 95.5 87.3

Discount Brokerage and Commission 0.8 2.1 0.9 1.9 2.3 3.6 2.9 3.9 1.7 1.6

Establishment Costs 0.9 2.2 1.1 2.4 1.5 2.3 1.8 2.4 2.0 1.8

Other Expenditures 0.4 1.1 0.6 1.3 1.0 1.5 1.3 1.8 4.5-; 4.1

Total Expenses 34.7 88.3 40.9 87.4 59.7 92.8 69.3 93.1 103.7 94.8

NET INCOME 4.6 11.7 5.9 12.6 4.6 7.2 5.1 6.9 5.6 5.2

1/ Of which Rs 58.5 million represented interest on loans and advances and Rs 5.5 million interest on sinking fund and other investments. x

2/ Of which Rs 62.2 million represented interest on loans and advances and Rs 11.8 million interest on sinking fund and other investments.

3/ Including a provision of Rs 3.1 million for overdue interest.

February 10, 1972

INDIA



PROJECTED STATEMENTS OF NET INCOME

1971/72 1972/73 1973/74 1974/75°b of % of % of % ofTotal Total Total Total

Rs M Income Rs M Income Rs M Income Rs M Income

INCOME

Interest Received on:

Project Loansl/ 2/ 0.8 0.8 4.6 4.1 11.6 9.1 15.5 11.0Other Loans and Investments- 96.4 98.6 106.1 95.3 114.8 90.3 125.4 88.4

Total Interest Received 97.2 99.4 110.7 99.4 126.4 99.4 140.9 99.4

Miscellaneous Income 0.6 0.6 0.7 0.6 0.8 0.6 0.9 0.6

Total Income 97.8 100.0 111.4 100.0 127.2 100.0 141.8 100.0

EXPENSES

Interest Paid on:

Loans on Amount of Projec 0.6 0.6 3.9 3.5 9.7 7.6 13.0 9.2 D X

Other Debentures and Loans- 85.0 86.9 92.5 83.0 98.3 77.3 106.0 74.7

Total Interest Paid 85.6 87.5 96.4 86.5 108.0 84.9 119.0 83.9

Establishment Costs 2.5 2.6 3.0 2.8 4.0 3.1 4.5 3.1Other Expenditures 1.7 1.7 2.5 2.2 3.2 2.6 3.3 2.4

Total Expenses 89.8 91.8 101.9 91.5 115.2 90.6 126.8 89.4

NET INCOME 8.0 8.2 9.5 8.5 12.0 9.4 15.0 10.6

1/ Assumes 7 3/4% interest per annum.2/ Assumes an average of 7 1/4% interest per annum on loans made to June 30, 1971, 7 1/2% on loans made in 1971/72 and 7 3/4% on loans made

thereafter: interest on investments rising from 5% in 1970/71 to 6% in 1974/75.3/ Assumes 6 1/2% interest per annum.4/ Assumes an average of 6.1% in 1970/71 rising to 6.3% in 1974/75.

February 10, 1972

INDIA



CONDENSED BALANCE SHEETS

June 30, 1966 June 30, 1967 June 30, 1968 June 30, 1969 June 30, 1970 June 30, 1971Rs M Rs M Change from Rs M Change from Rs M Change from Rs M Change from Rs M Change from

previous previous previous previous previousdate date date date dateRs M _ Rs M Rs M Rs M Rs M

ASSETS

Cash on Hand and with banks 2.4 13.3 10.9 20.9 7.6 0.6 (20.3) 15.2 14.6 27.6 12.4

Investments 118.5 169.4 50.9 223.0 53.6 290.4 67.4 371.7 81.3 461.1 89.4

Loans to Primary Banks 460.6 566.6 106.0 671.8 105.2 849.8 178.0 1,042.1 192.3 1,155.7 113.6

Other Assets 16.9 23.4 6.5 24.7 1.3 41.7 17.0 41.3 (0.4) 45.6 4.3

TOTAL ASSETS 598.4 772.7 174.3 940.4 167.7 1,182.5 242.1 287.8 690.0 219.7

LIABILITIES AND EQUITY CAPITAL

Debentures 499.6 629.2 129.6 737.0 107.8 989.9 252.9 1,231.4 241.5 1,467.3 235.9

Loans and Overdrafts 16.4 1.7 (14.7) 47.8 46.1 10.3 (37.5) 11.1 0.8 2.6 (8.5)Other Liabilities 42.1 93.4 51.3 95.1 1.7 104.4 9.3 136.4 32.0 115.0 (21.4)

TOTAL LIABILITIES 558.1 724.3 166.2 879.9 155.6 1,104.6 224.7 1,378.9 274.3 1,584.9 206.0

Capital Equity:

Paid-up Share Capital 37.2 44.0 6.8 52.9 8.9 66.6 13.7 78.1 11.5 88.7 10.6

Reserves and Net Income 3.1 4.4 1.3 7.6 3.2 11.3 3.7 13.3 2.0 16.4 3.1

TOTAL CAPITAL 40.3 48.4 8.1 60.5 12.1 77.9 17.4 91.4 13.5 105.1 13.7

TOTAL LIABILITIES AND EQUITY CAPITAL 598.4 772.7 174.3 940.4 167.7 1.182.5 242.1 1,470.3 287.8 1 219.7

February 10, 1972

INDIA



PROJECTED BALANCE SHEETS

June 30, 1972 June 30, 1973 June 30, 1974 June 30, 1975Change from 1/ Change from Change from Change from

Rs M Previous Date Rs M Previous Date Rs M Previous Date Rs M Previous Date

ASSETS

Cash on hand and with banks 23.4 8.2 21.0 (2.4) 39.3 18.3 23.8 (15.5)Investments 2/ 510.0 138.3 570.0 60.0 640.0 70.0 700.0 60.0Loan to Primaries: Project- 20.0 20.0 100.0 80.0 200.0 100.0 200.0 --

Other 1,400.0 357.9 1,500.0 100.0 1,600.0 100.0 1,800.0 200.0Other Assets 50.0 8.7 55.0 5.0 60.0 5.0 65.0 5.0

TOTAL ASSETS 2,300.4 533.1 21246.0 242.6 2,539.3 293.3 2,788.8 249.5

LIABILITIES AND EQUITY CAPITAL

Debentures: Project 20.0 20.0 100.0 80.0 200.0 100.0 200.0 --

Other 1,650.0 418.6 1,800.0 150.0 1,950.0 150.0 2,150.0 200.0Loans and Overdrafts 30.0 18.9 10.0 (20.0) 10.0 -- 10.0 --

