Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 8145

PROJECT COMPLETION REPORT

INDIA

DROUGHT ASSISTANCE PROJECT(LOAN 2886-IN/CREDIT 1852-IN)

OCTOBER 31, 1989

Country Operations DivisionCountry Department IVAsia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Rupee (Rp)(Yearly Averages)

Year Rupee/US$

1987 (Project Appraised) 12.961988 (Project Completed) 14.60

ACRONYMS

EOI - Bank of IndiaGOI - Government of India_OC - Indian Oil CorporationMaTC - Minerals and Metals Trading CorporationSBI - State Bank of IndiaSTC - State Trading Corporation

FISCAL YEAR

Government of India: April 1 - March 31

FOII OFFICIAL USE ONLYTHE WORLD SANKF

Washington. DC 20433USA.

Oll co *s ostn c wlOpsuafm ivabMgn

October 31, 1989

MEMORANDUM TO THE EYXCUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on IndiaDrought Assistance Project (Loan 2886-IN/Credit 1852-IN)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on India - Drought Assistance Project (Loan 2886-IN/Credit 1852-IN)" prepared by the Asia Regional Office. No audit of thisproject has been made by the Operations Evaluation Department at this time.

Attachment

This document has a restried distribution and may be used by recipients only in the petormenoeof their official duties. Its contents may not otherwise be disclosed without World Bank authoiastion.

FOR OMCIAL USE ONLY

PROJECT COMPLETION REPORT

INDIA

DROUGHT ASSISTANCE PROJECT(LOAN 2886-IN/CREDIT 1852-IN)

TABLE OF CONTENTS

Page No.

PREFACE ..................................................... . iEVALUATION SUMMARY ................................................ iii

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

1. Project Identity ......... .............................. .1 2. Background ................................................ .1 3. Project Objectives and Description ..... ................... . 34. Project Design and Organization ...... t.................i.n... 45. Project Implementation ......... ............................ 56. Project Results ........................................... . 6

Actual Impact of the Drought ...... ....................... 6Achievement of Project Objectives ........................ 7

7. Project Sustainability ....... ............................ . 98. Bank and Borrower Performance .............................. 99. Financing of Edible Oils ....... ............................ 910. Findings and Lessons Learned ...... ......................... 10

PART III: STATISTICAL INFORMATION

Project Data ............................................... 12Project Timetable .......................................... 12Loan/Credit Disbursements . . .................... ........... 12Project Costs .............................................. 13Staff Inputs ............................................... 13Field Mission Dates .......... . ............... 13Status of Covenants ........................................ 14

I ni.is 'document has a restricted distribution and may be used by recipients only in the perforManceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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PROJECT COMPLETION REPORT

DROUGHT ASSISTANCE PROJEC',(LOAN 2886-IN/CREDIT 1852-IN)

PREFACE

This is the Project Cunpletion Report (PCR) for the DroughtAssistance Project in India, for which Loan 2886-IN in the amount of US$150.0million and Credit 1852-IN in the amount of SDR 156.3 million (US$200.0 mil-lion equivalent) were approved on Novciber 24, 1987. The loan-credit wasclosed on July 15, 1988, eight and a half months ahead of schedule. It wasfully disbursed, and the last disbursement was on October 6, 1988.

The PCR was prepared by the Country Operations Division of the IndiaDepartment, Asia Regional Office (Preface, Evaluation Summary, Parts I andIII), based on the President's Report, the loan/credit documents, and studyof the project files. The draft PCR (Parts I and III) was sent to theBorrower, and the editorial comments submitted by the Borrower have beenincorporated in the report. The Borrower chose not to submit an assessmentfor incorporation as Part II.

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PROJECT COMPLETION PEPORT

INIA

DROUGHT ASSISTANCE PROJECT(LOAN 2886-INICREDIT 1852-IN)

EVALUATION SUMKARY

Objectives

The project objectives were to: (a) assist India in meeting thecosts and the reconstruction/rehabilitation requirements resulting from thedrought; (b) help sustain and enhance the momentum of the economic reformprocess during the drought; and (c) support the Government's longer termstrategy for increasing India's resilience to droughts. The loan/..reditwas designed to provide fast-disbursing assistance, and financing importsof primarily agro-industrial inputs, petroleum products, non-ferrousmetals, and other drought-related industrial intermediate inputs (paras.3.2, 3.3, 4.1-4.3).

Immlementation Exnerience

Project implementation was excellent. Preparation andimplementation of the project were completed under greatly acceleratedtimetables, with a high level of support and professionalism by theBorrower and its implementing agencies. The preparatory work duringappraisal to approve and clarify procurement arrangements for the import ofbulk commodities and other imported items financed by the project wasinstrumental in ensuring smooth and rapid disbursement of the loan/credit(para. 8.1). The use of loan/credit proceeds was in line withunderstandings reached during negotiations (para. 5.1-5.3). The financingof edible oil imports was dictated by the need for urgent replenishment ofstocks as an integral component of the Government's recovery program(paras. 9.1-9.3).

