noeumenz of

The World Bank

FOR OMCAL USE ONLY

Report No. P-4346-IN

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON TWO

PROPOSED LOANS

TO

INDIA

(IN AN AMOUNT OF t150.2 MILLION EQUIVALENT)

AND TO THE

INDIAN FARMERS FERTILISER COOPERATIVE LIMITED

(IN THE AMOUNT OF US$152 MILLION EQUIVALENT)

FOR THE

COOPERATIVE FERTILIZER INDUSTRY PROJECT

June 4, 1986

This 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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CURRENCY EQUIVALENTS(As of May 30, 1986)

US$1.00 = Rs 12.79Rs 1.00 = US$.0800Rs 1 million = US$80,000

The US Dollar/Rupee exchange rate is subject to change.Conversions in the Staff Appraisal Report were made atthe US$1.00 = is 13 which represents the average exchangerate at the time of the appraisal.

FISCAL YEAR

Government o, India: April 1 - March 31

IFFCO: July 1 - June 30

Abbreviations and Acronyms

FAI - Fertilizer Association of IndiaFICC - Fertilizer Industry Coordination CommitteeGAIL - Gas Authority of India LtdGoI - Government of IndiaHBJ Pipeline - Hazira-Bajaipur-Jagdishpur PipelineIFFCO, the Company - Indian Farmers Fertilizers Cooperative Ltdkv, kw, MW, MWH - kilovolts, kilowatts, Megawatts, Megawatt-hourHARD - Ministry of Agriculture and Rural DevelopmentMP - Madhya Pradesh StateNFL - National Fertilizers LtdOECF - Overseas Economic Cooperation Fund, Japantph, tpd, tpy - Metric tons per hour, per day, per yeartyn - Metric tons per year of nutrientUP - Uttar Pradesh State

FOR OMCAL USE ONLY

INDIA

COOPERATIVE FERTILIZER INDUSTRY PROJECT

Loan and Project Summay

Borrowers: GOI Loan: India, acting by its PresidentIFFCO Loan: Indian Farmers Pertiliser

Cooperative Limited (IFFCO).

Guarantor of IFFCO Loan: India, acting by its President.

Amount: US$302.2 million equivalent, consisting of:GOI Loan; US$150.2 million; and IFFCO Loan;US$152 million.

Terms: GOI and IFFCO loans: 15 years, including 5years' grace at the standard, variable interestrate. GOI would bear the foreign exchange riskon its Loan and IFFCO would bear the foreignexchange risk on its Loan. OOI would chargeIFFCO a Guarantee Fee such that the effectiveinterest rate paid by IFFCO would be 13.75Z, thecurrent rate paid by similar firms in India.

Project Description: The project consists of (a) construction andcofiussioning of a greenfield fertilizermanufacturing plant to be owned and operated byIFFCO, one of the two cooperative sectormanufacturers of fertilizers in India. Theplant would be located at Aonla in the state ofUttar Pradesh; (b) investments at 3 existingIFFCO manufacturing plants at Phulpur, [alol,and Kandla to improve operating efficiencies,reduce energy consumption, improve productquality and output, and lower pollution; (c) astudy to develop a performance evaluation andcontrol system for use by GOI for all publiclyowned fertilizer plants; and (d) the importationof fertilizer materials. The project facesminimal technological risks as the technologieshave been widely used in India. There is apotential risk that the feedstock pipeline-thegas pipeline from Hazira via Bijaipur and Aonlato Jagdishpur (the HBJ Pipeline)--may not becompleted in time for the new plant but provi-sion has been made for firing the steam gener-ation units on liquid fuels should gas suppliesbe delayed. Letters of Intent covering con-struction of the pipeline have been issued andprocurement of major items is in progress.

This document as arestuicted distbution and may be used by recpients only in the performaneof their offi dutiea Its contents may not otherwise be disclosed without World Bank autborizaion.

US$ MillionsEstimated Cost Local Foreign Total

(a) Aonla Plant 1/

Land and Site Development 8.7 _ 8.7Civil Works and Building 25.1 18.7 43.8Equipment, Katerials & Spares 67.5 197.7 265.2Erection and Commissioning 23.0 4.4 27.4License, Engineering, Management 29.7 17.3 47.0Township and Infrastructure 25.1 2.3 27.4

Sub total - Base Cost Estimate 179.1 240.4 419.5

(b) Rehabilitation Component 2/

Phulpur Plant 11.4 10.4 21.8Kalol Plant 24.9 16.1 41.0Kandla Plant 10.3 7.2 17.5

Sub total - Base Cost Estimate 46.6 33.7 80.3

Total Base Cost Estimate 225.7 274.1 499.8

Physical Contingencies 7.4 7.4 14.8Price Contingencies 23.6 27.2 50.8

Total Installed Cost 256.7 308.7 565.4

Working Capital for Aonla 84.2 - 84.2Interest During Construction 42.6 75.4 118.0

(c) Performance Evaluation and 0.1 0.2 0.3Control System Study

(d) Fertilizer Imports Component - 150.0 150.0

Total Financing Required 383.6 534.3 917.9

1/ Including taxes and excise duties estimated at $13.2 million.

2/ Including customs duty, taxes and excise duties estimated at $18.2million.

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Financing Plan: US$ MillionsLocal Foreign Total

GOI, Suppliers Credits 169.3 81.3 250.6IBRD - 302.2 302.2OECF, Italy, Denmark - 150.8 150.8IFFCO and Cooperatives 132.5 - 132.5Local Borrowing 81.8 - 81.8

Total Financing Required 383.6 534.3 917.9

Estimated Disbursements:

(US$ Millions)IBRD Fiscal Year FY87 FY88 FY89 FY90 FY91 FY92

Annual 174.3 43.7 50.0 27.6 5.7 0.9Cumulative 174.3 218.0 268.0 295.6 301.3 302.2

Economic Bate of Return: About 17X for the Aonla component (see text)

Appraisal Report: No. 6025-IN, dated June 2, 1986.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORSON TWO PROPOSED LOANS ONE TO GOI AND ONE TO IFFCO

FOR THE COOPERATIVE FERTILIZER INDUSTRY PROJECT

1. I submit the following report and recommendation on two proposed loans;the first to GOI in the amount of $150.2 million (equivalent) to finance aportion of India's fertilizer imports and a study of the peformance evaluationand control mechanisms, and the second to the Indian Farmers FertiliserCooperative Ltd (IFFCO) with guarantee by the Government India (GOI) in theamount of US$152.0 million (equivalent) to help finance the construction of agreenfield fertilizer plant at Aonla in the state of Uttar Pradesh, and enhancethe operating efficiency of three of its existing plants. GOI would bear theforeign exchange risk in its loan and IFFCO would bear the foreign exchange riskon its loan.

PART I - THE ECONOMY 1/

2. An economic report, "India: Economic Situation and DevelopmentProspects" (6090-IN, dated May 9, 1986), was distributed to the ExecutiveDirectors on May 12, 1986. Country data sheets are attached as Annex I.

Background

3. India is a large and diverse country with a population of about 760 mil-lion (in mid-1985) and an average per capita income of about US$260.Agriculture continues to dominate the economy, accounting for 36% of CDP, 23Z ofexports and about two-thirds of employment. The steady increase in population,which continues at a rate of 2.2% a year, has put increasing pressure on naturalresources, in particular cultivable land. By the mid-1960s, nearly all produc-tive land had been brought under cultivation. While irrigation continues toincrease total cultivable area, an increasing share of the labor force will haveto be absorbed in non-agricultural activities. Industrial development has notprogressed rapidly enough to provide employment opportunities for the growinglabor force, or to bring about a rapid economic transformation, with sig-nificantly higher productivity and income levels. As a result the long-termgrowth of per capita income has only averaged about 1.4% p.a. and close toone-half of India's population continues to live below the poverty line. Thepervasiveness and intensity of poverty is such that its alleviation has been andremains at the core of India's development strategy.

4. During the 1950s and 1960s, India's economic performance was generallycharacterized by slow economic growth, moderate inflation and a sustainable

1/ Parts I and II of the report are similar to Parts I and Ir of thePresident's Report for the Combined Cycle Power Project (No. P-4254-IN),dated March 10, 1986.

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external position. GDP rose at about 3.5%, with agriculture and industry grow-ing at 1.8Z and 4.8% respectively; imports increased by 4.6Z and exports by 5.8%a year. India was able to reduce its dependence on foodgrain imports from apeak of 14X of total foodgrain consumption in 1966/67 to 4.5% by 1969/70 throughimprovements in agricultural production, but progress in poverty alleviation wasslow mainly because of continued high population growth.

5. In the early to mid-1970s, in response to a sharp deterioration inIndia's terms of trade, the Government introduced various polity measuresdesigned to stimulate exports. This resulted in a large increase in exportgrowth to about 7.3% per annum in the 1970. compared with only 2.2% per annumbetween 1950/51 and 1969/70. While expanding world markets, particularly in theMiddle East, contributed to this growth, liberalized access to imported inputsand more effective export incentives played a major role. The success in theexport expansion effort coupled with continued import substitution, particularlyof foodgrains resulted in a surplus on current account between 1976/77 and1978/79, which was further enhanced by increased concessional aid flows. Indiawas thus in a relatively favorable position to deal with the increases in inter-national oil prices, the sharp deterioration in the terms of trade and a seriesof poor harvests. The comfortable foreign exchange position also played a majorrole in the Government's decision to initiate import liberalization.

6. Towards the end of the 1970s, India again faced considerable domesticdifficulties. In 1979/80 it experienced one of the country's worst droughtswhich caused a large reduction in agricultural production. In addition,industrial production, plagued by labor unrest and a vicious circle of supplyshortages (coal, power and transportation), failed to expand. These eventscoincided with a second round of international oil price increases. As aresult, the current account reverted to a deficit position and the remarkableprice stability that the Indian economy enjoyed after 1975 came to an abruptend. The Government responded by mounting an adjustment program, which wasembodied in the Sixth Five Year Plan (1980/81 - 1984/85). The program aimed atraising the GDP growth rate from its historical level of 3.6% to 5.2% per annumwhile adjusting the country's external balance to the adverse price developmentsin world markets. The major elements of the program were alleviation ofinfrastructure and supply constraints, increased energy independence, improvedefficiency in resource use, promotion of exports and efficient importsubstitution.

Economic Performance Under the Sixth Plan

7. Overall the Government's adjustment program has been effective despitethe severe drought in 1982/83 and a worsening of the external environment in theearly 1980s. During the Sixth Plan period, GDP grew by 5.1% per annum, I/ wellabove India's long-term growth rate of 3.6%. However, overall growth during the

1/ Actual GDP growth rate during the 1979/80-1984/85 period was 5.1% perannum. However, this figure overstates the trend in recent years becauseof the relatively low base year (1979/80). The 4.5% GDP growth per annumand 3.3% annual agricultural growth between 1980/81-1983/84 (two "normal"years) are more representative of the growth rates during the period.

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first half of the 1980s has not been steady, mainly because of the effect ofuneven rainfall on agricultural production. In 1980/81 and 1981/82, the economysubstantially recovered from the 1979 drought, with real CDP growing by 7.6%and 5.3Z, respectively. The recovery was particularly robust in agriculturewhere normal weather helped output to rise by more than 15% in 1980/81 and 5.5%in 1981/82. A severe drought in mid-1982 brought the economic recovery to ahalt. Agricultural output declined by 4%, which in turn reduced GDP growth toonly 1.8%, and put further strains on the balance of payments and domesticresource situation. The timely implementation of various economic policiesrelating to foodgrain imporLs, procurement and distribution, and the increasedallocation of power to irrigation pumps mitigated the adverse effects of thepoor monsoon. An excellent monsoon combined with satisfactory performance ofthe infrastructure sectors, in particular coal and transport, led to a recoveryof the economy in 1983/84. Agricultural output rose by 9%, industrial output by4.5Z and overall GDP by 7.4Z. The power sector, however, emerged again as aconstraint on higher growth, especially in industry. In 1984/85, despite amediocre monsoon and difficult political circumstances, the aggregate growth ofthe economy estimated to be 3.6%.