Other Liabilities 180.0 43.6 200.0 20.0 230.0 30.0 250.0 20.0

TOTAL LIABILITIES 1,880.0 501.1 2,110.0 230.0 2,390.0 280.0 2,610.0 220.0

Equity:

Paid-up Share Capital 105.0 26.9 115.0 10.0 125.0 10.0 150.0 25.0

Reserves: X

At beginning of year 15.6 -- 18.4 2.8 21.0 2.6 24.3 3.3 x

Add Net Income 8.0 -- 9.5 1.5 12.0 2.5 15.0 3.0 4Total Available 23.6 -- 27.9 4.3 33.0 5.1 39.3 6.3Dividends Paid>/ 5.2 -- 6.9 1.7 8.7 1.8 10.5 1.8At End of Year 18.4 5.1 21.0 2.6 24.3 3.3 28.8 4.5

Total Equity 123.4 32.0 136.0 12.6 149.3 13.3 178.8 29.5

TOTAL LIABILITIES AND EQUITY 533.1 2,246.0 242.6 2,539.3 293.3 2 ,788.8 249.5

1/ See Appendix 4-4.

2/ Assumes about 80% of Project lending.

3/ Assumes 5% paid in 1971/72, 6% i.n 1972/73 and 7% in 1973/74 and 1974/75.

February 10, 1972

ANNEX 5Page 1

INDIA


Commercial Banks Operating in Maharashtra(as of April 1971)

Number ofNationalized Banks Branches

Allahabad Bank 13Bank of Baroda 95Bank of India 91Bank of Maharashtra 179Canara Bank 48Central Bank of India 105Dena Bank 90Indian Bank 14Indian Overseas Bank 17Punjab National Bank 47Syndicate Bank 27Union Bank of India 94United Bank of India 4United Commercial Bank 38State Bank of India 221State Bank of Hydrabad 56State Bank of Bikaner 6 Jaipur 7State Bank of Indore 2State Bank of Mysore 1State Bank of Sauashtra 1State Bank of Travancore 1

Total 1,151

ANNEX 5Page 2

Number ofBanks Under Private Ownership Branches

Sangli Bank Ltd. 43United Western Bank Ltd. 47Belgaum Bank Ltd. 14Ratankar Bank Ltd. 9Ganesh Bank of Kuruwadi 2Bank of Karad Ltd. 10Andhra Bank Ltd. 2ViJaya Bank Ltd. 4Miraj State Bank Ltd. 9National and Grindlays Bank Ltd. 12American Express International Banking Corp. 1Bank of American Trust & Savings Association 1Banque National de Paris 2Bank of Rajasthan Ltd. 2Bank of Tokyo 1British Bank of Middle East 1Canara Banking Corporation 4Chartered Bank 5Eastern Bank Ltd. 1First National City Bank 3General Bank of Netherlands 2Habib Bank Ltd. 1Hindustan Mercantile Bank Ltd. 1Hindustan Commercial Bank Ltd. 2Hongkong and Shanghai Banking Corporation 1Mercantile Bank Ltd. 6Mitsui Bank Ltd. 1New Bank of India Ltd. 1Oriental Bank of Commerce Ltd. 1

Total 189

Note: All of the preceding banks are scheduled, i.e., areincluded under the Second Schedule to the ReserveBank of India Act, 1935. They are entitled tocertain borrowing facilities from the ReserveBank of India.

Febiruary 11, 1972

I N D I A

MAHARASHTRA AGRICULTURAL CREDIT PROJECTDETAILS OF ESTIMATED PROJECT COST

Unit First Year Second Year Third Year Total ProjectCost Units Total Cost Units Total Cost Units Total Cost Units CZst

7 (Rs M) (Rs M) (Rs M) . TigM)

1. Minor Irrigation

Dugwells - - 40.0 - 80.0 - 80.0 - 200.0Lift _ _ 16.8 _ 33.6 33.6 _ 8h.0Tubewells 60,000 50 3.0 100 6.0 150 9.0 300 18.0

Total - - 59.8 - 119.6 - 122.6 - 302.0

2. Land Development, 2.6 16.1 16.1 34.8

Total Lending Program - - 62.4 - 135.7 - 138.7 - 336.8

3. Project Equipment 1/

Drilling Rigs - 3.6 - 3.6Earth-Moving Machinery - - 17.0 - 34.0Hydrological .quipment - - 0.9 - - - - -

Total - - 21.5 - 17.0 _ - _ 38.5

4. Consultancy Services 1/ - 0.6 2.

TOTAL PROJECT COST - - _ 153.8 - 139.3 _ 377.6

1/ For details see Appendix 6-2

February 10, 1972

I N D I A

MAHARASHTRA AGRICULTURAL CREDIT PROJECTDETAILS OF PROJECT EQUIPMENT AND CONSULTANCY SFR.VCES COSTS

Unit CIF Spare Unit Price Unit Local Unit Total Total ImportedNumber Price Parts With Spares Dist. Cost Cost Cost Component

(Rs) Rs) (RT (Rs (Rs '000) (Rs '000)

A. Project Eoripment

1. Drilling Rigs

Hammer Drills 4 650,000 98,000 748,000 150,000 898,000 3.600 3,000

Total - - - 3,600 3,000

2. Earbh Moving Machinery

Elevator Scrapers 48 368,000 55,000 423,000 85,000 508,000 24,400 20,300Crawlers with Bunding

Toolbars 20 285,000 42,000 327,000 65,000 392,000 7,800 6,500Land Planes 20 66,000 10,000 76,ooo 15,000 91,000 1,800 1,500

Total - - . 34,000 28,300

Total Project Equipment =37,600 3l300

No. Annual Total Foreign ExchangeNumber Years Cost Cost Components

(Rs)' (Rs'000) (Rs '000)

B. Consultancy Services forGrourndwater Directorate 1/

Chief Advisor 1 2 . 450,000 900 600Assistant Advisors 2 2 350,000 1,400 1,000Gaging Equipment - - - 900 700

Total Consultancy Services - - 3,200 2,300

1/ Personnel costs include salaries, on-costs, travel and consultancy overheads.