Re-sults

Overall, the Indian economy withstood the impact of the droughtparticularly well. Agricultural value added declined much less than hadbeen anticipated--only 1.0% compared with an initial estimate of between 5%and 8%. The kharif (summer) foodgrain crop declined by about 8%, but therabi (winter) crop increased by 2% compared with 1986/87. The improvedrabi crop was assisted by the spread of irrigation which has enlarged thesector's drought-proof base and by government actions to ensure the supplyof inputs (para. 6.1). the industry and services sector also exhibitedincreased resilience to the agricultural shortfalls (para. 6.2).

Nevertheless, the budgetary and balance of payments costs of thedrought were substantial. Central Government allocations for drought-related relief and public works programs increased by US$1 billion andadditional resources were also earmarked by the states. Edible oil importsincreased from 1.3 mmt in 1986/87 to almost 2 m-t in 1987/88 and there were

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further drought-related imports in 1988/89. Petroleum and petroleurproduct imports increased by 1.8% in 1987/88 to meet the drought-inducedincrease in demand for thermal power. T'his, together with a firming ofworld petroleum prices, led to an increase in the value of petroleumimports of US$l billion. In addition, about 2 mmt of wheat and 850,000tons of rice were imported in 1988/89. These drought-related importscontributed to a loss of foreign exchange reserves of US$300 million in1987/88 and a further loss of US$1.4 billion in 1988/89 (para. 6.3).

In terms of its principal objective of helping to sustain andenhance the momentum of the economic reform process during the droughtsituation, the project must be considered a success: The project, togetherwith support from other donors, played an important role in assisting theGovernment to manage the budgetary and balance of payments consequences ofthe drought without rolling back the reforms already underway and, in fact,with further progress in a number of important areas (para. 6.6). Inparticular, the industr_al reform process continued in 1987 and 1988through a series of policy changes in the regulatory framework which shouldincrease competition and facilitate the modernization process (para. 6.7).In addition, export policies and incentives were further expanded withlmproved access to restricted or canalized imports, extension of exportincentives to indirect exporters, easier access to i-ported capital goods,and improved tax incentives (para. 6.8). Progress in import policy reformhas been less impressive; nevertheless, the process has continued witheasier access to imports by exporters and greater reliance on the exchangerate and tariffs than quantitative controls to limit imports (para. 6.9).

SLignificantly, the project also contributed to an acceleration ofefforts to tackle the problems of farming in rainfed areas as part of theGovernment's longer term strategy for increasing resilience to droughts.Increased efforts are being made to integrate the activities of extensionand soil conservation agencies, at the Center and in the States.Stabilization of watersheds and upgrading of wastelands is being stepped upby acceleration of tree plarting programs and increased use of vegetativesoil conservation. The initial stages of this process are being supportedby ongoing Bank-assisted projects (paras. 6.10 and 6.11).

Sustainabilti,

Overall, the project effectively supported India's economic reformprocess and contributed to an acceleration of the development of programsdesigned to increase India's longer term resilience to drought inagriculture. The prospects for sustaining the initiatives supported by theproject in agriculture, industry, and trade over the medium to longer termappear good in the face of a fairly broad consensus at the senior levels ofthe bureaucracy, an open and constructive dialogue with the Government, anda strong commitment by the Government to move ),head in these areas (paras.6.10-6.11, 7.1).

Findings and Lessons Learned

The project was well conceived, was effectively implaminted, andachieved its stated objectives. The timely completion and success of theproject can be ati bii to a I. ( n)-

(a) The Bank and the Government, in close collaboration, actedpzomptly to assess the overall economic, social and sectoral impact of thedrought, and the extent of the required assistance.

(b) Agreement with the Government on the strategy and scope ofthe overall recovery program was reached rapidly.

(c) Implementation arrangements were simple, made use of existinginstitutions, and were commensurate with the country's implementationcapacity.

(d) The preparatory work to approve and clarify procurementarrangements was instrumental in ensuring smooth and rapid disbursement ofthe loan/credit.

(e) The commitment of the Government to the recovery program, andthe determined efforts and professionalism of the government officials andother agencies involved deserve special mention.