8. During the Sixth Plan period, foodgrain production continued to growat an average annual rate of 2.6Z a year-sufficient to maintain a broad balancebetween supply and steadily increasing domestic demand. The progress achievedis an indication of the effectiveness of programs to expand irrigation,strengthen extension and encourage efficient use of other agricultural inputswhich are being implemented. Bountiful harvests have led to record foodgrainstocks in recent years. Over the past year, Government held stocks haveincreased by more than 40%. Maintenance of ample, balanced operating stocks toensure smooth operation and even expansion of the public distribution systemremains a top priority of Indian agricultural policy. Yet, the financial costof foodgrain storage and subsidies represent a rapidly growing burden on thebudget.

9. Growth of the industrial sector during the Sixth Plan period was slow anduneven. Industrial growth averaged about 3.4Z a year--below the growth ratesachieved in the 1960s and 1970s. An inadequate policy environment, coupled withdepressed domestic demand, power and raw material shortages, as well as laborunrest are the main causes for the slower than anticipated growth of theindustrial sector. After the severe drought in 1979/80, manufacturing outputgrew at 1.7% in 1980/81 and 3.3% 1981/82. The drought in 1982/83, which led towidespread shortfalls of agro-based raw materials and a sharp drop in the demandfor consumer durables, combined with a prolonged textile strike in Bombay,reduced the growth of industrial output to 1.7% in that year. Following theexcellent monsoon in 1983184, industrial output gained momentum and grew by5.0%. Preliminary estimates place ths growth of the manufacturing sector atabout 5.5% in 1984/85.

10. The performance of the infrastructure sectors was mixed under the SixthPlan. While electric power generation, coal production and railway traffic grewby 8.7%, 6% and 2.5% a year respectively, oil and gas production increased by22.6%. The rapid expansion of domestic oil production is largely the result ofIndia's oil development program. Backed by substantial financial commitment,performance under the program has been excellent with real investment and oilproduction levels running well ahead of Plan targets. In 1984/85 domestic oil

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production is estimated to have reached 29.4 million tons. While the gapbetween domestic consumption of petroleum and production remains large, India'sdependence on oil imports dropped from 63% of consumption in 1979/80 to 30% in1984/85. About two-thirds of current output comes from offshore fields aroundBombay High. As most of these fields have now reached their mature stage,further increases in domestic oil production will have to come mainly from newdiscoveries.

11. India's economy reverted from a situation of a resource surplus in thelate 1970s to an aggregate resource deficit during the Sixth Plan period. Thegap between gross investment and national savings increased from negligiblelevels to an average of 2.1Z of GDP in 1980-85. Gross domestic capital forma-tion increased from an average of 22.6% of GDP in 1975-80 to 24.7% in 1980-85while gross national savings remained constant at an average of 22.6% of GDP inboth periods. The increase in capital formation mainly resulted from anincrease in the public investment rate, but it was largely a financial ratherthan a real phenomenon since prices of investment goods increased considerablyfaster than the general price level.

12. The basic thrust of fiscal policy during the Sixth Plan was to providesufficient resources for growth and planned investment while maintaining infla-tion under control. However, the Sixth Plan period was characterized by sig-nificant budgetary resource constraints. Despite massive additional resourcemobilization efforts, public sector deficits exceeded 7% of GDP as compared toonly 4-5% of GDP during the mid-1970s. The shortfall was met by additionalmarket borrowings, both domestically and from abroad and by deficit financing.Major reasons behind the large deficits were continued losses by mostdepartmentally-run undertakings, unsatisfactory performance of the two majornon-departmental undertakings of the States (the State Electricity Boards andthe State Road Transport Corporations), and the increasing importance of sub-sidies which are estimated to have reached 2.8% of GDP in 1984/85. Of these,fertilizer subsidy accounted for more than 0.8% of GDP, and food subsidiesnearly 0.5% of GDP.

13. Developments in the savings-investment balances were mirrored in thebalance of payments. Thus, India's current account balance, which had recordedsurpluses between 1976/77 and 1978/79, reverted to deficits averagingUS$3.5 billion and 2.1% of GDP during 1980-85. Several developments contributedto these relatively large deficits. First, the terms of trade deterioratedsharply in 1979/80 due to the second round of oil price increases and continuedto move against India during the first three years of the 1980s. Second, a moreliberal import policy towards industrial inputs was pursued. Third, netinvisibles declined as travel receipts fell off, workers' remittances stagnated(reflecting slower development activity in the Middle East), and payment ofinterest on higher levels of foreign debt increased. Fourth, export growth wassluggish partly due to growing domestic demand, and, perhaps most significantly,due to depressed foreign markets and prices. Faced with a growing need forexternal capital inflows and stagnation in the availability of concessionalassistance, india drew SDR 3.9 billion from the Extended Fund Facility of theIMF and borrowed significant amounts on commercial terms from the Euro-dollarmarket and increased the use of suppliers' and export credits.

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14. Price performance during the Sixth Plan period has been mixed. Theoverall improvement in economic Derformance in the early 1980s, combined withmore restrictive monetary policies in 1981/82 and 1982/83, resulted in a sharpdecline in the rate of inflation. The growth rate of wholesale prices declinedfrom 182 in 1980/81 to only 2.6% in 1982/83. The lagged effects of shortages offoodgrains in 1982/83 and of other agricultural products and industrial goods in1983/84 coupled with a rise in the domestic cost of imports and rapid liquiditygrowth, gave a boost to inflationary pressures towards the end of 1983/84. Theannual average growth of wholesale prices rose to over 9% in 1983/84, and therate of growth of consumer prices exceeded 12%. In SepLember 1984, theGovernment took a number of measures to dampen pressure on prices includingincreased imports of important agricultural commodities (sugar, jute, coconutoil and others), releases of sugar stocks for distribution through fair priceshops, and a reduction in wheat prices for flour mills. These measures,together with a decline in cereal prices as a result of the bumper crop in1983/84 and a generally restrictive budgetary policy, led to a slowdown in therate of increase of wholesale prices to about 7.1% in 1984/85.

15. Developments in the Indian economy during the Sixth Plan underscore theprogress that has been made in recent years towards accelerated GDP growth,external adjustment, and increased investment. The experience of recent yearsillustrates that India has the capacity to grow and develop at a more rapidpace. It is a tribute both to the fundamental soundness of key policies andprograms, particularly in agriculture, and to the strength and effectiveness ofpublic administration, that neither the serious political disturbances inPunjab, nor the assassination of Prime Minister Indira Gandhi, resulted insignificant disruptions to the performance of the economy in the last year ofthe Sixth Plan. But the results during the Plan period also highlight thedisappointing performance of industry, the continuing shortfalls in electricpower generation, the rising public sector deficits, the importance of regainingand sustaining momentum in export growth and the need for continued prudenteconomic management so as to avoid a resurgence of inflation while generatingadequate resources for development. This mixture of achievements and challengesprovides the context for an assessment of development prospects and policies.

Development Prospects and Policies

16. To deal effectively with its dual challenges of alleviating pervasivepoverty and expanding employment opportunities for a growing labor force, theSeventh Plan aims at sustaining an annual rate of growth of GDP of at least 5Z.The Seventh Plan lays down the development strategy for 1985/86-1989/90, andcontinues the emphasis on agriculture, energy development, export promotion,domestic import substitution where economically justifiable and the removal ofinfrastructural bottlenecks.

17. Achieving a GDP growth of around 5% a year will place heavy demands onpolicy adjustment and entail major challenges. India will need to:(a) maintain the recent higher rate of expansion of agricultural production;(b) accelerate industrial production and export growth through policy changeswhich enhance competition and efficiency; (c) expand supply capacities in theeconomy by improving basic infrastructure services and the availability ofenergy; (d) improve the efficiency with which resources are used, including

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particularly the existing capital stock in infrastructure and industry; and(e) further improve the already high resource mobilization effort.

18. Agriculture. Despite an impressive performance under the Sixth Plan,Indian agriculture faces many chaLlenges in the second half of the decade. Aspossibilities for extending cultivated acreage shrink, agricultural growth willdepend on finding new ways of increasing the productivity of land through fur-ther development of irrigation, better water management, more intensive use ofnew technology, efficient delivery of inputs and services, and appropriatepricing policies. High priority must be given to the expansion of the country'sirrigable area through completion of ongoing irrigation projects, as well asselective investment in new undertakings. Besides creating new irrigationpotential, the efficiency of irrigated farming will have to be enhanced throughthe improvement of water management practices in existing irrigation systems.Greater emphasis should al3o be given to obtaining higher yields under rainfedand dryland farming conditions. Finally, even greater efforts must be made tobuild and strengthen institutions to ensure the efficient delivery of agricul-tural services, input supplies, credit and technology.

19. Industry and Trade. Prospects for raising India's GDP growth ratewill, to a large extent, depend on more rapid industrial production and exportgrowth to be attained through improved productivity and efficiency. A keyrequirement will be greater competitive pressure on industry than has been thecase in the past. The size and domestic orientation of the Indian economy makeit necessary that this competitive pressure come mainly from within the domesticeconomy. An important complement, however, will be greater exposure to foreigntrade to stimulate domestic competition as well as to induce technologicalinnovation and modernization.

20. To increase domestic competition, domestic policies will need to allowfreer entry and exit of firms in the industrial sector and greater reliance onmarket price signals. While the Government has taken various initiatives in theabove directions during the past several years, the most significant wereannounced in the context of the 1985/86 Budget. These include the broadening oflicensing categories for certain industries, delicensing for others, increasesin the size limits for MRTP 1/ and small-scale industries, reductions in theincentive for small-scale industries to stay small and various initiatives tostimulate efficient indigenization of 'sunrise' industries (energy explorationequipment, computers, telecommunication equipment, motor vehicles and parts,general electronics). These are significant advances that need to be sustainedin future years.

21. Changes in external trade policy will also be required to stimulateexport growth which is essential riot only for current financing of imports, butto enhance borrowing capacity, to service debt, to provide an impetus to theeconomy from the demand side, and to expose entrepreneurs to the quality-consciousness of competitive external markets. While some changes have beenrecently introduced, there remains a need to: (a) provide greater access toimported inputs and capital goods through continued import liberalization;

1/ Monopolies and Restrictive Trade Practices Act, 1969.

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(b) review tariffs, eliminating anomalies and lowering their overall level; and(c) modify trade policies in such a way that the net impact of incentives ismore neutral between exports and import substitution.

22. Infrastructure Sectors. Investments in these sectors currently con-stitute about one-third of total investment in India, and the efficiency withwhich these investments are managed has an important bearing on the efficiencyof total investment and the growth rate of the entire economy. There is sub-stantial evidence that better plaanming and management of public investments inpower, coal, railways and irrigation could improve returns and lower the currentcapital-output ratios. For example, more efficient use of investment could beachieved by better water management in irrigation projects, improved load 'ac-tors in thermal power generatior., better capacity utilization in the fertilizerindustry and improved efficiency in railway transport.

23. Resource Mobilization. India's gross national savings rate (22.6% in1980-85) is already high for a country at India's level of income.Nevertheless, the investment required to sustain the relatively high GDP growthrates realized during the Sixth Plan period--while holding foreign savings as ashare of GDP at prudent levels-will require some further increase in theaggregate savings rate especially in public savings. Because there will con-tinue to be well-founded demands for expansion of current and capital expendi-tures in the public sector, the burden for a reduction in the savings investmantgap has to be put on the revenue side. Increasing tax rates beyond their cur-rent high levels would be counter productive. Thus, economically efficientpricing policies in public enterprises, supported by improvements in theiroperational efficiency, are to be preferred over tax increases as vehicles forincreased public resource mobilization. The sheer size of past and presentpublic enterprise investment indicates that if proper returns were made evenonly a part of them, an increase in revenues of about 3% of GDP would beattainable. In a number of sectors, e.g. thermal power, railways, andfertilizer, concerted efforts are being made--with Bank assistance-to increaseefficiency and reduce costs. These efforts need to be improved and expandedinto new areas.