December 6, 1971

INDIA

MAHARASRTRA AGRICULTURAL CREDIT PROJECT

ESTIMATED SCHEDULE OF DISBURSEMENTS (CUMULATIVE)

Lending Program Other InvestmentsMinor Land Equip- Consultancy Total

Irrlgation Development Total ment Services Total Disbursements(Rs M) Rs M) T(Rs M) (Rs M) (Rs M) (Rs M) (Rs M) (US$ M)

Quarter Ending

1972/73

September 30, 19722/ -- -- -- -- -- -- -- --

December 31, 1972 -- -- -- -- 0.1 0.1 0.1 --

March 31, 1973 -- 1.0 1.0 -- 0.3 0.3 1.3 0.2June 30, 1973 8.0 2.0 10.0 16.0 0.5 16.5 26.5 3.6

1973/74

September 30, 1973 16.0 3.0 19.0 16.0 0.7 16.7 35.7 4.9December 31, 1973 26.0 5.0 31.0 24.0 0.9 24.9 54.9 7.5March 31, 1974 36.0 7.0 43.0 24.0 1.1 25.1 67.1 9.2June 30, 1974 51.0 9.0 60.0 32.1 1.3 33.4 92.h 12.7

1974/75

September 30, 1974 66.0 11.0 77.0 32.1 1.5 33.6 109.6 15.1December 31, 1974 86.0 13.0 99.0 32.1 1.5 33.6 131.6 18.1 March 31, 1975 106.0 16.0 122.0 32.1 1.5 33.6 153.6 21.1June 30, 19752/ 126.0 19.0 145.0 32.1 1.5 33.6 175.6 24 .1

1975/76

September 30, 1975 146.0 22.0 168.0 32.1 1.5 33.6 197.6 27.1December 31, 1975.3/ 166.0 25.4 191.h 32.1 1.5 33.6 218.4 30.0

1/ Estimated date of credit effectiveness.2/ Estimated date of Project completion.3/ Closing Date.

February 10, 1972

ANNEX 7

INDIA


Present and Proposed Interest Rates for Project Institutions

The following table gives the present (in brackets) and proposedinterest rates and margins (expressed as % per annum) for Project institutions.

MarginIncrease

Borrowing Rate Lending Rate Margin (Decrease)

ARC

Project ( -) 5.4/1 t -) 6.5 ( -) 1.1Other (5.0)/2 5.0/2 (6.5) 6.5 (1.5) 1.5

LDB /3

Project ( -) 6.5 ( -) 7.5 ( -) 1.0 -Other ARC (6.5) 6.5 (7.25) 7.5 (0.75) 1.0 0.25Other Schemes (6.1)/2 6.25/2 (7.25) 7.5 (1.15) 1.25 0.1

Primary Banks /4

Project ( -) 7.5 ( -) 9.0 ( -) 1.5 -Other ARC (7.25) 7.5 (9.0) 9.0 (1.75) 1.5 (0.25)Other Schenes (7.25) 7.5 (9.0) 9.0 (1.75) 1.5 (0.25)

/1 Weighted average of 5.25% and 5.75%.

/2 Average figures.

/3 Participating commercial banks would also receive funds from ARC at aninterest rate of 6.5% and would lend to ultimate borrowers at 9%giving them a margin of 2.5% per annum.

/4 In addition Primary Banks and commercial banks would retain the proceedsof a 0.5% evaluation fee charged on all investment lending.

February 11, 1972

ANNEX 8Page 1

INITA

MAMARASIWR1A ARTICr,LTUA. CREDIT PROJECT

1 arm Incomes and Financial Rates of Return on Investments

1. lhis Annex is an explanation of the methodology and assumptionsadonted in the illustrative farm models (Appendix 8-1), financial rates ofrettirn (n(nerdix R-2), and estimated increases in cropped area and production(A.nenpnix 9-)

n)ata on costs and revenues are based on present prices. The netincremental nroduction value is based on a comparative static analysis ofeach indiviAual farm model.

3. Pamily labor has been excluded from production costs. Only hired

labor during the neak periods has been included.

4. In the case of minor irrigation investments, farmers are requiredto make a denosit representing the cost of the electrical connection(TRq 79;nn) to the State Electricity Board to obtain priority for the connec-tion. The deposits would be included in the loans extended to farmersand accordinRly have been included in total Project costs. However, thecost of electric power, at Rs .18fkwh, is considered to be approximatelyadequate to cover all costs of generation and distribution and, therefore,the connection charge has not been included as an investment cost in thefarm models.

5. Winancial rates of return are based on the estimated life of theassetst 7n years in the case of dugwells, tubewells and lift irrigation,and In years in the case of land development. For minor irrigation invest-ments it is assumed that electric pumpsets would be replaced in the 8thand lth vears.

fi. Full production increases estimated in Appendix 8-3 would resultnot onlv from direct effects of the proposed investments but also from theaccomranving improved cultivation patterns. They are assumed to occurafter a development period of 4 years.

7. Rased on these assumptions, the financial rates of return overthe life of the assets would range from 4n to 73%.

P. qensitivitv tests have been conducted to demonstrate the effect ofa decrease in oroduction value (through lower prices or yields). Theresultint rates of return (7) are as given below:

ANNEX 8Page 2

-20X gross productionPresent production value and presentand investment costs investment costs

Model T 73 30

Model I1 40 24Model III 51 31Model IV 65 38Model V 60 39

November 8, 1971

I N D I A


FARM MODELS: FINANCIAL

Model I: Investment: Dugwell Improvement (Rs 4,o00); Farm Size: 4 ha

Area Yield Costs Gross Production Value Net Production ValueFull Full Full Full Full Incremental

Before Development Before Development Before Development Before Development Before Development-ha - - - - - - - - ton/ha - - - - - - - - - - - Rs ^ - - - - - - - - - - - - - - - - - - - - - - -

Kharif

Pulses 0.7 0.5 0.4 0.6 47 54 244 261 197 207 10Jowar (Irrigated) 1.0 1.7 3.0 3.0 782 1,329 1,590 2,703 808 1,374 566Jowar (Non-Irrigated) 1.0 - 0.6 - 110 - 318 - 208 - (208)Groundnuts 0.4 0.4 0.9 1.4 106 220 486 756 380 536 156Cotton 0.5 1.0 1.4 1.4 478 955 1,211 2,422 733 1,467 734Chillies 0.1 0.2 1.6 1.6 104 208 338 675 234 467 233Sugarcane / 0.2 0.2 (Harvested in Rabi season)

Rabi

Groundnut - 0.4 - 1.4 - 220 - 756 - 536 536Wheat 0.8 1.0 1.4 1.4 343 429 1,142 1,428 799 999 200Vegetables 0.2 0.4 9.3 9.3 230 460 744 1,488 514 1,028 514Sugarcane 0.2 0.2 87.5 87.5 742 742 1,269 1,269 527 527 -

Total 5.1 6.0 2,942 4,617

Cropping Intensity 128% 153% Hired Labor 124 532 (124) (532) (408)