PROJECT COMPLETION REPORT

INDIA

DROUGHT ASSISTANCE PROJECT(LOAN 2886-INICREDIT 1852-IN)

PART I

1. PROJECT IDENTITY

Project Name: Drought Assistance ProjectLoan/Credit No.: Ln 2886-IN/Cr 1852-INRVP Unit: AsiaCountry: IndiaSector: Emergency Assistance Operation

2. A&MUM

2.1 In 1987, India experienced a severe drought. The monsoons whichnormally last from June to September were generally late and deficient: 21of the courtry's 35 meteorological zones had deficient or scanty rainfall,affecting 63% of the area of the country (President's Report, para. 37).For many regions of thLe country this was the third or fourth successiveyear of poor rainfall. Major rainfall deficit areas included some of themost importanr foodgrain producing areas--the Punjln, Western UttarPradesh, Eastern Madhya Pradesh and Orissa. Ironically, much of WestBengal and Bihar experienced torrential rains and suffered some of theworst flooding in decades (PR, para. 38).

2.2 As the extent of the drought became apparent during August andSeptember 1987, it was estimated that there would be a sharp reduction infoodgrain output from the kharif c.op1l/ Kharif foodgrain output wasexpected to fall to around 70 million tons, down from 80 million tons in1986/87 (which was also below normal due to drought conditions) and therecord 89 million tons in 1983/84. The major part of this loss wasexpected in rice production (the main kharif crop). There was also severedamage to the oilseeds crop. In particular, the groundnut crop in Gujarat,which accounts for about 15% of India's oilseed production, was totallvlost. In addition, there was serious damage to fodder, especially inRajasthan and Gujarat, and shortages of water for livestock and humanconsumption were emerging in severely affected western states and inOrissa. In the flood-stricken areas of Eastern India there was somewashout of the rice crop, especially in Northern Pihar (PR, para. 40).

2.3 Official estimates indicated that rice stocks (six million tons asof October 1, 1987) may not have been sufficient to meet desiredconsumption levels and that imports of cereals may also be needed tomaintain minimum stocks as a buffer against future droughts (PR, para. 42).In addition, since India has no reserves of edible oils, imports wererequired to replenish the stocks in the private and public distributionsystems and to sustain the local processing (vanaspati) industry (PR, para. 40).

L/ Kharif is the summer crop usually grown from June/July toOctober/November.

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2.4 The social impact of the drought was expected to be especiallysevere. It was estimated that nearly 285 million people would be affectedin the rural areas in different states. Of these, more than 90 millionbelonged to the vulnerable stetions of society, consisting of small farmersand agricultural laborers. Drinking water shortages, aggravated bysuccessive droughts in Rajasthan, Gujarat, Orissa and other states, wereexpected to affect more than 90,000 villages in these states (PR, para.43).

2.5 Agricultural GDP was expected to decline by 5 to 8%. Loweragricultural demand and drought-induced power shortages were also expectedto feed through into re.aced growth in the industrial and service sectors,leading to a reduction in growth of total GDP to no more than 2%, with thepossibility of zero overall growth (PR, para. 44). The budgetary cost ofthe drought was also expected to be significant. The Government increasedits allocation for drought-related relief and public works programs from Rs6.5 billion (equivalent to US$500 million) to Rs 20 billion (US$1.5billion), financed by cuts in other outlays and a package of additionaltaxes (PR, para. 45). Shortages of foodstuffs generated an acceleration ofdomestic inflation, with an increase in consumer prices approaching 10%expected (PR, para. 46).

2.6 The balai ,e of payments costs were estimated at a minimum ofUS$1.0 to US$1.2 billion for the remainder of the Indian fiscal year (toHiarch 31, 1988) and more than US$1.5 billion over an eighteen month period.For the period to March 1988, agricultural commodity imports (includingfoodgrains and edible oils) were expected to increase by US$0.8 billion;additional petroleum and petroleum product imports of US$150 million andnon-ferrous metal imports of US$50 million were also expected. Exports ofagricultural products were expected to fall by ove- US$200 million (PR,para. 47).

2.7 As the severity of the drought became apparent during the summermonths, the Government acted promptly to implement a comprehensive droughtrelief program. The main relief efforts were directed at minimizing croplosses, especially for the rabi crop (the winter crop, usually grown fromOctober/November to February/April), and providing emergency relief forelements of the population severely affected by the drought. Measurestaken to minimize crop losses were focussed on ensuring adequate suppliesof major inputs (e.g., seeds, water, power and credit) and increasing thetotal area coverage under rabi crops and increasing the coverage of lesswater-inten3ive and alternative short-duration crops in water-deficientareas. The Center and State Governments have well-established machinery tomeet the immediate needs of the population severely affected by drought,since India has a history of periodic droughts and one part of the countryor another experiences drought almost every year. Key elements of thedrought relief programs included: (a) rural employment programs; (b)provision of drinking water; (c) public distribution system for essentialcommodities; (d) supplementary nutrition programs; and (e) cattlepreservation (PR, paras. 48-53).