24. Balance of Payments. A policy of sustained GDP growth of 5Z per annumwill need to be complemented by measures which assure a viable balance of pay-ments position. Acceleration of industrial growth will lead to a substantialincrease in import requirements, even after allowing for continued import sub-stitution of key bulk comodity items. Bank staff estimates place the exportvolume growth necessary to support these growing import requirements withoutexcessive increases in external borrowing at about 8% a year over the SeventhPlan period. Prospects for India to attain the needed higher export growthrates appear to be reasonably good because India's share in total world exportsin value terms is only about 0.4%, leaving ample room for growth. Furthermore,India's exports are relatively less sensitive to fluctuations in demand in theOECD industrial countries because exports are well diversified with respect toboth products and markets. Nevertheless, success in India's export drive willdepend heavily on changes in domestic policy to improve the supply andprofitability of exports.

25. Even assuming favorable export performance, India will continue to needsubstantial external capital flows to augment its own resources for the foresee-

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able future. Even with 8% export growth, the 5% GDP growth implies an increasein gross capital inflows from US$17.5 billion to US$34.5 billion between theSixth and Seventh Plan periods. In the past, the bulk of this financing wasprovided in the form uf official development assistance. In more recent yearsthe availability of concessional assistance to India has declined. Totalbilateral grants and concessional loans declined from a level of aboutUS$1.3 billion per annum over the years 1979/80-1981/82 to US$1 billion in1983/84. Moreover, there was a large deterioration in the terms of aid frommultilateral sources. For example, while total lending from the Bank Groupcontinued to increase in nominal terms, the grant element declined from 71Z to41Z as new commitments of IDA declined from a peak of $1,535 million in FY80 to$673 million in FY85 and about $640 million in FY86.

26. In the event that official develnpment assistance does not increasesignificantly from recent levels, nearly the full additional financing requiredwould have to be provided from additional non-concessional borrowing from offi-cial and commercial sources. Thi- -ill increase India's debt service ratio fromthe present level of 15.5% to 21.6% by 1989/90. Provided India can in fact,expand export earnings along the lines described earlier, and provided India'spast record of prudent borrowing and debt management continues, the countryshould be able to raise the projected amounts. While its foreign resourcerequirements would be manageable, the increase in its external debt exposurewould leave it with little cushion to deal with unfavorable eventualities andwith the risks of policy change.

27. In the short term, a relatively large level of external borrowing,including an increased emphasis on commercial borrowing, will be necessary tocope with the balance of payments consequences of the growth strategy describedearlier. Althcugh India is currently in a position to increase borrowing oncommercial terms from the very low levels of the past, there are, of course,limits beyond which India will choose to sacrifice growth objectives rather thanaccept debt on unfavorable or unmanageable terms. While therefore a greatervolume of both official concessional and non-concessional assistance iswarranted, concessional assistance, in particular, will be invaluable inmoderating the build-up in India's debt service burden. Apart from the quan-titative arguments for concessional aid, there remains the imperative to assistIndia in addressing the problems of pervasive poverty. While Ini.;a is nowbetter placed than other poor countries to tackle its development problems, themobilization of additional resources to address poverty problems is heavilyconstrained. Concessional assistance can also play a very important role inrelieving this constraint.

28. Summary. India has demonstrated that it can sustain a rate of growthcloser to 5.0Z per annum than to the long-run trend of 3.6% per annum. If therate of population growth can be brought to below 2.0% per annum, a 5.0% growthrate would mean a doubling of the trend rate of growth of per capita income of1.4% per annum. Success in these efforts would make a significant difference tothe prospects of easing poverty in India. Development prospects over the nextfew years will hinge on the extent to which the economy can be brought into bothinternal and external balance, while at the same time achieving more rapidgrowth than in the past. This will require the continuation of the currentdevelopment strategy which assigns high priority to export promotion, public

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finance discipline, improvement of economic efficiency, and investment ininfrastructure, supported by adequate flows of external borrowing and aid.

PART II - BANK GROUP OPERATIONS IN INDIA

29. Since 1949, the Bank Group has made 93 loans and 183 development creditsto India totalling US$8,735 million and US$13,809 million (both net ofcancellation), respectively. Of these amounts, US$1,633 million has beenrepaid, and US$8,743 million was still undisbursed as of March 31, 1986. BankGroup disbursements to India in the current fiscal year through March 31, 1986totalled US$1,003 million, representing an increase of about 28 percent over thesame period last year. Annex II contains a summary statement of disbursementsas of March 31, 1986.

30. Since 1959, IFC has made 36 commitments in Lidia totallingUS$310 million, of which a total of US$186 million has been repaid, sold, ter-minated or cancelled. Of the balance of US$124 million, USt118 million repre-sents loans and US$6 million equity. A suimmary statement of IFC disbursementsas of March 31, 1986, is also included in Annex II (page 5).

31. The thrust of Bank Group assistance to India has been consistent withthe country's d-velopment objectives in its support of agriculture, energy andinfrastructure. Of particular importance have been investments in irrigation,extension and on-farm development dRsigned to increase agriculturalproductivity, and efforts to improve the availability of basic agriculturalinputs to farmers through credit, fertilizer, marketing, storage, and seedprojects. Major elements of the lending program have also been directed athelping to meet the energy needs of the economy while curbing the growth of oilimports, and to ease the infrastructure bottlenecks which have hampered economicgrowth in India, particularly through power generation and distribution, andrailways and telecommunications projects. The Bank Group has also providedfinancing for a broad range of medium- and small-scale industrial enterprises,primarily in the private sector, through its support of development financeinstitutions. Recognizing the importance of improving the ability to satisfythe essential needs of urban and rural populations, the Bank Group has supportednutrition and family planning programs, a rural roads project, as well as watersupply and sewerage and other urban infrastructure projects.

32. This pattern of assistance remains highly relevant, and consonant withGovernment priorities, as reflected in the the Seventh Plan. First, highpriority will continue to be given to GOI's agricultural program. While Indiahas made significant progress in agriculture, productivity growth will have tobe sustained to improve the balance between food demand and supply and to con-tribute to poverty alleviation and employment. Thus, the Bank Group will con-tinue to support irrigation, fertilizer production and distribution, andagricultural extension, research and credit. Second, alongside GOI's efforts inpromoting greater efficiency and faster development of the industrial sector,increased assistance will be provided for industrial development. Third, inline with the stress which the Seventh Plan gives to the expansion and moreefficient use of basic infrastructure capacity and to the development of India'sindigenous hydrocarbon resources, the Bank Group will continue to provide sub-stantial support to the development of the energy, transport and telecommunica-tions sectors to alleviate critical shortages which constrain output in both

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the agricultural and industrial sectors. Fourth, support of urban developmentand other GOI basic social services programs for the poor will also continue inlight of the growth in population which, despite successes in lowering birth anddeath rates, still increases by about 16 million each year.

33. The need for a substantial net transfer of external resources in supportof the development of India's economy has been a recurrent theme of Bankeconomic reports and of the discussions within the India Consortium. Thanks inpart to the response of the aid coummnity, India successfully adjusted to thechanged world price si nation of the mid-1970s. However, India continues torequire a substantial levei uo foreign assistance both to offset the overalldeterioration in the world trade environment, and to sustain the relativelyhigher investment and growth rates achieved during the Sixth Plan period. As inthe past, Bank Group assistance for projects in India should aim to include thefinancing of local expenditures. India imports relatively few capital goodsbecause of the capacity and competitiveness of the domestic capital goodsindustry. Consequently, the foreign exchange component tends to be small inmost projects. This is particularly the case in such high-priority sectors asagriculture and irrigation.

34. India's poverty and needs are such that whenever possible, externalcapital requirements should be provided on concessional terms. Accordingly,the bulk of the Bank Group assistance to India in the past was provided fromIDA. However, IDA lending to India is declining from a peak of US$1.5 billionin FY80, mostly due to funding constraints related to IDA. The amount of IDAfunds available to India is likely to remain small in relation to India's needsfor external support. Thus, this requirement for additional assistance willhave to be met, in part, through larger Bank lending. Given its developmentprospects and policies, India is judged creditworthy for Bank lending to supple-ment IDA assistance. A continuation of efforts already underway to achievegrowth in productive capacity, trade expansion, higher levels of savings,foodgrains self-sufficiency and a reduction in the rate of population growthshould result in continued economic growth and improvement in the balance ofpayments. India's debt service ratio is estimated at about 15.2% in 1984/85.This ratio is projected to rise to around 20% by 1989/90, mainly due to thehardening structure of India's debt; and to increase slightly over this levelthrough the mid-1990's. Although the projected debt service ratios are con-siderably above historical levels, they are still manageable and will not adver-sely affect India's creditworthiness.

35. Of the external assistance received by India, the proportion contributedby the Bank Group has grown significantly. In 1970/71, the Bank Group accountedfor 22% of total commitments, 11% of gross disbursements, and 10% of net disbur-sements as compared with 68Z, 38Z and 47%, respectively, in 1984/85. In1984/85, about 26.3Z of India's total debt service payments were to the BankGroup. On March 31, 1985, India's outstanding and disbursed external publicdebt was estimated to be about US$26.5 billion, of which the Bank Group's sharewas US$11.1 billion or 42% (IDA's US$8.9 billion and IBRD's US$2.2 billion). Asof March 31, 1986 outstanding loans and credits to India held by the Banktotalled US$20,911 million, of which US$8,743 million remain to be disbursed,leaving a net amount outstanding of US$12,168 million.

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PART III - THE FERTILIZER SECTOR

Background

36. India's fertilizer industry accounts for about 4% of the total outputof the organized industrial sector, and in 1984/85, represented about 0.6% ofGDP at factor cost. The subsector employs about 79,000 people, representingabout 0.7Z of total employment in the sector. The industry comprises 42manufacturing plants owned and operated by 27 producers. Twenty-two of theplants are owned wholly or partly by GOI, sixteen plants are owned by privatesector groups and the remaining four are owned and operated by cooperativesector companies including the Indian Farmers Fertiliser Cooperative, Ltd.(IFFCO). Plant capacity utilization rates, though increasing, vary widely.Average capacity utilization of publicly owned plants has increased from 41%in 1980/81 to 60% in 1984/85. Average capacity utilization of privatelyowned plants for the same period has increased from 612 to 91%, while in thecooperative sector, utilization rates have consistently remained near orabove 100%.

The Indian Fertilizer Market

37. Supply and Demand. Increased fertilizer use is central to India'sefforts to increase agricultural output. Indigenous production capacity ofboth nitrogenous and phosphatic fertilizers has grown from 148,000 metrictons of nutrient per year (tyn) in 1952 to its current level of 6.9 milliontyn, of which 75X (5.2 million tyn) is nitrogenous fertilizer productioncapacity. Both the production techno'logies and plant design capacities havechanged over the period and have generally followed international trendstowards more energy-efficient, larger capacity manufacturing facilities.Plant locational decisions have been made in the light of regionalsupply/demand requirements, raw materials sources, and infrastructureconsiderations. Feedstock choice for nitrogen fertilizer initially favorednaphtha, then fuel oil and, still later, coal so as to decrease the country'sdependences on imported hydrocarbons. Following the discovery of largequantities of natural gas near Bombay, most of the new nitrogen plants havebeen, and will be based on this feedstock. India is currently the fourthlargest fertilizer producer in the world, after the USA, USSR, and China.

38. In spite of this impressive build-up of production capacity, thecountry, today, faces a supply gap of some 3.0 million tyn at an FOB cost ofabout US$750 million. While fertilizer consumption has grown at an averagerate of 14% per annum over the past 25 years, there is considerable potentialfor continued strong growth. Application rates in India, which average 36.6kg of nutrient per hectare, are low in comparison to other developingcountries l/ and there are widespread disparities in fertilizer usage among

1/ Comparable figures for Mexico, Brazil, and China are 67 kg/ha, 79 kg/ha,and 150 kg/ha respectively.