Total 3,066 5,149 7,342 11,758 4,276 6,609 2,333

~t00j ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~co

I/ Annual Crop

December 6, 1971

I N D I A



Model II: Investment: Dugwell (Rs 1U,500); Farm Sizo: 5 ha

Area Yield Costs Gross Production Value Net Production Value

Full Full Full Full Full Incremental

Before Development Before Development Before Development Before Development Before Development

* - - - - - - - ton/ha - - - - - - - - - - - - - - - - - - Rs - - - - - - - - - - - - - - - - - - - - - - - - - -

Kharif

Pulses 0.6 0.5 0.4 0.6 40 54 209 261 169 207 38

Jowar 2.0 2.0 0.8 3.0 220 1,564 848 3,180 628 1,616 988

Cotton 2.0 1.0 0.3 1.4 350 955 900 2,422 550 1,467 917

Groundnut 0.4 0.4 0.7 1.4 106 220 378 756 272 536 264

Chillies 1 - 0.2 - 1.6 - 208 - 675 - 467 467

Sugarcaye / - 0.2 - - - -

Banana _/ 0.2 - - - -

Rabi

Groundnut - 0.4 - 1.4 - 220 - 756 - 536 536

Wheat - 1.0 - 1.4 - 429 - 1,428 - 999 999

Vegetables - 0.5 - 9.3 , - 578 - 1,860 - 1,282 1,282

Sugarcane - 0.2 - 87.5 - 742 _ 1,269 - 527 527

Banana - 0.2 - 50.0 - 1,400 - 4,000 - 2,600 -2,600

Total 5.0 6.8 716 6,370

Cropping Intensity 1 0 , 136°h Hired Labor - 656 (656) (656)

Total 716 7,026 2,335 16,607 1,619 9,581 7,962

t1.

1/ Annual Crop.

December 6, 1971

I N D I A



Model III: Investment: Tubewell (Rs 57,500); 5 Farms, Size 4 ha

Area Yield . Costs Gross Production Value Net Production Value



ha - - - - - - - - ton/ha - - - - - - - - R - - - - - - - - - - -s - - - - - - - - -

Kharif

Pulses 0.5 - 0.4 - 34 - 174 - 140 - (140)

Jowar 1.5 1.8 0.8 3.0 165 1,408 636 2,862 471 1,454 983

Baira 0.2 - 0.5 - 19 - 77 - 58 - (58)

Groundnut 0.3 - 0.7 - 80 - 284 - 204 - (204)

Cotton 1.5 0.8 0.3 1.4 263 764 675 1,938 412 1,174 762

Chillies - 0.4 - 1,6 - 416 - 1,351 - 935 935

Sugarcane 1, - 0.4 - - _ _ _ _ _ _

Banana 1/ - 0.2 - - - - - - - -

Rabi

Groundnut - 0.3 - 1.9 - 165 - 770 - 605 605

Wheat - 1.0 - 1.4 - 429 - 1,428 - 999 999

Vegetables - 0.3 - 9.3 - 344 - 1,116 - 772 772

Sugarcane - 0.4 - 87.5 - 1,484 - 2,538 - 1,054 1,054

Banana - 0.2 - 50.0 - 1,400 - 4,000 - 2,600 2,600

Total 4.0 5.8 561 6,410 -

Cropping Intensity 100% 145% Hired Labor -- 740 (740) (740) a td

Total 561 7,150 1,846 16,003 1,285 8,853 7,568 a

]/ Annual Crop

December 6, 1971

I N D I A

MAHARASHTRA AGRICIJLTURAL CREDIT PROJECT


Model IV: Investment: Lift Irrigation (Rs 480,000); h6 Farms, Size 5 ha

- Area _ Yield Costs Gross Production Value Net Production ValueFull Full Full Full Full Incremental

Before Development Before Development Before Development Before Development Before Development- - - - ha - - ton/ha - - --- - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - -

Kharif

Pulses 0.7 0.5 0.4 0.6 47 54 244 261 197 207 10Jowar 2.0 2.2 0.8 3.0 220 1,720 848 3,498 628 1,778 1,150Groundnut 0.4 - 0.8 - 106 432 326 (326)Cotton 1.7 1.0 0.3 1.4 298 955 765 2,422 467 1,467 1,000Chillies - 0.2 - 1.6 - 208 - 675 - 467 467Sugarcane / - 0.3 - - - - - - -

Banana 1, - 0.3 - - - - - - - -

Rabi

Groundnut - 0.5 - 1.4 - 276 - 945 - 669 669Wheat 0.3 1.0 0.5 1.4 84 429 153 1,428 69 999 930Vegetables - 0.5 - 9.3 - 574 - 1,860 - 1,286 1,286Sugarcane - 0.3 - 87.5 - 1,113 - 1,903 - 790 790Banana - 0.3 - 50.0 - 2,100 - 6,000 - 3,900 3,900

Total 5.1 7.1 - - 755 7,429 - - -

Cropping Intensity 102% 14 2/ - Hired Labor - 936 - - - (936) (936) , >

Total 755 8,365 2,442 18,992 1,687 10,627 8,940

1/ Annual Crop

December 6, 1971

I N D I A



Model V: Investment: Land Development (Rs 4,500); Farm Size 2.5 ha

Area Yield - Costs Gross Production Value Net Production Value


Before Development Before Development Before Development Before Developmant Before Development

-- ha - - - -- - - - - ton-ha -- - - - - - - - - - - - - - - - RB - - - - - - - - - - - - - - - - - - - - - - - -

Kharif

Pulses 0.3 0.2 0.4 0.6 20 16 104 104 84 88 4

Jowar 0.8 0.8 0.8 3.0 88 562 339 1,272 251 710 459

Cotton 0.8 0.8 0.3 1.4 140 642 360 1,938 220 1,296 1,076

Rice 0.2 0.4 0.8 2.5 37 153 102 640 65 487 422

Chillies - 0.2 - 1.6 - 177 - 675 - 498 498

Rabi

Wheat 0.2 0.4 0.6 1.4 56 143 122 571 66 428 362Jowar 0.4 0.2 0.8 3.0 44 140 170 318 126 178 52

Rice - 0.4 - 2.0 - 156 - 512 - 356 356

Vegetables - 0.1 - 9.3 - 102 - 372 - 270 270

Total 2.7 3.5 385 2,091

Cropping Intensity 108% 140% Hired Labor - 32 (32) (32)

Total 385 2,123 1,197 6,402 812 4,279 3,467 a

December 6, 1971

ANNEX 8Appendix 8-2

IN D I A

MAHARASITRA AGRICULTURAL CREDIT PROJECT

FINANCIAL RATES OF RETURN BY TYPE OF INVESTMENT(Rs)