3-

3. PROJECT OBJECTIVES AND DESCRIPTION

3.1 During the first three years of the Seventh Plan (which covers1985-90), the Government undertook a series of important policy initiativesin industry, trade and public finance. These included significantderegulation of industry, easing some restrictions on imports, especiallycapital goods for the modernization of industry, the introduction of newexport promotion measures and incentives and the introduction of a modifiedvalue added tax system (IIODVAT), covering more than one third of India'smanufactured production (PR, paras. 10 to 12). Many of these initiativesrepresented radical departures from past practice. The associatedadjustment costs (including budgetary and balance of payments costs) we,realso potentially significant, albeit manageable. The onset of severedrought in 1987, therefore, posed a considerable threat to the adjustmentprocess as budgetary, balance of payments and other resources were pre-empted to meet the immediate needs of drought relief. As indicated (para.2.6), the balance of payments costs of the drought were expected to exceedUS$1.5 billion over an eighteen month period. Foreign exchange reserveshad already fallen from US$5.4 billion in January 1987 to US$5.2 billion(excluding gold) in September 1987 (PR, para. 64). While reserves remainedadequate to meet the expected import bill, the Government wasunderstandably concerned that, if foreign exchange reserves continued tofall significantly there could be a crisis of confidence, especially amongnon-resident Indians, who account for substantial net inflows of foreignexchange (about US$1.3 billion in 1986/87), and who bold very large freely-convertible deposits (estimated at about US$7 billion in mid-1987).

3'.2 The objectives of the project were to: (a) assist India in meetingthe costs and the reconstruction/rehabilitation requirements resulting fromthe drought; (b) help sustain and enhance the momentum of the economicreform process daring the drought; and (c) support the Government's longerterm strategy for increasing India's resilience to droughts. The timelyinjection of fast-disbursing foreign exchange under the project wasdesigned to assist the Government to manage the balance of paymentsconsequences of the drought while w^intaining the momentum of the economicreform process. Without the proposed assistance from the Bank and fromJapan and other donors (the total of which was expected to amount to aroundUS$ 750 million over an eighteen month period), balance of paymentspressures were considered likely to lead to irresistible demands on theGovernment to protect its reserves position by restricting imports, therebyslowing economic growth and delaying the process of industrialmodernization and restructuring (PR, para. 64).

3.3 The loan of US$150 million and credit of SDR 156.3 million (US$200million equivalent) was designed to finance imports of primarily agro-industrial inputs (including oilseeds, edible oils, pesticides, veterinarymedicines and animal feed), petroleum and petroleum products, non-ferrousmetals, and other drought-related industrial intermediate inputs (e.g.,textile fibers and industrial components and spares). The bulk of theloan/credit was expected to finance: (a) petroleum and petrole "roductsto meet the increased demand for thermal power generation--especially forirrigation and drinking water pumping--and compensate for reduced hydro-power generation due to the drop in reservoir levels, and for incremental

. ('I I - is

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the production of which was curtailed due to pre-emption of power suppliesfor agricultural and drinking water needs; and (c) edible oils to replenishstocks in the private and public distribution systems and ensure adequatesupplies for the local processing industry (PR, para. 66).

3.4 In conjunction with the project, the Bank also introducedmodifications to its existing portfolio to speed up the implementation ofongoing projects in drought-affected areas and, in selected cases, widenedthe scope of projects to make them more responsive to the criticalconstraints on agricultural production and village water supply arisingfrom the drought (PR, para. 69).

4. PROJECT DESIGN AND ORGANIZATION

4.1 Consistent with the objectives outlined above, the project wasdesigned to provide assistance in an amount and over a sufficiently shorttime period to have a discernible impact on the Government's ability tomanage the heavy costs of its drought relief efforts while at the same timesustaining and enhancing the momentum of the economic reform process. Theproject was considered to be an appropriate response to the droughtsituatLon on the following grounds: (a) the drought was one of the worst ofthe century and followed two consecutive years of poor rainfall; 'b) Indiahas in place an effective drought relief program; (c) it has sustainedsatLsfactory economic performance over time which has helped buildresilience to droughts; (d) it has a satisfactory longer term droughtamelioration program; and (e) it has an economic reform program under waywhich the Bank endorses, but which was placed in jeopardy because of thedrought.

4.2 The project provided an important breakthrough in our policydialogue with GOI. In the context of the project, the Governmentreaffirmed its commitment to continue the process of modernization andincreased efficiency of the economy upon which it has embarked and outlinedits program in a letter to the Bank (ref. Annex IV of the President'sReport). This program includes deregulation of domestic industries andstreamlined decision making on the revival or exit of sick industrialunits. It also includes improvements in the support system for exportersand review of import regulations and tariffs to eliminate anomalies in thestructure of nominal and effective protection. As noted (ref. para. 3.2),in the context of discussions of the project the Government also indicatedits intentions to accelerate implementation of the Seventh Plan strategyfor longer term drought amelioration and rehabilitation. Key elementsinclude the adoption of a National Water Policy, with priority given tointensifying efforts to improve the effectiveness of existing irrigationschemes already underway and improve the planning and design of futureprojects. At the same time the strategy includes increased attentionfocussed on rainfed agriculture, with particular emphasis to be placed onaccelerating the dissemination of technologies for soil and on-farmmoisture conservation.