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states within India. While the Punjab averages 149 kg/ha, some other statesuse as little as 12 kg/ha. By 1991, in spite of the planned increasedproduction capacity, demand is expected to outstrip supply by at least 1.2million tyn and, depending on various assumptions as to growth rates, the gapcould again be as high as 3.7 million tyn by 1994/95.

India's Fertilizer Investment Strategy

39. Given the expected shortfall in domestic production and the largequantities of natural gas available from newly discovered fields, the prin-cipal thrust of India's investment program in fertilizers is to expandnitrogen production through the construction of 10 large ammonia/urea plants.Four have been completed; two are under construction; the seventh (theproposed Aonla plant) is now at an initial stage of implementation; and afurther three are planned to be owned and operated in the private sector.All will use natural gas from the Bombay High and South Bassein offshorefields as feedstock and most will use common process technologies.

40. In addition to establishing new facilities, GOI is keenly aware that,in order to mitigate the cost of imports, the utilization of existingcapacity must be improved. In consultation with the Bank, GOI has inprogress a comprehensive program of plant-by-plant studies particularlyfocussing on some of the public sector-owned manufacturing facilities todetermine technical rehabilitation measures that would permit higher capacityutilization and energy conservation to reduce operating costs, and to iden-tify uneconomic units for closure.

Previous Bank Group Operations

41. The Bank Group has supported the fertilizer industry in India throughtwelve projects with a total financial contribution of about $1.1 billion.The financing has been through IDA for seven projects, IFC for threeprojects, and IBRD for two projects. These projects aimed primarily atexpanding and balancing the expansion of capacity in the public sector.According to their project completion reports, three (Cochin, Cr. 624-IN;Gorakhpur, Cr. 279-IN; and Nangal Cr. 357-IN) experienced completion delaysdue to delays in finalizing engineering arrangements, late delivery ofequipment, and/or poor management. A Project Completion Report (SEC M83-69,June 22 1983) on the Bank-financed Phulpur project owned by IFFCO pointed outthe need for improved implementation, monitoring and management systems;prompt Government decision-making; and greater selectivity in the use ofengineering technologies and equipment. A report being issued by theOperations Evaluation Department (Sustainability of Projects-Review ofExperience in the Fertilizer Subsector) on all projects in the sector con-cludes that the transfer of technology is an ongoing process, and that theBank Group has an important role to play. It cautions against using toooptimistic estimates of plant construction times and points to the need forproject sponsors to be selective in choosing domestic suppliers of servicesand equipment. The proposed project has been prepared with these lessons inmind. All legal covenants in the earlier projects were and/or are being met.

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Fertilizer Prices and Subsidies

42. Both the retail and ex-factory fertilizer prices are administered bythe Government. The ex-factory or so-called "retention" price is set accord-ing to a formula that, on a plant-by-plant basis, will enable the producingunit to earn a 12Z post-tax return on capital employed when operating at 80%capacity utilization and at certain agreed input consumption norms. Urea 1/retention prices for the various plants vary widely and currently range froma low of US$128/ton to a high of US$377/ton, depending on technology andfeedstock used, plant age, cost of feedstock and other factors. The weightedaverage retention price for all plants during 1984/85 was US$238/ton, which,with the cost of freight and distribution margins, brought the averagefarmgate cost of domestic urea to US$263/ton. While the retention pricesystem has certain advantages, it does not strongly encourage producers toimprove the efficiency of the production--since it allows them to recovermost costs--and, being separately calculated for each plant, does not gener-ate the necessary element of competition among manufacturers. As part of. theinitiatives being undertaken by the Government at this time, there is a majorreview of the retention pricing mechanism to ensure that the pricingmechanism stimulates competition among producers using similar technology,feedstock and equipment and to encourage lower operating costs. Support forthese measures is built into this project (see para. 53).

43. The farmgate price for the different types of fertilizers is uniformthroughout India and is set at levels that ensure that farmers have suffi-cient incentives to increase fertilizer usage and therefore crop outputs.GOI has maintained farmgate prices practically constant for a number of yearsin keeping with its policy of stimulating agricultural production throughincreased fertilizer application. The current price of urea, at US$181/tonis about 30Z below the current average farmgate cost of domestically producedfertilizer of US$263/ton--implying a substantial budget subsidy. The incen-tive to farmers to use fertilizer obviously depends not only on fertilizerprices, but also on crop prices and on crop response rates. At currentlevels, the use of fertilizer is profitable for Indian farmers and a study ofprices, crop response rates and fertilizer usage is currently underway.

44. The Fertilizer Subsidy. Since current average retention prices areabove retail prices, a Government budget subsidy is required to sustain theproducer margins. The overall cost of the subsidy has risen rapidly duringthe 1980s, largely because of sharp increases in the retention prices formany existing fertilizer plants 2/ and the coming on stream of new plantswith above average retention prices. In 1979/80, the total fertilizer budgetsubsidy amounted to US$745 million. By 1984/85, the subsidy had reached

1/ Urea is the most common form of nitrogenous fertilizer sold in India.

2/ A major factor in the rising retention prices was higher energy costs,which constitute 50% of the production costs of urea. These rose dramati-cally between 1979 and 1985. Natural gas prices increased 1290%, naphtha155% and power 75%.

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US$1440 million and is expected to exceed US$1.5 billion in 1985/86.However, not all of this subsidy represents a net outflow of funds from theCovernment's budget. Currently, about half of the subsidy related to domes-tically produced nitrogenous fertilizer is actually transferred to gas andenergy suppliers as payments under the retention price for energy andfeedstock costs are higher than international energy prices or compensatesfor duties and taxes charged on capital equipment (which are reflected inthe capital costs of existing fertilizer plants).

45. The level of total economic 1/ subsidy is also substantial andamounted to US$1.1 billion or US$87/ton in 1984/85 - virtually all of whichwas attributable to users since, on average, the retention price closelymatched the economic cost of fertilizer during that year. If, longer term,international prices (FOB Europe) tend toward a projected equilibrium levelof around US$190/ton by 1990 and if there is no further increase in farmgateor retention prices, the economic subsidy would increase to around US$115 perton and the need to progressively reduce the cost of the overall subsidy tothe levels implied in its public statements will require concerted action byGOI to both reduce producer prices and increase user prices. Apart from thepolitical ramifications of substantial and repeated user price increases, thedisincentive effects on fertilizer use will clearly have to be taken intoaccount and, in addition, production costs will have to be reduced.

46. The Government has recognized the need to reduce the burden of thesubsidy and has already undertaken a number of major steps. First it hascommitted itself publicly to reduce the subsidy--the Long Term Fiscal Policy(LTFP) Statement issued recently calls for a reduction in the total food andfertilizer subsidy from 1.4Z of GDP in 1984/85 to an average of 1.1 over thePlan period (1985/86 - 1989/90), a goal that implies a substantial reductionin fertilizer subsidies. Second, it has recently (February 1986) increasedthe retail price of urea by 10Z--the immediate effect of which is to reducethe budget subsidy by about 20Z below what it would have been without thisincrease. Third, it has nearly completed two major studies, one whichexamines the need for changes in the retention price system to more ade-quately reflect market conditions, and the other examines all aspects of theprice/subsidy question with reference to crop prices and input/output ratios.The results of both of these reports are expected later in 1986 and willprovide the framework for the actions to be taken over the next few years tomeet the LTFP goal. GOI would review the conclusions of the reports with theBank and, in implementing the recommendations, take the Bank's views intoaccount. Finally it has agreed, in the context of the proposed project that,in order to meet the subsidy-reduction targets implied in the LTFP, it willhave to meet a series of successively more stringent performance targets for

1/ The economic subsidy in India's situation of being a net importer offertilizers, consists of two components: first, a user subsidy that isthe difference between the farmgate price and the delivered cost ofimports; and second, a producer subsidy that is the difference betweenthe delivered cost of imports and the delivered cost of domesticallyproduced fertilizer.

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all fertilizer plants and the distribution system. The year-by-year targetsare outlined in Annex V of this report.

Rationale for Bank Involvement

47. The Bank Group's principal objective in the past has been to supportIndia's strategy for increasing domestic production of basic commodities suchas fertilizer in which India has a comparative production advantage. It hasplayed a central role in helping to build domestic capacity, and in helpingindividual plants optimize design and technology choice and avoid delays inimplementation and commissioning. Through assistance from foreign licensorsand equipment suppliers, domestic engineering and contracting firms have beenable to build their capabilities to a point where domestic replication of newgeneration, large scale fertilizer plants is feasible. Over the next 5-6years the Bank envisages a series of three projects, including the proposedproject, that adds a focus on rehabilitation of additional existing plantsand upgrading of the fertilizer distribution network, while maintaining adialogue with, and supporting the Government in its efforts to reduce fer-tilizer costs and the level of subsidies. If the Government is to achievethe ambitious targets it has set for itself in terms of subsidy reduction,considerable adjustment costs will be incurred over the next five years asplants invest in upgraded production and energy efficiency and distributionfacilities. Many of these measures are the result of the Bank's dialoguewith the Government and the fertilizer industry, and the Bank is supportingGOI's efforts in taking these initiatives by including in the project a $150million imports component that first, partially meets GOI's immediaterequirements for fertilizer imports to bridge the domestic productionshortfall, and second, in the medium term, frees up that amount of GOI fundsto make the efficiency investments required to meet the targets--investmentswhich, individually, would be too small for inclusion in a cost-effectiveIBRD project.

PART IV - THE PROJECT

48. The project was appraised in July 1985. Negotiations were held inWashington in April/May 1986 with the Indian delegation coordinated by Mr. V.K. Malhotra of the Government's Department of Economic Affairs, Ministry ofFinance. The Staff Appraisal Report (No. 6025-IN) dated June 2 is beingcirculated separately. A supplementary data sheet is attached as Annex III.

Project Objectives and Description

49. The main objectives of the proposed project are to expand domesticnitrogenous fertilizer production capacity, thereby lessening India's depend-ence on imports, and to improve the operational efficiency of existing plantsin the cooperative sector. The resulting reduction in fertilizer importsalso lessens the burden on India's internal transportation system andincreased domestic production capacity also reduces the chances of supplyinterruptions at critical times due to shipping, port, and/or transportationcongestion or delays--thus enabling farmers to more efficiently prepare theircrops. The focus of the proposed project is consistent with the Bank'sstrategy for the industrial sector which is to give encouragement and finan-

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cial support to such industrial and other policy shifts as are now beingconsidered and to provide project assistance for those initiatives designedto improve the competitive position of those entities engaged in raisingproductivity and reducing unit costs.

50. The project would include (i) construction of a natural gas-basedplant to produce 423,000 metric tons per year (tpy) of amonia in order toproduce 690,000 tpy of urea, together with related offsite and utilityfacilities at Aonla in the State of Uttar Pradesh; (ii) rehabilitation ofthree existing plants in the cooperative sector to increase production andenergy efficiencies; (iii) the preparation of a study for a management per-formance control, signalling and incentive scheme for India's public sectorplants similar to that used in other countries; and (iv) imports of finishedfertilizers and raw materials required for the manufacture of fertilizers inthe early years prior to the start-up of the proposed Aonla manufacturingplant. The Bank would lend a total of US$152 million to IFFCO (the IFFCOloan) for the Aonla and rehabilitation components and US$150.2 million to GOI(the GOI loan) for the imports component (US$150.0 million) and for carryingout the study (US$200,000).

Detailed Features

51. The Aonla component, for which the Bank would provide US$112 million,consists of (a) a single-train 1350 tons per day (tpd) amonia unit; (b) two1100 tpd urea units; (c) integrated power and steam generation facilities;(d) cooling water and effluent treatment facilities; (e) storage for about10,000 tons of refrigerated aimmonia and about 45,000 tons of bulk urea, andassociated bagging facilities; (f) other related offsites; and (g)infrastructures, including a township with about 1000 housing units. Theannonia unit employs technology from Haldor Topsoe A/S (Denmark) and both thedesign and capacity is the same as that used in the Bank-financed MadhyaPradesh Fertilizer project (Ln. 2415-IN). The two urea units use theammonia-stripping technology offered by Snamprogetti (Italy) and the designand size is similar to that used successfully in several other plants inIndia.