Year I 2 3 4 5-7 8 9-14 15 16-20

Model I: Investment: Improved Dugwell(Rs 4,000) : Farm Size: 4 ha

Net Value of Incremental Production _/ 1,167 1,750 2,333 2,333 2,333 2,333 2,333 2,333 2,333Capital Investment 4,000 1.250 2/ 1.250Net Incremental Flow (2,833) 1,750 2,333 2,333 2,333 1,083 2,333 1,083 2,333

Financial Rate of Return: 737with 2017 price or yield decline (on incremental 2 ha): 307,

1) Year 1 - 507,; Year 2-75%; Year 3 onward full value2) 50%b of pump and motor

Model II: Investment Duawell(Rs 15,500) Farm Size: 5 ha

Net Value of Incremental Production 1/ 1,592 3,185 4,777 6,370 7,962 7,962 7,962 7,962 7,962Capital Investment 15.500 2,500 2,500

Net Incremental Flow (13,908) 3,185 4,777 6,370 7,962 5,462 7,962 5,462 7,962

Financial Rate of Return: 40%With 20%. price or yield decline: 24%

1) Year 1, 20%; year 2, 4070; year 3, 60%, year 4, 807,year 5 onward full value.

Model III: Investment Tubewell(Rs 4,500 t/ Farm Size: 4 ha

Net Value of Incremental Production 2/ 1,513' 3,026 4,540 6,054 7,568 7,568 7,568 7,568 7,568Capital Investment 11500 1,000 1.000


Financial Rate of Return: 51%With 20% price or yield decline: 31%

1) Partial Investment of Total Scheme2) Year 1, 20%; year 2, 40%7; year 3, 60%; year 4, 80%Z; year 5

onward full value.

Model IV: Investment: Lift Irrigation(Rs 10,500)1/ Farm Size: 5 ha

Net Value of Incremental Production 2/ 1,788 3,576 5,364 7,152 8,940 8,940 8,940 8,940 8,940Capital Investment 10.500 2,625 2.625


Financial R-te ot Return: 65%With 20% price or yield decline: 38%

1) Partial Inivestment of Total Scheme2) Year 1, 20%b; year 2, 40%; year 3, 607%; year 4, 80%; year 5 onward full value.

Model V: Investment: Land Development 16-30(Rs 4,500) Farm Size 2.5 ha

Net Value of Incremental Production 1/ 693 1,387 2,080 2,774 3,467 3,467 3,467 3,467 3,467Capital Investment 4,500 - - - - - - - -


Financial Rate of Return: 60%/With 207, rice or yield decline: 397.

1) Year 1, 207%; year 2, 40%; year 3, 607%; year 4, 80%; year 5onward full value.

December 6, 1971

I N D I A


ESTIMATED INCREASES IN CROPPED AREA AND PRODUCTION

Cropped Area ProductionIncrease Increase

Before After (Decrease) Before After (Decreased)- - - - - - - ha - - - - - - - - -7- ton -

Foodgrains

Jowar 101,!50 98,900 (2,550) 117,160 296,700 179,540Bajra 3,300 6,000 2,700 1,650 10,800 9,150Wheat 22,000 45,900 23,900 24,480 64,260 39,780Rice 2,200 8,800 6,600 1,760 19,800 18,040Pulses 31,550 22,200 (9,350) 12,620 13,320 700

Total Foodgrains 160,500 181,800 21,300 157,670 404,880 247,210

Commercial Crops

Cotton 61,650 56,o00 (5,650) 28,395 78,400 50,005Groundnut 14,050 25,250 11,200 12,595 35,575 22,980Sugarcane 3,600 8,200 4,600 315,000 717,500 402,500Banana 4,300 4,300 - 215,000 215,000Vegetables 3,600 18,250 14,650 33,480 169,725 136,245Chillies 1,800 12,600 10,800 2,880 20,160 17,280 t B

Total Commercial Crops 84,700 124,600 39,900 392,350 1,236,360 844,010

ODTotal All Crops 245,200 61,200

NOTE: The increases in cropped area and production are estimated at full development (in thefifth year after investment).

December 6, 1971

ANNEX 9

INDIA

MARARASHTRA AGRICULTTtAL CREDIT PROJECT

Economic Rate of Return

1. The economic rates of return from participating enterprises havebeen calculated as shown in the attached tables. The following principal as-sumntions have heen made-

(a) MorM market nrices as projected by the Trade Policies andExnort Prolections Division of IBRD's Economics Departmenthave been used to estimate benefits.

(b) Current prices net of taxes and duties have been used forinvestments and price contingencies have been excluded.

(c) Water rates on major irrigation schemes have been adjustedto reflect the cost of scheme investment.

(d) Family labor has been excluded from productioncosts. Onlv hired labor during the peak periodshas been included.

(e) The electricity connection charge has not beenincluded as an investment cost (see Annex 8).

1. Rased on these assumptions, the economic rates of return over thelife of the assets would range from 33% to 55%.

The effects of possible decreases in production value (through low-er prices or vields) have been tested. If gross production value wereto decline by 2n% the economic rates of return would range from 15% to 30%.

lnvvember R, 1q71

I N D I A


FARM MODELS: ECONOMIC

Model I: Investment: Improved Dugwell (Rs 3,850); Farm Size 4 ha

Area Yield . Costs Gross Production Value Net Production Value



- - - - ha -ton/ha - - - - - - - - - - - - - - - - - - - Rs - - - - - - - --- - - - - - - - - - - - - - - -

Kharif

Pulses 0.7 0.5 0.4 0.6 47 54 244 261 197 207 10

Jowar (Irrigated) 1.0 1.7 3.0 3.0 782 1,329 1,590 2,703 808 1,374 566

Jowar (Non-Irrigated) 1.0 - 0.6 - 110 - 318 - 208 - (208)

Groundnut 0.4 0.4 0.9 1.4 106 220 360 560 254 340 86

Cotton 0.5 1.0 1.4 1.4 478 955 910 1,820 432 865 433

Chillies 0.1 0.2 1.6 1.6 104 208 338 675 234 467 233

Sugarcane 1 0.2 0.2 - - - - - - - - -

Rabi

Groundnut - 0.4 - 1.4 - 220 - 560 - 340 340

Wheat 0.8 1.0 1.4 1.4 343 429 784 980 441 551 110

Vegetables 0.2 0.4 9.3 9.3 230 460 744 1,488 514 1,028 514

Sugarcane 0.2 0.2 87.5 87.5 742 742 963 963 221 221 -

Total 5.1 6.0 2,942 4,617

Cropping Intensity 1287 153% Hired Labor 124 532 (124) (532) (408)

Total 3,066 5,149 6,251 10,010 3,185 4,861 1,676 %

1/ Annual Crop.