4.3 In accordance with the urgency of the situation, the project wasprepared and presented to the Board on a greatly accelerated timetable.Based on initial discussions with the Government in late August 1987, the

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the Board in November. Given the objective of providing fast-disbursingassistance, particular attention was focussed during appraisal on theprocurement arrangements for items on the positive list of imports ofdrought-related products (including petroleum and petroleum products,edible oils, etc.), most of which had not previously been financed underBank-assisted projects in India. The Regional Procurement Adviser visitedIndia to reach agreement with each of the purchasing (importing) agencieson the products to be covered and the procurement arrangements to befollowed. Many of the products included in the project are purchased underinternational tendering procedures. These procedures were reviewed andfound to be generally consistent with Bank requirements and, wherenecessary, modifications were agreed. This approach proved to be highlysuccessful in facilitating smooth and rapid project implementation andprovided a model for the design of import financing components for otherprojects in India.

5. PROJECT IMPL9MTION

5.1 Implementation of the project, in terms of disbursement of thefunds to finance imports of drought-related items, was excellent. Theproject was declared effective on December 16, 1987 with a Closing Date ofMarch 31, 1989. The Loan was fully disbursed by June 1988 Z/ and closed 81/2 months ahead of schedule on July 15, 1988.

5.2 The use of loan/credit proceeds was in line with understandingsreached during negotiations regardlng the coverage and composition ofdrought-related imports to be financed by the Bank/IDA, incluclng GOI'sundertaking that no more than US$100 million would be used to financeimports of edible oils. More than 80% of the loan/credit was diLs-arsedagainst major contracts for which the Borrower submitted documentaryevidence to the Bank for review. All such contracts were entered on Form384s. The loan/credit was disbursed against the following imports:

Petroleum and petroleum products US$ 189.7mEdible oils : US$ 90.1mNon-ferrous metals : US$ 27.7mIndustrial spares & raw materials : US$ 57.7m

_ ,......

TOTAL US$ 365.2m A/

A/ Includes currency adjustment equivalent to US$15.2 million

5.3 The excellent disbursement performance under the project was inlarge part due to the determined efforts of GOI and the purchasing agencies(comprising indian Oil Corporation, State Trading Corporation, Minerals andMetals Trading Corporation, Bank of India and State Bank of India), and tothe close attention paid to procurement arrangements during projectpreparation (ref. para. 4.3 above).

/ An amount of US$2.1 milllon equivalent was disbursed on October 6, 1988representing a small balar-e remaining in the Special Account due tocurrency fluctuations.

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6. PROJECT RESUlTS

Actual Impact of the Drought

6.1 Overall, the Indian economy withstood the impact of the droughtparticularly well. Agricultural value added declined much less than hadbeen anticipated, recording a decline of only 1.0% compared with an initialestimate of between 5 and 8% (ref. para. 2.5). The kharif foodgrain cropdeclined by only about 8t and the rabi crop, which is largely irrigation-based, increased by 2% compared with 1986/87. This contrasts with thedrought of 1979/80, for example, during which kharif and rabi foodgrainoutput declined by 19% and 14%, respectively. The smaller khariffoodgrains loss in 1987/88 is largely attributable to the above averagerainfall in the Eastern rice region, which in fact experienced floods whilethe rest of the country was suffering drought conditions. The positivegrowth in rabi foodgrain production, despite moisture stress and other Egrowth retarding effects of monsoon failure which extended into the rabiseason, was assisted by the spread of Irrigation that has enlarged thesector's drought-proof base and by Government actions to ensure the supplyof inputs, especially steps to achieve improved management of availablewater resources.

6.2 In addition to the better-than-expected agricultural performance,the industry and services sectors also exhibited increased resilience toagricultural shortfalls. Industrial value added grew at 6.5%, down from8.3% in 1986/87 but above the trend rate of growth over the previous 10years of 5.3%; the services sector grew at 5.1%. Overall, GDP growth for1987/88 is estimAted at 3.6%, compared with earlier projections of 1-2%.