52. The rehabilitation component, for which the Bank would provide US$40million, consists of investments at three existing plants: at Phulpur,investments would include replacement of furnace tubing, larger coal grindingmills and other measures to be identified by an "end-to-end" energy audit andengineering study to be carried out under the project; at Kalol, majorupgrades are required to the plant which was commissioned in 1975, includingrehabilitation of the urea plant, modifications to the primary reformers,replacement of heat exchangers, purchase of better inspection equipment, andadditional ammonia storage; and at the Kandla plant, modifications wouldinclude retrofitting of two of the process trains with improved reactors,additional storage and product bagging facilities, and supplementary seawaterdesalination units.

53. The performance evaluation and control system cimponent, for whichthe Bank would provide US$200,000, would, as an important institution-building element, further develop the management information system now being

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implemented by the Department of Fertilizers and would incorporate:(i) periodic evaluation of individual company and plant financialperformance; (ii) a signalling system to highlight variations from estab-lished performance standards; (iii) a control mechanism to monitor progressof corrective actions being taken; and (iv) a management performance incen-tive scheme to foster improved plant operatiors. The terms of reference ofthe study to design the new system which would comence no later thanNovember 1, 1986 and be carried out by June 30, 1987, will be agreed by June30, 1986.

54. Fertilizer and associated raw material imports to the value of US150million, would also be financed under the project to support GOI's efforts toincrease production efficiency, improve pricing policy and reduce thesubsidy. India is currently importing about US$500-750 million of fer-tilizers each year to make up the shortfall in domestic production so thisimport component will still only finance about 12X of imports for a two-yearperiod. However it will free up an equivalent amount of resources to makeinvestments needed to raise the efficiency of production and distribution.

Project Implementation

55. The Aonla component of the project would be constructed, owned andoperated by the Indian Farmers Fertiliser Cooperative Ltd. (IFFCO), a companyestablished in 1967. The company is well managed, has satisfactory internaland external audit arrangements, management systems and capital structure.It employs approximately 5000 staff of whom nearly 2000 are professionallyqualified. The in-house training systems are extensive and appropriate tothe needs of the organization. The Board of 31 Members has delegated suffi-cient powers to the management to carry out its mandate effectively.Consequently it is considered that there would be little, if any, managerialrisk in having IFFCO implement the project. Preparations for the Aonla plantare complete and, as of March 1986, the engineering, procurement and con-struction activities on the process units were 74Z, 441 and 141 completerespectively (in physical terms). Detailed engineering will be completed andmost major equipment orders placed by mid 1986. The Aonla plant is expectedto be completed by October 1988, although for purposes of financial andeconomic analysis, a more conservative, and typical profile has been assuredwith a completion date of December 31, 1989.

56. IFFOO will also undertake the rehabilitation component. The manysub-components (about 29 separate improvements are envisaged) are eachexpected to take from one to three years to complete, and all would be com-pleted by end 1990. The standard six-year disbursement profile has beenassumeu in preparing the project economic estimates because of the possibledifficulties of managing a large number of sub-projects simultaneously inthree different plant locations. The final selection of design and engineer-ing requirements, although not yet definitive, is to be agreed between IFFCOand the Bank and will be based on proven technology: most will involve theinstallation of packaged units of standard designs. GOI confirmed, duringnegotiations, that it expected that all necessary approvals would be providedby December 31, 1986 and IFFCO would, by December 31, 1986, furnish to the

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Bank for its approval a detailed plan for the management and execution of therehabilitation component.

57. The study of performance evaluation and control systems would beundertaken by internationally recruited consultants under the direction andresponsibility of the Department of Fertilizers. Costs are based on anestimate of 15 man-months at US$10,000 per man-month, plus computer costs andlocal expenditures. The Mines and Minerals Trading Corporation, a governmententity would implement the imports component as part of its ongoing respon-sibility for importing the country's total fertilizer requirements.

Marketing

58. Close to 80% of the Aonla plant's urea production is expected to beconsumed in UP - the state where both the Aonla and the Phulpur plants arelocated. IFFCO has established a solid, extensive, and competitive marketingposition in this the major fertilizer consuming state in India. It isactively involved in extension efforts that are also supported by the Bankand, as a result, no new market development or seeding initiatives arerequired under the proposed project.

Environment

59. The Aonla plant is located in a sparsely populated, non-fertile area.The plant has been designed and will be operated to meet the liquid effluentand gaseous emissions tolerances/limits according to Indian standards whichare comparable to those applied to similar facilities in industrializedcountries and which are considered satisfactory by the Bank. These designcriteria have been incorporated in the contracts between IFFCO and itsprocess consultants and form an integral part of the process guarantees to bemet by them without limit to their liabilities. For the rehabilitationcomponent, a number of the investments proposed at the three plants areintended to reduce effluents and treat pollutants in order to comply with, orimprove on these same standards.

Gas Supply and Infrastructure

60. Natural gas for the Aonla plant will be transported from the BombayHigh/South Bassein offshore gas fields via the HBJ pipeline as shown on Map19363 attached. GOI has confirmed the timely availability of adequate gassupplies for the Aonla plant and procurement of major items (including pipe)for the HBJ pipeline is in progress. GOI has signed a contract with thesuccessful bidder for the construction of the pipeline and mobilization ofthe construction teams has commenced. GOI would ensure adequate supplies ofgas to the project by no later than July 31, 1987. IFFCO and the GasAuthority of India Ltd. (GAIL) would be required to conclude by June 30, 1987a formal gas supply agreement that would be acceptable to the Bank. Thesupply of gas to Aonla is a key component of the project and, in case ofunforeseen delays in construction or commissioning of the pipeline, provisionhas been made to fire the steam generation units with liquid fuels (seepara. 70 below).

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61. Power for the Aonla component will be supplied, in part, from captivepower generation units and from a new twin 132kv transmission line from theezisting UP power grid to the project. The UP State Electricity Board hassanctioned the required 8mw of power for the plant and provided assurancesthat the state grid has adequate resources to provide the entire powerrequirements of the complex on a temporary basis if necessary. Local surfacewater sources are inadequate to supply the estimated 40,000 cubic meters perday required of the project. Groundwater studies have indicated, however,that a series of 15-16 tubewells, appropriately spaced, would meet the plantand township needs without adversely affecting surrounding wells.

Project Costs and Financing

62. The financing required for the project, including contingencies,interest during construction, working capital, and the fertilizer importscomponent is US$917.9 million, of which about US$534 million is in foreignexchange. Taxes and duties included in the total cost amount to US$31.4million. Physical contingencies have been calculated at 2% and 10Z of thebase costs of the Aonla and rehabilitation components, respectively, andprice contingencies have been calculated on the basis of escalations of 5%for 1986, 62 for 1987 and 7X for 1988 and beyond. The proposed Bank loanstotalling $302.2 million would finance about 18% of the costs of the Aonlacomponent, 30% of the costs of the rehabilitation component, 66Z of the costsof the study on performance evaluation and control systems, and 100Z of thecosts of fertilizer imports. The proposed loans to GOI and to IFFCO, withGOI guarantee, would be for 15 years with a five-year grace period, at thestandard, variable rate. For the IFFCO loan, GOI would, in addition, chargeIFFCO a Guarantee Fee such that, together with IFFCO's cost of covering theforeign exchange risk, the resulting effective interest cost on the Bankfunds to IFFCO would approximate the standard rate applicable for similarindustrial type loans in India (currently 13.75%).

63. The additional debt financing requirement of US$330.8 million woulUbe financed, in part, by the Overseas Economic Cooperation Fund of Japan(OECF) in an amount of $126.8 million equivalent, by DANIDA, an agency of theDanish Government, (US$6 million equivalent), and by the Italian Government(US$18 million equivalent). Local borrowings and GOI would provide theremaining debt requirements. Equity funds in the amount of US$284.9 millionwould be provided by GOI, by the shareholder cooperatives and from IFFCO'sinternal resources, including internal cash generation of the project itself.Under the terms of the GOI guarantee agreement, GOI would promptly provideIFFCO with any additional funds and facilities required to complete theproject and cover any possible cost overruns.

Procurement and Disbursement

64. Equipment financed by the Bank loan for the project would be procuredprimarily through international competitive bidding (ICB). Procurementthrough limited international bidding (LIB) procedures would be permissiblefor equipment from specialist suppliers and proprietary to the process design(US$5 million) and small items under contracts each with an estimated valueof not more than US$200,000 (totalling about US$8.5 million) from qualified

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local suppliers from at least three eligible countries; and also forspecialist erection/comissioning services supplied by vendors (about US$3.5million) and engineering and consulting services (about US$13.5 million).For purposes of bid evaluation under ICB procedures, qualified local sup-pliers will receive a margin of preference of the lower of either 15%, or thegenerally applicable duty for such goods. Prior Bank approval would berequired before awarding all contracts over US$500,0oo (estimated to cover70% of the loan amount). Imports of fertilizers would also be procured ineconomic shipping quantities in accordance with the Bank's LCB procedures.

65. The proposed loan would be disbursed against: (i) 100% of foreign(CIF) or locally manufactured (ex-factory) costs for equipment, materials andspare parts and 70% of other costs for items procured locally; (ii) 100% ofthe costs of engineering and commissioning services by equipment suppliers;(iii) 100% of foreign and 70Z of local costs for specialist transportationservices and for civil works and erection services within supply and erectcontracts, both let under ICB; (iv) 100% of the foreign cost of the study andconsultancy services for the rehabilitation component; and (v) 100% of theforeign cost of imported fertilizers, net of duties and taxes. Disbursementswill be made under Statements of Expenditure for payments relating to con-tracts with a value below US$500,000. Retroactive financing in the amountnot to exceed US$11.2 million for procurement of long lead time items wouldbe provided for eligible expenditures made after July 31, 1985.

Financial Evaluation of IFFCO

66. Largely because of high capacity utilization of existing plants andsound management, IFFCO's financial position is strong. It has earned ade-quate returns and its financial ratios are better than the standard bench-marks considered prudent for the industry. Profits are expected to riserapidly once the Aonla plant comes on stream. Capacity utilization from year1991 is expected to be 95% or better. In order to ensure IFFCO's continuedfinancial soundness, IFFCO would (i) maintain its debt-equity ratio at alevel not greater than 60:40; (ii) maintain a ratio of current assets tocurrent liabilities of at least 1.2:1 after completion of the project; (iii)not incur any additional debt if its projected debt service coverage ratiowould be less than 1.3; (iv) not make additional investments in fixed assetsduring implementation of the project in excess of an aggregate US$80,000,000equivalent (representing mostly projects already under execution); and (v)not prepay any debt or declare any dividends if such action would result inthe current ratio falling below 1.4:1. The financial rate of return (FRR) ofthe project is an acceptable 12% which is lower than the economic rate ofreturn of about 17%, primarily because the projected urea retention pricesare lower than their projected economic values and domestic energy prices areprojected to be above their projected economic values (para.69 below).

Audits and Accounts

67. IFFCO would also submit, in a form satisfactory to the Bank (a) itsannual audited financial reports within nine months from the end of itsfinancial year, (b) monthly construction progress reports until commissioningof all components is completed, and (c) not later than 30 days after the end

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of each quarter, quarterly financial statements for IFFCO. As is usualpractice, IFFCO would also prepare a project completion report. GOI, for itspart, would provide a quarterly report on the implementation of the fer-tilizer imports program and the study in a form satisfactory to the Bank.

Benefits and Risks

68. The project will ireate about 1200 permanent jobs and an additional3000 jobs at the peak construction phase of the plant at Aonla. Localengineering firms involved in the project will gain valuable experience andknow-how, a?' the project will have significant backward linkages into theindustrial sCLor, creating additional jobs and investments.