December 6, 1971

I N D I A


FARM MoDELS: ECONOMIC

Model II: Investment: Dugwell (Rs 15,350); Farm Size 5 ha

Area Yield *. Costs Gross Production Value Net Production ValueFull Full Full Full Full Increrneni

Befo-e Development Before Development Before Development Before Development Before Development---- ha - - - - - ton/ha - - - - - - - - - - - - - - - - - Rg - - - - - - - - - - - - - - - - - - - - - - - - -

Rharif

Pulses 0.6 0.5 0.4 0.6 40 54 209 261 169 207 38Jowar 2.0 2.0 0.8 3.0 220 1,564 848 3,180 628 1,616 988Cotton 2.0 1.0 0.3 1.4 350 955 780 1,820 430 865 435Groundnut 0.4 0.4 0.7 1.4 106 220 280 560 174 340 166Chillies - 0.2 - 1.6 - 208 - 675 _ 467 467Sugarcane _/ - 0.2 - - - -Banana 1/ - 0.2 - - - - _ _ _ _

Rabi

Groundnut - 0.4 - 1.4 - 220 - 560 - 340 340Wheat - 1.0 - 1.4 - 429 - 980 - 551 551Vegetables - 0.5 - 9.3 - 578 - 1,860 -1,282 ,2821Sugarcane - 0.2 - 87.5 - 742 - 963 - 221 221Banana - 0.2 - 50.0 - 1,400 - 4,000 - 2,600 2,600

Total 5.0 6.8 716 6,370

Cropping Int,ensity 100% 136% Hired Labor - 656 (656) (656) N

Total 716 7,026 2,117 14,859 1,401 7,833 6,432 W

1/ Annual Crop

December 6, 1971

I N D I A



Model III: Investment: Tubewell (Rs 57.200); 5 Farms, Size 4 ha

Area Yield Costs Gross Production Valueu e



- - - - ha - - - - ton/ha - - - - - - - - - - - - - - - - - -s- - -- - - -- - - - - - - - - - - - -

Kharif

Pulses 0.5 - 0.4 - 34 - 174 - 140 - (140)

Jowar 1.5 1.8 0.8 3.0 165 1,408 636 2,862 471 1,454 983

Bajra 0.2 - 0.5 - 19 - 77 - 58 - (58)

Groundnut 0.3 - 0.7 - 80 210 - 130 - (130)

Cotton 1.5 0.8 0.3 1.4 263 764 585 1,456 322 692 370

Chillies - 0.4 - 1.6 - 416 - 1,351 - 935 935

Sugarcane l/ - 0.4 - - -

Banana I/ - 0.2 - - - - - _ _

Rabi

Groundnut - 0.3 - 1.9 - 165 - 570 - 405 405

Wheat - 1.0 - 1.4 - 429 - 960 - 551 551

Vegetables - 0.3 - 9.3 - 344 - 1,116 - 772 772

Sugarcane - 0.4 - 87.5 - 1,484 - 1,925 - 441 441

Banana - 0.2 - 50.0 - 1,400 - 4,000 - 2,600 2,600

Total 4.0 5.8 561 6,410

Cropping Intpnsity 100% 145% Hired Labor - 740 (740) (740) '

Total 561 7,150 1,682 14,260 1,121 7,110 5,989

1/ Annual Crop

December 6, 1971

I N D I A



Model IV: Investment: Lift Irrigation (Rs 472,640); 46 Farms, Size 5 ha

Area Yield _ Costs Gross Production Value Net Production ValueFull Full Full Full Full Incremental

Before Development Before Development Before Development Before Development Before Development-- ha- ---- ---- ton/ha_ _ - a - -~ ~~ ~ton/a -- - - - -- -- - - - -- -Rs - - - - - - - - - - - - - - - - - - - - - - - -

Kharif

Pulses 0.7 0.5 0.4 0.6 47 54 244 261 197 207 10Jowar 2.0 2.2 0.8 3.0 220 1,720 848 3,498 628 1,778 1,150Groundnut 0.4 - 0.8 - 106 - 320 - 214 - (214)Cotton 1.7 1.0 0.3 1.4 298 955 663 1,820 365 865 500Chillies - 0.2 - 1.6 - 208 - 675 - 467 467Sugarcane 1/ - 0.3 - - _Banana 1/ - 0.3 _ _

Rabi

Groundnut - 0.5 - 1.4 - 276 - 700 - 424 424Wheat 0.3 1.0 0.5 1.4 84 429 105 980 21 551 530Vegetables - 0.5 - 9.3 - 574 - 1,860 - 1,286 1,286Sugarcane - 0.3 - 87.5 - 1,113 - 1,444 - 331 331Banana - 0.3 - 50.0 - 2,100 - 6,000 - 3,900 3,900

Total 5.1 7.1 755 7,429 10

Cropping Intensity 102% 1427/ Hired Labor - 936 (936) (936) I >

Total 755 8,365 2,180 17,238 1,425 8,873 7,448

1/ Annual Crop

December 6, 1971

I N D I A



Model V: Investment: Land Development (Rs 4,369); Farm Size 2.5 ha

* .Area _- Yield _ Costs Gross Production Value Net Production Value

Full Full Full Full Full I:icrernental


- - - - hatnha - - - - - - - - -tnh - - -________ - -- - - - - - -Ra - - - - - - - - - - - - - - - -

Kharif

Pulses 0.3 0.2 0.4 0.6 20 23 104 104 84 81 (3)

Jowar 0.8 0.8 0.8 3.0 88 666 339 1,272 251 606 355

Cotton 0.8 0.8 0.3 1.4 140 805 312 1,456 172 651 479

Rice 0.2 0.4 0.8 2.5 37 177 91 570 54 393 339

Chillies - 0.2 - 1.6 - 218 - 675 - 457 457

Rabi

Wheat 0.2 0.4 0.6 1.4 56 192 84 392 28 200 172

Jowar 0.4 0.2 0.8 3.0 44 166 170 318 126 152 26

Rice - 0.4 - 2.0 - 389 - 456 - 67 67

Vegetables - 0.1 _ 9.3 - 129 - 372 _ 243 243

Total 2.7 3.5 385 2,765

Cropping Intensity 108=/ 1407/ hired Labor - 32 - (32) (32)