6.3 The budgetary and balance of payments costs of the drought weresubstantial. As indicated (para. 2.5), the Central Government increasedits allocation for drought-related relief and public works programs by US$1billion. The overall cost would have beer much higher, however, aftertaking into account the States' outlays from their own resources on droughtrelief activities. On the balance of payments front, as expected (ref.para. 2.6), the costs were substantial and carried over into 1988/89.Edible oil imports increased from 1.3 mmt in 1986/87 to almost 2 mit in1987/88 and there were further drought-related imports in 1988/89. Becauseof the severity of the drought, which also followed two years of poormonsoons, hydroelectric power generation declined by 12%. In response,petroleum and petroleum product (POL) imports increased by 18% in 1987/88to meet the drought-induced increase in demand for thermal power. This,together with a firming of world petroleum prices, led to an increase inthe value of POL imports of US$1 billion. In addition, about 2 mmt ofwheat and 850,000 tons of rice were imported in 1988/89. These drought-related imports contributed to a loss of foreign exchange reserves ofUS$300 million in 1987/88 and a further loss of US$1.4 billion in 1988/89.

6.4 To ensure food supplies in the face of the drought, the Governmentincreased sales through the Public Distribution System (PDS) anddistribution through the relief network. Almost 23 mit of wheat and ricewere provided from the Central Pool, versus 20 mit in 1986/87. Lowprocurement meant that much of this came from the buffer stocks that hadbeen built up in earlier years; stocks fell from 19.5 mnt in March 1987 to

9.4 -mt in March 1988. Supplies of edlble oils, for which there were nobuffer stocks, were augmented by a major increase in Government imports(ref. para. 6.3). Overall, the Government's efforts, supported by theConsortium members and channeled through the well-developed relief system,played a major role in mitigating the severe economic and socialconsequences of the drought.

6.5 The very good monsoon of 1988 3/ produced a strong recovery inagricultural production and overall economic growth, as well as vitalreplenishment of water resources. The drought-breaking rain even extendedto areas of the country (e.g., Rajasthan and Gujarat) which had experiencedthree or four consecutive years of drought.

Achievement of Project Obiectives

6.6 In terms of its principal objective of helping to sustain andenhance the momentum of the economic reform process during the droughtsituation, the project must be considered a success. The project, togetherwith support from other donors, played an important role in assisting theGovernment to manage the budgetary and balance of payments consequences ofthe drought without rolling back the reforms already underway and, in fact,with further progress in a number of important areas.

6.7 In particular, the industrial reform process continued in 1987 and1988. Among the major measures adopted during this period were: (a)automatic endorsement of licensed capacity at the maximum output reached in1988, 1989, or 1990; (b) easing of licensing requirements, by raising theceiling above which licenses are needed from 1981's Rs 50 million figure toRs 150 million (nearly 100% in real terms) for investments outside urbanareas and to Rs 500 million for investments in the most backward areas; (c)easing of licensing and entry restrictions facing large firms (firmssubject to .he Monopoly and Restrictive Trade Practices Act (MRTP) and theForeign Exchange Restriction Act (FERA)); and (d) reduction in the numberof products legally reserved for small-scale production. These policychanges should increase domestic competition, at the same time makingmodernization easier. The Government has also strengthened its sickindustry policy, resisting "bail-outs" of sick firms while using therecently-created Board for Industrial and Financial Reconstruction and thedevelopment banks to work out financial packages for viable firms and forclosing non-viable ones. Private and public firms are increasingly usingtermination benefits to rationalize their workforce.

6.8 In addition, the considerable improvements in exMoit ]olicies andincentives introduced in recent years were further expanded. The 1988-91Import Export 2olicy, announced in April 1988, enhanced the programs ofimports for exporters. The types of manufactured exports entitled to REPlicenses (transferable licenses that can be used to import restricted orcanalized imports) were increased and rates of entitlement were raised fora number of products. Also, provisions for extending export incentives toindirect exporters were introduced. Exporters' access to imported capitalgoods was improved, by reducing restrictions on capital goods imports for

/ By the end of September, only 3 of 35 districts reported poor or scanty1 7

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exporters and by reducing tariffs on some of them. The policy alsoimproved the rules and facilities for export and trading houses, bondedwarehouses, and free trade zones. In addition, the Budget for 1988/89raised the export profit tax deduction to 100% of export profits, and theReserve Bank of India (RBI) increased and liberalized its foreign exchangeallowance for export marketing. Finally, the coverage of export incentivesand import licensing for exports schemes was broadened and procedures werefurther streamlined.

6.9 While the progress in imgort policy reform has been lessimpressive than for industrial and export policy, the process of gradualreform has continued. The main recent improvements in import policy havebeen easier access to imports by exporters, easier application of existingrestrictions and greater reliance on prices (the exchange rate and tariffs)to limit imports. The substitution of price rationing for quantitativecontrols has had the desirable effect of transferring to the Governmei,t(and exporters in the case of the exchange rate and REP licenses) thescarcity premia on foreign exchange that otherwise would go to recipientsof import licenses. Increased imports of capital goods and intermediateshave been an important factor in the higher growth of total factorproductivity in manufacturing. However, protection remains high on basicinputs and many final products.