69. The economic rate of return (ERR) of the Aonla component is about17%, based on projected equilibrium international fertilizer and energyprices and completion of the plant in a conservatively estimated 63 months.The rate is sensitive to changes in product prices, and, to a lesser extent,to operating costs. A 10Z drop in fertilizer prices would reduce the ERR to14.8Z. A one year delay in start-up or a 20% increase in capital costs wouldreduce the ERR to 14.8% or 14.2Z, respectively-rates that are stillacceptable. A reduction of 30Z in projected energy costs (equivalent to along term oil price of US$13.00 per barrel) would increase the ERR to 20%if fertilizer prices remained at currently projected levels. Some of therehabilitation sub-projects have directly measurable ERR's that range from22-44%. Others do not, however, and no overall ERR has been calculated forthe rehabilitation component.

70. The major potential risk faced by the project initially concerns thepossible delay in receipt of gas from the EBW pipeline. To compensate forthis possibility, conservative assumptions have been used by the Bank in thepreparation of the project by estimating a plant start-up date of January1990-which is two years after the planned pipeline completion date to Aonla.In addition provision has been made to fire the steam generation boilers withliquid fuels to cover short term delays in pipeline commissioning-up to 4-6months. Second, a significant drop in the long-term international price offertilizers, possibly as a result of a long-term decline in world-wide energyprices would affect the economic attractiveness of the project as shown inpara 69 above, and the possibility of lower international fertilizer pricescannot be ruled out in today's volatile energy market. Should internationalfertilizer prices stay depressed, then on strictly economic gr3unds, theGovernment would be better off importing fertilizer than investing in domes-tic production capacity. Nevertheless, reliance, except possibly at themargin, on imports in a volatile mar.tet is not an appropriate developmentobjective for India with its abundant gas resources and growing fertilizerdemand.

-22-

PART V - RECOMMEADATION

71. I am satisfied that the proposed loans would comply with the Articlesof Agreement of the Bank, and recommend that the Ezecutive Directors approvethe proposed loans.

A. W. ClausenPresident

Washington, D.C.June 4, 1986

ANNEX 1I ha L.g Pag 1 of 6

mu: cmu ucaur DlSuu13 ̂aguaLk. 136311 SLII 130016 li l KN * O

AM taM- u. U)TOTAL 2267.6 3361.6 2367.6 .AOUCUEeR*1 1763.5 1760.5 1811.4

N I CA C .. .- 240.0 276.3 1011.1

CUILo SO 0or oL QOIvzLII) 79.0 :13*0 151.0 2 5.? 566..

iuwr&mu m rna IUcewuPOPUIATIKO, nMD-TUl CT03M) 4549.0 567569.0 733248,0133* IWULATIOU 3 OF IOTA?.) 11.0 19.6 24.4 22.2 25.9)

OPUSATIxow It1* 200 CuLL) 694.4As* MWUATK (EILL) 1700.0

OUUATIOV 3 N1 1.6 .

MR 30. IN. 122.2 166.6 223.0 173.8 366.9331 3 IN. AGRI. LAND 244.6 307.5 395.6 353.3 1591.2

P0WMAINA1 AMg STUICIS (1)0-14 1us A0.L 42.7 39.5 36.3 32.2

1544 Yu 54.4 56.1 36.5 59. 57.7*5 no ADftN 1.6 3.0 3.9 4.3 3.5

POPMATZ oROT RhTn (2)TOTAL 1.l$ 2.3 2.2 2.0 2.303211 2.5 3.3 3. 4.1 4.1

5i3i- 113T 11 Tt CMI 1TO05) 47.7 61.5 3.9 27.5 30.1°0 3211 3U*A tM TH06) 23.9 17.9 12.5 10.2 9.4

6 S3031 IIOTIOV KM 2.9 2.6 2.3 1.7 1.9

ACCIWIM. am" (10) 64.0 3762.0 6626.0 j am (Z w lN*UI VOW) .. 1.7 32.0 49.4 56.

110011 D.no0 no lo arIN01 O00 IPOD301. PCX1 C*FlZT(1969-71.100) 96.0 102.0 113.0 116.6 124.4

PO3 CAPITA SOWLT OrcALOR61S Cs or RopUy 36) 96.0 91.0 92.0 106.3 115.733133 (1RAS MR D) 56.0 50.0 50.0 60.1. 60.3Q1 VNICH uNDUL Mi. FOUl 17.0 15.0 13.0 /i 14.4 14.1

c1l, (AM 1-4) DUJ Las 26.3 19.7 11.0 7.3 7.2

LIUE ZKC3. AT Stan t(To ) 42.2 47.3 56.9 60.5 60.613*3r "W?. BASS (MI TO3 165.0 139.0 93.0 69.2 64

aCCESS 20 LUC WATSR (VW)TOTAL . 17.0 41.0A 44.2 44.00331 .. o 60.0 7n I 77.2 57.6301*1. ., 6.0 31.0 cL 34.6 37.1

A0SS10 TO uCISTA 31S3951Cl OF POPMIATIOU

TaTAL .. 18.0 6.0 ml 7. 50.1URBN 650 27.0 2;.1 52.9NM"*1. 1.0 1.0 c 3.5 44.7

PUUIIWSM 3 ICCt 41*0.0 689.0 2690.0 q 3216.0 7751.10. MI ISn "MN 10910.0 / 7420.0 40.0 490.7 2464.6pop. M 0 *. 33D

TOTAL 2160.0 1650.0 1290.0 1j 1039.2 1112.11m .3 .. 70.0 299.1 651.4R0UR , . . 1041C.0 G602.2 2516.9

A3.DIIU13 P 01TL SCD . .. .. 52.3 41.1

-I-*V nIAG Z 012; a 0r 5o 3

TOW. 5.2 5.601A3 35.2 5.6laL 5.2 3.6

AWEUW 30. ot PZS/UOGtTOOAL 2.6 2.6

2.6 2. .ROM3*1. 2.6 2.6

S3x36*Z OrUUI DC S1W RUIZT.TOTAL .. ..omum.. ..RURAL. .. ..

ANNE 1T A D L C 34 Page 2 of 6

IDIA -SOCIAL INDICATORS DATA SETINDIA REEREC aGRUPS CWIIGCITED AVERAGES) /a

nOST (MST nang ETIIWTCS) lbIT ICEIIT LOW i 3 NIDDLE 1ICOIIC

L9601 mob- ZESTINAT_ ASIA & PACIFIC ASIA A PACIFIC

ADJUSTSD IUURNT RATSIOSPRIMARI: TOTAL 61.0 73.0 79.0 /c 92.6 100.7

MALE 80.0 90.0 93.00 105.5 104.4FUWE 40.0 56.0 64.0 L 79.3 97.2

SECONDAXf TOTAL 20.0 26.0 30.0 Ac 31.3 47.8MALE 30.0 36.0 39.0 k 40.6 50.6FINALE 10.0 15.0 20.0 7T 21.9 44.8

VOCATIONAL CI Of s53ONDRY) 2.8 1.0 .. 3.2 18.4

FUPIL-TEACNIL RATIOPRIMARY 46.0 41.0 54.0 lc 38.0 30.4SECONDARY 16.0 21.0 .. 17.4 22.2

amnwXPASSENGC CARS/THOUSAN POP 0.6 1.1 1.4 /h 0.3 10.1RADIO RNCEIVIRS/TUOUSAND POP 4.9 21.5 55.8 129.8 172.9TV RBCEIVERS/THOUSAND POM 0.0 0.0 2.9 19.8 58.5NEWSPAPlE ("DAILY CGEAL

INTERZST") CIIUDLATIONPEK uWmai POPULTIO 10.6 16.2 19.4 th 25.7 65.3

CINEMA ANllIAL AITENDANCE/CAPITA 3.2 6.2 6.6 6.0 3.4

LABOR POrnTOTAL LABOR FORCE (CToUS) 185951.0 219194.0 284251.0

FEMALE (IRWINT) 30.7 32.5 31.4 33.2 33.6AGRUCILTURE (PERUENT) 74.0 74.0 71.0 /c 69.6 52.2INDUSTRY (PERCENT) 11.0 11.0 13.2 7;9 15.8 17.9

PAATICIPATION RATE (PEZRCET)TOTAL 42.8 40.0 38.8 41.9 38.9KALZ 57.0 52.4 51.7 53.6 50.6FEKALZ 27.3 26.9 25.3 29.1 26.8

3COO1C DERNDEEC RATIO 1.1 1.1 1.1 1.0 1.1

*351 DI STTYOUPUCENT OF PRIVATE I3CMRECEIVED U

HIGHEST OF HOUSEIIOLDS 26.7 26.3 / .HIGHEST 20Z OF HOUSEHOLDS 51.7 48.9 7 .. .. 48.0LOWEST 20z OF rOUSEIOLDS 4.1 6.7 7 .. .. 6.4LOUISr 40X OF 1O15RALDS 13.6 17.27 .. .. 15.5

P =ua TM=ESTDUIMA ABSOUTC POVERTY INCOMELEVL CUSS PER CAPITA)

URBAN .. .. 132.0 /h 133.9RURAL .. .. 114.o 7i 111.6 151.9

ESTIKAMAD RELATV POWET 1ICO5LEVEL CUSS PR CAPITA)

URBAN .. .. .. .. 177.9RURAL .. .. .. 61.7 164.7

ZSTIMAES POP. BELO ABSOLUTPOWRT. INCO1 Lo. (1)

URBAN .. .. 40.3 /h 43.8 23.5RURAL .. .. 50.? 7; 51.7 37.8

NOr AVAILABLENOT APPLICABLE

N 0 T E S

Ia The groulp averages for each indicator are population-weighted arithetic mean. Covernge of countriessmog the idicators depend on availablilty of data and Is not utfoo.

lb Unless otherwis noted, "Data for 1960" refer to ay year betwee 1959 and 1961; "Data for 1970" bete1969 and 1971; end data for 'Most Recent EstIate ' between 1981 and 1983.

/e 1980; /d 1977; /a 1978; /f 1962; aJg 1976; /h 1979; /1 1964-65.

JUNE, 19i5

ANNEX 1

DEFINITIOS OF SOCIAL INDICATORS rg o 6Notes: Altbougb the data are drawn from souruca geeralljudgd the mst autboritative and reliable. It huld abo be noted that they may not be iternatioiallycompamble bemuse o the lck of sanardized dellitionra nd coocpta used by dilfnt coutrie in colcting the dat The data ar. nonetdles. uaeul todescribe order of magnitude. Indicate trend. and characteri certin maor dilernes been countriesThe remkren groups are (I) the same country group of the subject country aid (2) a country group with somewhat higher average income n anthe countygroup of the abjet country (except for 'High Income 0 Expote" group where 'Middle Income North Afric and Middle East" r . .cho bemuse of stronger

cio-cultural affinitie). In the reference group data the avera are population weighied arithmetic men for each indicater and shown only when rmajrityofthe counrie in a roup ba data for that indicator Sce the coveag ofcountrine mmong the indicaton depends on the availbilityofdata aw is not uniform.coution must be ecd in rating averg of one indicator to nother Thes averag are only ueflul in comparing the value done indicator at a time amongthe country and mreence groups

AREA (thousand sq.km.) Crude ath RAte (per J_thodI-Number orf ve births in the year

Total-Total surface area comprising land area and inland waters; per thouand of mid-year population; 1960, 1970. and 1983 data.1960, 1970 and 1983 data. Cr Deat RAte (per tJ-mN)-Number of deaths in the yearAgrkabaal-Estinate of agricultural area used temporarily or per thousnd of mid-year population; 1960. 1970. and 1983 data.pernanendy for crops, pasturcs. market and kitchen gardens or to Gos Repedws Rate-Average number of daughters a womanlie fallow. 1960. 1970 and 1982 data. will bear in her nomual reproductive period if she experiences

present age-specific fertiity rates; usually five-year averages endingCNP PER CAPITA (USS)-GNP per capita estimates at current in 1960. 1970. and 1983.market prices. calculated by same conversion method as World Faxdfy lafiAccuprors, AsI (thossandfl-Annual num-Rank Atlas (I 981483 basis); 1983 data. berofacceptorsofbirth-controldevices underauspicesof national

ENERGY CONSUMPTION PER CAPITA-Annual apparent family planning program.consumption of commercial primary energy (coal and lignite. Am* Plauru-Uws (prc of mrvd uwmem)-The percen-petroleum. natural gas and hydro-. nuclear and geothermal elec- tage of married women of child-bearing age who are pacticing ortricity) in kilograms of oil equivalenrt per capita; 1960. 1970. and whose husbads are practicing any form of contraception. Women1982 data. of child-bearing age are genrly women aged 15-49, although for

somn countries contraceptive usage is measured for other agePOPULATION AND VITAL STATISTICS groups.