Total 385 2,797 1,100 5,615 715 2,818 2,103 *

December 6, 1971 x

ANNEX 9Appendix 9-2

I N D I A


ECONOMIC RATES OF RETUPN BY TYPE OF INVESTMENT(Rs)

Year 1 2 3 4 5-7 8 9-14 15 16-20

Model I: Investment: Improved Dugwell(Rs 3,850) Farm Size: 4 ha

Net Value of Incremental Production / 838 1,257 1,676 1,676 1,676 1,676 / 1,676 1,676 1,676Capital Investment 3,850 -- -- -- -- 1.175 - -- 1.175 --Net Incremental Flow (3,012) 1,257 1,676 1,676 1,676 501 1,676 501 1,676

Economic Rate of Return: W0KWith 20% yield or price decline 15%1) year 1 50%; year 2, 75%; year 3 onward fall value2) 507% of pump and motor

Model II: Investment Dugwell(Rs 15,350): Farm Size: 5 ha

Net Value of Incremental Production / 1,286 2,573 3,859 5,146 6,432 6,432 6,432 6,432 6,432Capital Investment 15350 -- -- -- -- 2.350 -- 2,350 --Net Incremental Flow (14,064) 2,573 3,859 5,146 6,432 4,082 6,432 4,082 6,432

Economic Rate of Return: 33%With 207. yield or price decline 17%1) year 1, 2074; year 2, 40%; year 3, 607%; year 4, 80%; year

5 onward full value.

Model III: Investment Tubewell(Rs 11,440)1/: Farm Size: 4 ha

Net Value of Incremental Production 2/ 1,198 2,396 3,593 4,791 5,989 5,989 5,989 5,989 5,989Capital Investment 11 440 - -- --- --- 940 - 940Net Incremental Flow (10,242) 2,396 3,591 4,791 5,989 5X049 5,989 5,049 5,989

Economic Rate of Return: 41%With 207% yield or price decline 22%1) Partial investment of total scheme2) year 1, 20%; year 2, 40%/; year 3, 60%; year 4, 80%; year 5

onward full value.

Model IV: Investment Lift Irrigation(Rs 10.340)1/: Farm Size: 5 ha

Net Value of Incremental Preductian 2/ 1,490 2,979 4,469 5,958 7,448 7,448 7,448 7,448 7,448Capital Investment 10.340 -- -- -- -- 2X465 -- 2.465 --Net Incremental Flow (8,850) 2,979 4,469 5,958 7,448 4,983 7,448 4,983 7,448

Economic Rate of Return: 55%With 20% yield or price decline 302l) Partial investment of total scheme2) year 1, 20%; year 2, 40%; year 3, 607%; year 4, 80%;

year 5 onward full value.

Model V: Investment: Land Development 16-30(Rs 4,365): Farm Size 2.5 ha

Net Value of Incremental Production 1/ 421 841 1,262 1,682 2,103 2,103 2,123 2,103 2,103Capital Investment 4.365 -- -- -- -- -- -- -- --

Net Incremental Flow (3,944) 841 1,262 1,682 2,103 2,103 2,103 2,103 2,103

Economic Rate of Return: 39%With 20% yield or price decline 19%1) year 1, 20%; year 2, 40%; year 3, 60%; year 4, 80%;

year 5 onward full value.

February 10, 1972

ANNEX 10Page 1

INDIA


Comparison of Alternate Transport Means for Sugarcane

A. Background

1. The Maharastra State Government has requested financial assistancefrom IDA to provide some 20 well-established sugar mills with about 1,000tractors, mainly for sugarcane transport. The proposal is for wheel-typetractor/trailer units which could also be used for farm operations.

B. Comments

2. Present means of transportation are bullock carts, tractors andtrucks. Limiting factors for the choice of transport means are, firstly,the crushing season which normally should not exceed 180 days from Octoberthrough April/May and, secondly, the necessity of processing the harvestedcane within 24 hours in order to avoid unacceptable loss of sugar content.Bullock carts are only used over short distances (up to 10 km) because oftheir low carrying capacity and speed. Tractors and trucks are used forlonger distances, but information obtained in the field indicates that thetransport volume by truck greatly exceeds the volume handled by bullock cart:and tractors.

3. With regard to the advantage of tractors over trucks on deterioratroads, it appears that, under normal circumstances, the existing roadconditions in the sugarcane area, especially during the dry harvestingseason, are adequate to allow trucks access to the fields. This assumptionis supported by existing transport patterns.

4. The use of tractors for farm operations would be very limited,since the sugar mills would require the use of the tractor/trailer unitsfor transport during the harvesting season which covers, to a great extent,the periods during which tractors could be used for cultivation purposes.

C. Comparative Analysis

5. The intention of the following analysis is to compare investmentsin a tractor fleet and a truck fleet for sugarcane transport. For thispurpose, it has been assumed that investments in the sugar industry would

ANNEX 10Page 2

be economically justified. Since sugar processing is an integratedprocess, benefits for cane transport cannot be determined uniquely and,therefore, a least cost solution has been sought for the transport compo-nent. Transport volume and thus benefits would be the same in both cases,although tractors might be used for farm operations to some extent. It hasbeen assumed, however, that these minor additional benefits would be offsetby additional truck usage for general cargo after the harvesting season.Therefore only estimated cost streams have been computed and discounted,and the net present values compared. The lowest net present value indicatesthe preferred alternative.

6. General Assumptions: A sugar cooperative would exp-and its areaunder sugarcane from about 7,300 ha to about 8,900 ha with-an increase inthe corresponding daily crushing capacity from 2,600 tons to 3,250-tons.In addition, the weighing and unloading facilities would be improved tohandle the incremental intake of about 120,000 tons of cane in the 180-daycrushing season. The road network would be adequate to allow access tosugar fields.

7. Traffic Volume: About 120,000 tons of sugarcane grown in therange between 10 and 40 km around the sugar mill. The average daily volumewould be about 670 tons to be hauled over a linear average distance of25 km.

3.1 Time Limits: Assuming that present means of transport areadequate to handle present production in 180 working days, the additionaltransport facilities would have to work under the same constraint. Inacldition, one transport unit cannot work more than 10 hours per workingday.

9. Transport Units: Bullock carts have been excluded from thisarnalvsis because of the distances involved and their low carrying capacity.The tractor unit used for comparison would consist of one tractor andfour trailers and the truck unit would consist of one truck and twotrailers. Two trailers of the tractor unit (one of the truck unit) wouldbe loaded in the field during haulage of the others to the sugar mill.