6.10 The project also contributed to an acceleration of efforts totackle the problems of farming in rainfed areas as part of the Government'slonger term strategy for increasing resilience to droughts. The severityof the drought and the Bank's close involvement in assisting the Governmentto manage its consequences provided an important opportunity to furthej. thedialogue on these issues and advance the preparation of Bank-assistedprojects for the development of rainfed agriculture. The Government hasgiven priority to accelerating the dissemination of technologies for soiland on-farm moisture conservation. In this context, increased efforts arebeing made to integrate the activities of extension and soil conservationagencies, at the Center and in the States. Stabilization of watersheds andupgrading of wastelands is being stepped up by acceleration of treeplanting programs and increased use of vegetative soil conservation withinthe framework of the National Watershed Program for Rainfed Agriculture.The initial stages of this process are being supported by ongoing Bank-assisted projects (e.g., Pilot Project for Watershed Development in RainfedAreas (Cr 1424-IN)), which have demonstrated very good results from the newtechnologies.

6.11 As part of the next stage of this process, which will take theseresults and introduce them to other suitable areas of the country,preparation of two Bank projects--Integrated Watershed Development Project(Hills) and Integrated Watershed Development Project (Plains)--is now well-advanced. These projects will focus on an additional number of sub-watersheds and seek to: (a) verify and demonstrate new technologies forsoil and moisture conservation, based in part on the results of Bank-assisted pilot schemes in other parts of the country; (b) promote increasedresearch attention to rainfed farming technologies applicable to localconditions, including the relatively neglected subjects of fodderproduction and pasture management; (c) promote an inter-disciplinary

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implementation of activities in the fields of soil and moistureconservation, forestry, crop and animal husbandry, which are presently theresponsibility of four different Sta.e departments; and (d) promoteimproved management of common lands, including, importantly, activeinvolvement of the local people in planning and implementation.

7. PROJECT SUSTAINAILITY

7.1 The project effectively supported India's economic reform processand contributed to an acceleration of the development of programs designedto increase India's longer term resilience to drought in agricu.lture. Thesustainability of the latter is being addressed in the Bank's ongoingagricultural lending and economic and sector work programs and, as notedabove (para. 6.11), there is encouraging evidence of a strong commitment bythe Government to move ahead in these areas. With respect to the economicreform process, the prospects for continued reform over the medium ter% aregenerally good. There appears to be a fairly broad consensus at the seniorlevels of the bureaucracy--shared in academia and in the business community--that the reform process must continue. The Bank has an open andconstructive dialogue with the Government on the reforms necessary toaccelerate growth, thereby permitting more rapid progress towards povertyeradication, while holding current account deficits to prudent levels. TheBank is actively pursuing major policy issues in the context of itseconomic and sector work and in understandings being sought duringpreparation of individual sector and sub-sectoral operations on actionsalready taken and plans for further actions in those areas.

8. BANK AND BORROWER PERFORMANCE

8.1 As indicated above (ref. para. 4.3), the project was preparedwithin a very short time frame. Considerable flexibility was provided tothe appraisal and negotiating teams to procers the project expeditiouslywhile still paying due regard to project quality and consistency with Bankstandards. Elapsed time from project identification to Board Presentationwas only 12 weeks. At the same time the Borrower (GOI) gave priorityattention to the project and the professionalism and helpfulness of itsproject team greatly enhanced the quality and timing of the project'spreparation. Implementation of the project by the Ministry of Finance andthe agencies responsible for managing the import programs (IOG, STC, M1TC,BOI, and SBI) was excellent. The loan/credit #as fully disbursed withinsix months of Signing. In this context, the preparatory work duringappraisal to approve and clarify procurement arrangements for the import ofbulk commodities and other imported items financed by the project wasinstrumental in ensuring smooth and rapid disbursement of the loan/credit.

9. FINANCING OF EDIBLE OILS

9.1 Kharif oilseed production was seriously hit by the drought,especially groundnut production, which declined by 10% from the 1986/87crop. As India has an inadequate stock of edible oils (which it importseven in normal years, with imports averaging about US$700 million per year(in real terms) over the period 1980/81-1986/87), this decline inproduction could, unless adequate supplies were maintained to the localprocessing industry, have had a severe adverse impact on the poorest

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segments of the drought affected population. Hence, the Governmentstrongly requested that proceeds of the Loan and Credit should be disbursedagainst imports of edible oils in addition to the other items proposed bythe Bank.