Total P.pulauior. Mid-IYear (thousra -As of July 1 ;1960.1970, FOOD AND NTIUTIONand 1983 data.UrIh Population (peren of saast)-Ratio of urban to totl IndexefFo.dPfraedt hrCapta (1969-71 - IO-Index ofper

population; different definition of urban s*rcas may affet ccapita annual production of all food commodities. Production

ppility of data among counties; 1960o 1970u and 1983 data excludes animal feed and seed for agriculturc. Food comnoditiesability of dat-aon u 96.170ad9 t inDdude pdmary commodities (e.g. sugarcane instcad of sugar)

PopuAtion fqjectins which are edible and contain nutrients (e.g. coffee and tea arePopslation in year 2O0-Tlhe projection of population for 2000. excluded); they comprise cereals, root crops, pulses oil seeds.made for each economy separately. Starting with information on vegetables. fruits, nuts, sugarcane and sugar beets, livestock. andtotal population by agc and scx, fertility rates, mortality rates. and livestock products. Aggregate production of each country is basedinternational migration in the base year 1980. these parameters on national average producer price weights; 1961-65. 1970. andwere projected at five-year intervals on the basis of generalized 1982 data.assumptions until the population became stationary. Per Capita Spply ofCCaories (partnt efrequ_rnst)-Comput-Stationary population-Is one in which age- and sex-specific mor- ed from calorie equivalent of net food supplies available in countrytality rates have not changed over a lone period. while age-specific per capita per day. Available supplies comprise domestic produc-fertility rates have simultaneously remained at replacement levd tion, imports less exports, and changes in stock. Net supplies(net reproduction rate = 1). IP such a population, the birth rate is exdude animal feed, seeds for use in agriculture. quantities used inconstant and equal to the dtath rate. the age structure is also food processing, and losses in distribution. Requirements wereconstant, and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal activitysize was estimated on the basis of the projected characteristics of and health considering environmental temperature, body weights.the population in tie year 2000. and the rate of decline of fertility age and sex distribution of population, and allowing 10 percent forrate to replacement lcvd. waste at household level; 1961. 1970 and 1982 data.Population MonEntuan-Is the tendency for population growth to Per Capita Supply of Reav (grisper p da-Protein content ofcontinue beyond the time that replacement-level fertility has be n per capita net supply of Food per day. Net supply of food is definedachieved: that is, even after the net reproduction rate has reached as above. Requirements for aUl countries established by USDAunity. The momentum of a population in the year t is measured as provide for minimum allowances of 60 grams of total protein pera ratio of the ultimate stationary population to the population in day and 20 grams of animal and pulse protein. of which 10 gramsthe year x. given the assumption that fertility remains at replace- should be animal protcin. These standards.are lower than those ofment level from year t onward. 1985 data. 75 grans of total protein and 23 grams of animal protein as an

Pop blaion Density average for the world, proposed by FAO in the Third World FoodPer sqXkm.-Mid-year population per square kilometer (100 hec- Supply: 1961. 1970 and 1982 data.tares) of total area; 1960. 1970. and 1983 data. Per Cpit hoteti. Sapply fia Amaland PWse--Protein supplyPer sq.km. agricultural land-Computed as above for agricultunil of food derived from animals and pulses in grams per day; 1961-65.land only. 1960. 1970. and 1982 data. 1970 and 1977 data.

PApuaion Age Strctre (percent)-Children (0-14 years). work- CNN (ages 1-4) Deth Rate (per thousand)-N umber of deaths ofing age (I5-64 years). and retired (65 years and over) as percentage children aged 1-4 years per thousand children in the same ageof mid-year population; 1960. 1970. and 1983 data. group in a given year. For most developing countries data derived

Populaion Growth Rae (percean-)otat-Annual growth rates of from life tables; 1960. 1970 and 1983 data.total mid-year population for 1950-60. 1960-70. and 1970-83. HEAEXH

Populaton Growth Rate (perceit)-urhau-Annual growth rates Life Expectancy at Ath (yews) -Number of years a newbornof urban population for 1950-60. 1960-70. and 1970-83 data. infant would live if prevailing patterns of mortality for all people

ANNE 1Pa 4 of 6

at the tme of ofim birth we to day the a throuot Its Ur. l ir pucher AWo - phpwj,. m.d ceeor-Toal atudat -1960,1970 and 1913 data. rod in pimary ad eondry lves divided by numbes ofhow Marap Ra (per dahed)-Number of Inanta who die teachers in th orepondin lve.before rachin one yer of agp per thound live birh in a givenyew, 1960, 1970 and 1983 dat CONSU ONAeon to SO ohm (Poag Ivp5l Eea) ma d J _ Crn (er i)Ps conr ars -mr4-Number of people (totaL uran, and rurl) with resble pr motor c mtling leu et persons; esambul-wcs to safe water supply (Inded teed surfdce wate 'or ass earses and military vidle.utittd but onuminated water ewh a tat fiom protected re R.*. (pw eeesppomtans-All typ or rcverborehols spring ad snity wal) u parcentage of their for radio broadcat to enea pubic per thousd of popudlon;tive populations In an uba u a public fountain or s extdudes un-icesed reeies in countries nd In yean wbnloca not more dta 200 mers from a hom may be conideed reginration of radio ae wa in etect; da for cent o yes may

beng withi reaonble acom of that houe. In rual area not be cos1e Wm most count bobed lEdoreao able o wd Imply that the hoswife or member of thebehouihold do not have to ped a diproportonate part of the day TVRJde (e mreedvn for broadcastin fetc the fab w-' nel t°o nerl public per thousand populao; ecluds uncend TVAca k Etc va Dhpel (pomm j 1 , receve in counies and in yea whenrgistrton of TV ss wamnd mWl-Number of people (total, urban, and rural) served by in 6IfOLexcrem diposl a pernt of the respecve pouain CIad53 (Pe dhdpwpb 111.s-Shows the aver6Excret dis;l may include the collction and disposaL with or ae cirulation of -day geal intemrt nwspper" dded as avnitout treatment, of human excta and wast-water by watern- podical publicaion devoted primarily to rwcrd general newsborne systems or the use of pit privie and iinilr isa ntim. Iti couderd to be 'daly" if it appear at at four ti a wnePopuhidan per PiaPlod -opulahion divided by number of pc- aie A _ina AtteBdWcr pU CkliIe jlr YaY-Baed on thetiing physa qualified from a medicaRlshl at university leel. number of tickets sold during the yp, including admissions toPomldm per NMwsg Pam-fpulation ivided by number of dnve-in c;enas and mobie unitLpracting mnuk and female gaduate nurses, asditant nures,practicl nurses and nursng auxilm is. LOR FORCEPopludea per Hqsza Rd-metalmica, and rwuI-ftpllation Tta Lab' Fac (rl.wu.duD-Econoinically active peson, in-(totaL urbn, and rural) divided by their rcive number of cluding armed forcos and unemployed but exduding houswiv,hospital beds avilable in puiic mnd private, geaands students, etc., covering population of all ags. Definitions inhospitals and hblittion centrs. Hospital ar t r various countries are not compaable; 1960, 1970 and 193 data.pCrmanently sted by at st one physiin. Establishments prov- A e_ch (powe{)-Female labor force u percentage of total lboriding principally cusodial cue are not induded. Rural bospita fol,hosvr indudc bealth and inedical centers not pemanendy staffed Apgcshwv (peatJ-Labor force in farming forestry, huntiby a physician (but by a medical aistant, nun midwife. etc.) and fishing a pentag of total labor force; 1960 1970 and 1980which offer in-pate accommodation and provide a limted rang data.of medical facilities. lusry (perceaQ-Labor force in mining, constuction, manu-AvdzdoBa pf HfespIa 54-Total number of admissons to or facturing and eectricity, water and gs as percentage of total labordischarges from bospitals divided by the number of beds. force; 1960, 1970 and 1980 data.

G- r-JtionHOUSING or activity rtes are computed - total male, and female labor force

Avrage ofs HoeWhM (jsu p bafdD-ma. wham as percentages of totaL male and female popuation of al as.mlraW-A household consists of a group ofidividuals who shame repe_cly, 1960,1970. and 1983 date. These ae bead on ILOsliving quarters and their main meals. A boarder or lodger may or ptcipation rates reflecting age-sex srctof the populaio andmay not be induded in the houehold for statistical pupos long time trend. A few eimates are from naton el soeAeag Nmuugr of Promser S_Im-to, wrh, ad ral- Ecmeic Depduyn Reto-Ratio of population under 15, andAverage number of persons per room in all urban, and rural 65 and over, to the vorking age population (those aed 15-64).occupied conventional dwellings, respectively. Dwellinp exludenon-permanent stuur and unoccupied par. INCOME DISTREUTIONPereag of DwfLap wt BEdricly-ain whe, ii rial- Percntae of Tta Dlp khlle (hod In cwh mud hed)-Conventional dwelings with elctricity in living quarters as percen- Accruing to pecntie groups of households ranuked by total house-tage of total, urban, and rmral dwelligs respectively. hold income.

EDUCATION POVERTY TARGET GROUPSAtsed EuwvAme Rados The following estimates are very approximate mease of povertyPvaary sdool - ot -. ma k fw-Gs total mal and levels, and should be interpreted with considerable caution.fiende enrollment of all ages at the primary leve as percentages of Eadisated Absout Paveriy meane Leve (USSper ofpka)--whurspective primary school-ge populations. While many countrie d ries-Absolute poverty income level is that income leelconsider prinary school age to be 6-11 years, others do noL The below which a minimal nutridona0y adequate diet plus essntildifferences in country pracces in the ages and duration of school non-food requiremets is not affordable.are relected in the ratios givenL For some countrie with universal Es ud Relatve Po"t lam Leve (USS per capta)-ereducaton. gross enrollment may exceed 100 prcent since some ad ral-Rural relative poverty income lvd is one-third ofpupils abe below or above the country's standard primary-school avae per capita personal income of the country. Urban level isage. derived from the rural kevel with adjustment for higher cost ofSecody school - totafl male ad female-Computed as above; living in urban areas.secondary education requires at kast four yeas of approved pri- EsWmaed PJpade. Peew Absohite Porty cme Lee (pm'-rMary nstruction prvides generaL vocationaL or tacher training cid riv- Percent of population (urban and ruralinsructions for pupils usually of 12 to 17 years of age; corrspond- who are -absolute poor.-ence courses are generally excluded.Voational Enrolueni (prcet of seco=ay)-Vocational institu- Comparative Analysis and Data Divisiontions include tchical, industrial, or otber programs which operate Economic Analysis and Prections Departmentxtiependenly or as departments of secondary institutions. June 1985

AMUI 1.Page 5 of 6

GMW PMN CAPITA IN Iona UsasO Al

mOSS _371c PUNShIT 1is eu/B lb AUIAL RAU OF G_OM ( CONSTANT PCEs) e

Uss *ln s nn_ Ss es"-64i an _K e w e011-74176 7516JT G 97E0 1 "-1

GOP at _arket Prics 170.34 IN. 3.7 3.5 3.7 2.0 4.1 5.2Gres Smatle Investmfnt 1.10 23.4or.:m NatI.ioa ei SawI 250:3 20.0Current Acecut eltlme 5." 3.4

OUTPUT. LAO P060 AIS PRICTIVITY I1 1001

Value A (e -aAer PeWt V. or er

*1^UMAgau.S of. e Satimna

Ariculto 2A 25.0 172.? 0.6 304 S1Inteirp 24.5 23.0 31.1 12.0 1.002 103Sery 1600 j J3J J3 J3J -L