10. Number of Units Required:

Tractor Unit

(a) Hauling Distance: 25 km; one-way

(b) Tractor Speed: 10 km/hour; loaded15 km/hour; unloaded

ANNEX 10Page 3

(c) Number of Daily Trips:

(i) Travelling time to and from mill: 4.2 hours

(ii) Turn-around time at mill:Weighing-parking-uncoupling-coupling: 0.5 hours

(iii) Turn-around time at field:Uncoupling-coupling: 0.2 hours

(iv) Time required for one round trip: 4.9 hours

(v) Trips per day: 2

The tractor unit would travel 100 km per day and haul 18 tons over adistance of 25 km to the sugar mill. For the daily volume of 670 tons,37 units would be required.

Truck Unit

(a) Haulipg Distance: 25 km; one-way

(b) Truck Speed: 30 km/hour; loaded40 km/hour, unloaded

(c) Number of Dailv Trips:

(f) Travelling time to and from mill: 1.5 hours

(ii) Turn-around time at mill:Weighing-parking-uncoupling-unloading-coupling: 0.6 hours

(iii) Turn-around time at field:Uncoupling-loading-coupling: 1.2 hours

(iv) Time required for one round trip: 3.3 hours

(v) Trips per day: 3

The truck unit would travel 150 km per day and haul 56 tons over a distanceof 25 km to the sugar mill. For the daily volume of 670 tons, 12 unitswould be required.

ANNEX 10Page 4

11. Investment and Operating Costs:

Tractor TTnit

Investment Cost

Tractor (1); 35 hp Rs 44,400Trailers (4); 4.5 ton Rs 24,000

Rs 6 8_ 4 00

Operating Cost

Hours operated per season 1,800 h/seasonOperating Costs per season See Table 1Life of Assets: Tractor 10,000 hours (6 seasons)

Trailer 20,000 hours (12 seasons)Salvage value 20% of original investment

Truck Unit

Investment Cost

Truck (1); 9.5 ton Rs 60,000Trailers (2); 9 ton Rs 22,000

Rs ~82 0 00

Operating Cost

Hours operated per season 1,800 h/seasonKilometers travelled per season 27,000 kmOperating Costs per season See Table 1Life of Assets: Truck 330,000 km (12 seasons)

Trailer 330,000 km (12 seasons)Salvage value 20% of original investment

12>. The figures in Appendix 10-1 clearly indicate that a truck/trailercombination is preferable to a tractor/trailer combination under theassumptions made. The main reasons for this result are higher speed,g:reater capacity, and longer lifetime of the trucks. The key variables inthis analysis are the distances involved and the mode of operation. Sinceit: might not always be possible to operate a truck/trailer combination inthe sugarcane area, the results have been tested using alternate assumptionsconcerning the distance and the mode of operation. The results arenresented in the table below:

ANNEX 10Page 5

Comparison of Alternate Means of Transport Under Various Assumptions

Alternate Modes Distance from Field Means of Transport to be Chosenof Operation to Sugar Mill Financial Costs Economic Costs

Tractor/trailer 25 km Truck/trailer- Truck/trailerVS .

Truck/traiter

Tractor/trailer 25 km Truck Truckvs. Truck

Tractor/trailer 10 km Truck/trailer Truck/trailerVs.

Truck/trailer

Tractor/trailer 10 km Tractor/trailer Truckvs. Truck

/1 The analysis for this alternative is presented in Appendix 10-1. Theeconomic analysis is essentially the same and involves primarilycorresponding percentage changes in the costs.

13. The results show that over short distances a tractor/trailer fleetwould he preferable to a truck (without trailer) operation in financialterms, mainly because of the high taxation on nonagricultural vehicles.This exDlains also why some sugar mills use tractor/trailer combinationsto some extent for sugarcane haulage. However, the economic analysisindicates that both a truck/trailer combination and a solo truck operationwould he preferable to a tractor/trailer combination, even at 10 km.

14. The foregoing analysis assumes that the mills themselves would ownand onerate the means of transport for sugarcane and could, therefore,consider the possibilitv of using a truck fleet for hauling general cargo.In practice, however, a truck fleet would probably stand idle in the offseason since nublic carrier licenses are both expensive and difficult toobtain. Therefore the optimum solution under existing conditions might bethe rental of trucks on a fixed term basis.

November A, 1971

1 N D I A

MAHARASIITRA AGRICULTURAL CREDIT PROJECT

Net Present Worth of Cost Streams for Transport Alternatives(in Rs)

Season 1 2 3 4 5 6 7 6 9 10 11 12 13

lrac-or Unit

tnvestments

Tractor (1) 44,400 44,400Trailers (4) 24,000

Salvage Valoe (20X) (8,900) (13,700)

Operating Costs(1,800 hI

Foel and Lubrication 6,800 6,800 ) 6,800 6,800(R. 3.70/h)

Maintenance and Repairs 7,400 9,800 1/ 7,400 9,800Insorance (Camp.) 400 400 ) 400 400Drivers Wagrs ) 21,800 21,800 21,800 21,800 ) 21,800 21,800 21,800 21,800

(R. 250/e) 3,000 3,000 3,000 3.000

Clea.er's Wages(Rs 150/rn) 1,800 1.800 1.800

Tractor Unit 19,400 21,800 21,800 21,800 21,800 21,800 17,600 21,800 21,800 21,800 21,800 21,800 (13,700)

Total Fleet (37 Units)(Rs '000) 2/ 3.249 807 807 807 807 807 1_965 807 807 807 807 807 ( 507)

Net Present Value ofCost Stream at 107. 8.983

Truck Unit

Investments

Truck 60,000rrailers (2) 22,000

Salvage Valor (20J) (16,400)

Operating Costs (27,000 km)

Fuel and Lubrication(Rs 0.21/km) 5,600 5,600 )

Maintenance 2/ 5,000 12,OCO 1/Tao and Registration 4,500 4,500 ) 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400

Insurance 2,500 2,500Driver' Wages 3,000 3,000Cleaner's Wages 1,800 1,800

Tru-k UniL 22,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 (16,400)

Total Fleet (Rs '000) 2/

(a) 12 Units 1,253 353 353 353 353 353 353 353 353 353 353 353 ( 197)

(b) 24 Units(Without Trailers) 1,978 706 706 706 706 706 706 706 706 706 706 706 ( 300)

(a) Net P-resont Valor ofCost Stream at 10!/ z

(12 Units) 3,483(b) Net Present VolIe of a,

Cost Stream at 10' x0(24 Unit,) 6,472 a

1/ Ose set of tires a yer due to higher road u,sae-

D/ Including ir6 est19 nts and salvage valve.

December 6. 1921

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