9.2 The Bank's policy has consistently been to assist in emergenciesby financing productive activities and investment rather than relief andconsumption. This policy should normally have precluded the Bank fromincluding edible oils in the list of items to be financed under the Creditand Loan. However, in view of the fact that imports to be financed wereintended for the purposes of urgent replenishment of stocks as an integralcomponent of the Government's recovery program (rather than fordistribution through a relief operation) the Bank agreed to finance edibleoil imports up to a total amount of US$100 million equivalent, which wasconsidered appropriate to reflect the objective of urgent replenishment ofedible oil stocks. In the event, only US$91 million was utilized forimport of edible oils.

9.3 Typically, government response to an emergency will include bothshort-term relief as well as longer term recovery programs. The Bank'spolicy is, as stated above, to support recovery programs but not reliefoperations as the latter are well beyond its institutional competence andcapabilities. The Indian Government's request for Bank financing of edibleoil imports in this case, however, raised the issue whether food items(which are typically provided by other agencies in a relief operation)could be included for financing under a Bank supported recovery operation.After extensive discussions, both internal and with the Government, theBank responded with flexibility to accommodate the needs of the situationand financed edible oils for the purpose of replenishing food stocks as anintegral part of the recovery program. In this event, the Bank's responseto the Government's request was adequate to achieve the objectives of theProject, including disbursement of the assistance within the intended timeframe.

10. Findings and Lessons Learned

10.1 The project was well conceived, was effectively implemented, andachieved its stated objectives. The timely completion and success of theproject can be attributed to a number of factors:

(a) The Bank and the Government, in close collaboration, actedpromptly to assess the overall economic, social and sectoral impact of thedrought, and the extent of the required assistance.

(b) Agreement with the Government on the strategy and scope ofthe overall recovery program was reached rapidly.

(c) Implementation arrangements were simple, made use of existinginstitutions, and were commensurate with the country's implementationcapacity.

(d) The preparatory work to approve and clarify procurementarrangements was instrumental in ensuring smooth and rapid disbursement ofthe loan/credit.

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(e) The commitment of the Government to the recovery program, andthe determined efforts and professionalism of the government officials andother agencies involved deserves special mention.

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PART III

PROJECT DATA

RVP Unit AsiaSector Emergency Assistance OperationBorrower Government of IndiaExecuting Agency Ministry of FinanceFiscal Year of Borrower April 1 - March 31

PROJECT TIMETABLE

Item Date Planned ]Date Atual

- Identification (EPS) 09/08/87 09/08/87 (DraftIssues PaperReview Meeting)

- Preparation- Appraisal Mission 09/09/87 09/09/87- Loan/Credit Negotiations 11/04/87 11/04/87- Board Approval 11/24/87 11/24/87- Loan/Credit Signature 11/25/87 11/25/87- Loan/Credit Effectiveness 12/16/87 12/16/87- Loan/Credit Completion 12/31/88 07/15/88- Loan/Credit Closing 03/31/89 07/15/88

Related Bank Loans and/or Credits

None

Loan/Credit Disbursements

Cumulative Estimated and Actual Disbursements(USS million)

1987/88 1988/89

Appraisal Estimate 300.0 350.0Actual 363.2 365.2Actual as % of Estimate 121.1% 104.4%Date of Final Disbursement 10/6/88

NOTE: Due to changes in US$/SDR exchange rate, actual amount disbursed onIDA credit was US$215.2 million equivalent (estimated at US$200 million atnegotiations).

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Frolect Costs(US$ million)

Appraisal CostEstimates Actual ExDenditures

Petroleum & petroleumproducts A/ 189.7Edible oils / 90.1Non-ferrous metals A/ 27.7Industrial intermediates a/ 57.7

350.0 365.2 S/

n/ Separate estimates not made for each category.h/ Agreement reached at negotiations to limit edible oil imports financedunder project to no more than US$100 million./ Includes currency adjustment equivalent to US$15.2 million.

Staff Tnputs(Staff Weeks)

EH81 fFY89 Total

Appraisal 21.6 21.6Negotiations 0.3 0.3Supervision 4.6 0.6 5.2Completion 5.8 (est.) _.8I (est.)

Total 26.5 6.4 (est.) 32.9 (est.)

Field Mission Dates

Month/ No. of Days in Performance.xar Persons Field Rating Status

Appraisal 09/87 2 8 --

Appraisal/Negotiations 10/87 4 7 --

Supervision 03/88 1 4 1Project Completion 10/88 1 3 1

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Status of Covenants

Deadline for

Coveant Subjec-t 9Molsnce Statu

Ln./Cr. Agreement

Audit Reports Dec. 31, 1988 IOC & STC auditfor Implementing reports submitted.Agencies, Awaiting receiptincluding audit of audit reportsreports for Special for other importingAccounts and SOEs. agencies. (Expected

by no later thanOctober 1, 1989.)