Total/Average 146.2 100.0 244.6 nto.0 H0 too

OOVENNT rFINANCE

-erl I_rfmnt el Control 3eromnt

mlEIfl.I. S of G00W Pe age- S or GOP

Current HReeipts 436.23 20.46 10." 240.01 11.20 10.42Curr nt Eapenituree 478.28 22.34 20.05 274.17 12.09 11.30Curnt Surplusi0eficit -40.03 -1." -0.40 -332. -l.0S -0.30Capital Eemendturoe f/ 184.24 .6.4 1.12 14.1 6.* 6.06Esternel Assistance (tnt) 115.07 0.74 0.e7 - - -

-uV CbIDIT AND PRICES 1070171 ]JL7 973/93 itIaiiI 1jj13° jf2683 1083/14 1084105 Feb. 5 Fob, a* J-l in *u *at ^ *gt *nd p1 -Oli

Money snf Quasi-MOneY 100.0 224.1 472.2 557.7 627.5 729.7 *0.09 1.023.7 1.003.4 t.104.0_ la Credit to Government (net) 14.6 10.3 200.1 251.2 206.3 352.3 407.5 503.S 400.5 093.2Munk Credit to Commrcil Sector 64.6 354.2 310.1 30.4 434.6 517.1 *12.7 715.0 633.0 7e9.1

304115 1031116f1070171 11057 LZS 9j 012In1f2 1282/i3 I9G3394 964185 Apr. -Feb Amr.-PFb

CPreente6 of Indke-^ _re_Oney and Ouas I -Mony an a 7:f GOP MP 27.3 30.3 43.0 4;.6 42.S 44.2 44.4 46.0 - -

bhoIee1a Price Inme-

710707 -100l 100.0 173.0 217.6 2e7.3 261.3 288.7 316.0 336.4 336.0 357.5

A.nual Percentage Cnanges in.

e.-leaale Price Ino. 7.7 -1.1 17.1 19.2 9.4 2.6 9.5 7.1 7.1 *.0

Dana Crodit to Governent (net) 11.0 22.7 25.6 26.e 19.1 150. 15.3 23.5 20.3 gl 17.0 S/afik Credat te Commrcial Sector 19.4 22.7 21.5 16.2 19.6 19.0 16.1 11.7 12.3 RI 10.4 bF

It rne per capita GNP eat1_ete Is at market prices. using World Bank Alla ethodolooy. bass periao PnB6-83.

A:: eth-r conv*rsIona to aotlars In this table are at the average A*Ch-nnO rate prevling ouring thn perioa covere.

bi a uc Et aetna. Centrol Statistical Organization.

ci Coeputed trOm trend line of GCP at factor cost ceries. Including one observation before first year and one

onservation for act year of istad period.

a, world laso eatleates of not dtaburm_nt of conceasional aId *en I9R.

id, rranafera bet_-n Centre and States have teDn netted out.

It All loans and dv-ances to tnird pertl*i- have been netted out.II Pareentaga change froe end-arch 10W4 to end-February 19E5.

ni PereOntage chonge from and-varch 19WS to end-February 130.

Il Total Labor Force and percentage Dreakdoen froe 1031 Cenus. Excludas data for Anson.

)-jrrof 6

EALANCE w PASTS JilUfi ^tUlLE JUliE Al ZULU .1' ~ WIP AMIs 1SS IS D ES -1igmeM S.,MIS Million) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~UMEllion a-.

I&perum of Gomds 21 ass e4? ml I9ll iogrlng Ges" 1146 13.6Imports of ees" at 1435 43 1 133 14410 T 47 * .7Trade Elanwo -gm 4su1 -446? .4341 GOO_ 1S6 13.1UPS (not 33 9OU lOl1 Clething 7TV 6.6

LesSor ad Basther Prodhucte 377 *6.esoerct alncs -64 -463 -3436 -434 Jute Snmfacture 233 3.6,- __,___________ , rnm Ore- 4.6

Coltta Teatiles36 3.6Inseremt Intew (not) pi -257 -714 -616 -546 lum 74 0.3Not tronafor, J1 23004 303 33632 3n6 Onoaft 341 42.4

lolenco on Curront Account -2116 -2778 -1903 -rSSe-------------------------- re~~~Ttal 3337 100.0

65 62 _ 2____2Direct Inwoat_nt

OttC ido LOaw S GOrnts (not) 170 6661 153" 31x3 MARCH 3n- 1965Gruts Otmhuremonte 2321 2162 2133 330Aourtization 113 *17 U19 H0 uss JJllJen

Pi vote *orroming (not) 367 a" 31m 404 Outotondin an D i rod 36.33Undiflureed 10.6?

nen-Ieeidont Do1eo1te 434 723 316 13 Outmtndin Inctldino Undilbursod r 36.10Tr aeaStlen .Itt IMP (not) 160 1271 Oi -263AI I oter I ton I_ -1243 622 -741 -331

Increse in Roserves (-1 -0 -11 -n32 -l60 ---------------------------Groos aowenuem (d voar) aD 409" 1147 sl11 1070bot Remorse (am year 39 2060 1667 2176 2214 1IO/D LOWIC _"CH 31. 1C06 t USS will$

Fuel And RolotOd e11trllm -If -[--

Outotonio end Dimburod 20 350 _Imports (petrolosa) 91 4717 243 2212 2346 Undiagrmed 4700 2363

ot enichs Crude 20O 2240 1621 24" outatandig nd Undimburmed 7243 13562Pred.ectS 1122 1260 1032 lo0w

RATE or ECK0ANGE

June IOn to old-Decenbr 197 . USSI .00 * 117.1WRolOGD * U560.13=22

M- o-D om-c_r 1671 to nes-Juno 1972 s USS .00 - Ro7.2737tRai00 USSO.1n7376

Liter end-Juno 1372 s Floating Rate

Spot Rose ond-rch IS5 : US5m.00 - Re12.6430Eol.00 - USW0.0811w

Spot Radto onesrrcn l9GO USS .00 - Rm2.II3-Aol 00 * US0.0109

'L Etimstaid.i Figures gsven cover oll invoetment Incom (not). Majer par_ntC are Interst an foreign loam end charges

paid to I_P, end eaor receiptb are Interest arnd on foreign seet.I' Figures gin Include eorkers' roeittainco but -cClude official grant assimtanco uhCh Ie Included within

ott icol lonne and grants. *n non-resident eogemito which ore oneen Separately.! aciludo not use of IMP Cresit.ni Aortization *no interest payments on fDrotgn loae a a porcantog of total current receipte.ral Includes *ean-ngo rate edjustments to the valuation of resrvas mid f Inancing of 10-la1vCo in rupee trado.it E.t udinlg gold.9 nt of crude petroleum oil esporta.rl Incluse MF.

ANNEX IIPage 1 of 4

THE STATUS OF BANK GROUP OPERATIONS IN INDIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS(As of March 31, 1986)

US$ millionLoan or Fiscal (Net of CancelLations)Credit Year ofNo. Approval Purpose Bank IDA I/ Undisbursed 2/

57 Loans/ 2,662.9 - -

107 Credits fully disbursed - 6,563.7 -

482-IN 1974 Karnataka Dairy - 29.2 0.021251-IN 1976 Andhra Pradesh Irrigation 145.0 - 8.55680-IN 1977 Kerala Agric. Development - 30.0 4.26690-IN 1977 West Bengal Agricultural

Extension & Research - 12.0 5.12747-IN 1978 Second Foodgrain Storage - 107.0 2.49761-IN 1978 Bihar Agricultural

Extension & Research - 8.0 3.83788-IN 1978 Karnataka Irrigation - 117.6 10.92793-IN 1978 Korba Thermal Power - 200.0 8.46806-IN 1978 Jamu-Kashmir Horticulture - 14.0 7.98824-IN 1978 National Dairy - 150.0 1.43842-IN 1979 Bombay Water Supply II - 196.0 84.94848-IN 1979 Punjab Water Supply & Sewerage - 38.0 2.89855-IN 1979 National Agricultural Research - 27.0 8.931648-IN 1979 RAmagundam Thermal Power 50.0 - 36.14889-IN 1979 Punjab Irrigation - 129.0 9.16963-IN 1980 Inland Fisheries - 20.0 11.56981-rN 1980 Population II - 46.0 15.891003-IN 1980 Tamil Nadu Nutrition - 32.0 11.631011-IN 1980 Gujarat Irrigation II - 175.0 62.191012-IN 1980 Cashewnut - 22.0 12.471027-IN 1980 Singrauli Thermal II - 300.0 69.021028-IN 1980 Kerala Agricultural Extension - 10.0 3.761033-IN 1980 Calcutta Urban Transport - 56.0 13.201034-IN 1980 Karnataka Sericulture - 54.0 19.501046-IN 1980 Rajasthan Water Supply & Sewerage - 80.0 37.911843-IN 1980 Industry DFC XIII 97.6 - 1.931053-IN 1980 Farakka Thermal Power - 225.0 39.091887-IN 1980 Farakka Thermal Power 25.0 - 25.001897-IN 1981 Kandi Watershed and

Area Development 30.0 - 15.091072-IN 1981 Bihar Rural Roads - 35.0 7.611078-IN 1981 Mahanadi Barrages - 83.0 35.151082-IN 1981 Madras Urban Development II - 42.0 15.821108-IN 1981 M.P. Medium Irrigation - 140.0 55.211112-IN 1981 Telecommunications VIII - 301.2 39.921116-IN 1981 Karnataka Tank Irrigation - 54.0 29.301125-IN 1981 Hazira Fertilizer Project - 399.1 53.401135-IN 1981 Maharashtra Agricultural Ext. - 23.0 4.721137-IN 1981 Tamil Nadc- Agricultural Ext. - 28.0 12.861138-IN 1981 M.P. Agricultural Ext. II - 37.0 22.60

ANNEM IIPage 2 of 4

US$ millionLoan or Fiscal (Net of Cancellations)Credit Year ofNo. Approval Purpose Bank IDA 1/ Undisburued 2/

1146-IN 1981 National CooperativeDevelopment Corp. II - 125.0 47.60

1172-IN 1982 Korba Thermal Power Project II - 400.0 208.741177-IN 1982 Madhya Pradesh Major Irrigation - 220.0 125.892050-IN 1982 Tamil Nadu Newsprint 100.0 - 0.131178-IN 1982 West Bengal Social Forestry - 29.0 17.671185-IN 1982 Kanpur Urban Development - 25.0 12.122051-IN 1982 ICICI xIV 150.0 - 11.302076-IN 1982 Raagundam Thermal Power II 300.0 - 238.301219-IN 1982 Andhra Pradesh Agricultural Ext. - 6.0 4.282123-IN 1982 Refineries Rationalization 200.0 - 59.132165-IN 1982 Rural Electrification III 304.5 - 167.711269-IN 1982 Kallada Irrigation - 60.0 19.922186-IN 1982 Kallada Irrigation 20.3 - 20.001280-IN 1983 Gujarat Water Supply - 72.0 58.661286-IN 1983 JammuKashmir and

Haryana Social Forestry - 33.0 21.06,1288-IN 1983 Chambal Madhya Pradesh

Irrigation II - 31.0 15.221289-IN 1983 Subernarekha Irrigation - 127.0 98.122205-IN 1983 Krishna-Godavari Exploration 165.5 - 89.731299-IN 1983 Railways Modernization &

Maintenance II - 200.0 141.752210-IN 1983 Railways Modernization &

Maintenance II 200.0 - 197.042241-IN 1983 South Bassein Gas Development 139.3 - 133.711319-IN 1983 Haryana Irrigation II - 150.0 81.291332-IN 1983 U.P. Public Tubewells II - 101.0 74.781356-IN 1983 Upper Indravati Hydro Power - 170.0 134.202278-IN 1983 Upper Indravati Hydro Power 156.4 - 156.011369-IN 1983 Calcutta Urban Development III - 147.0 126.392283-IN 1983 Central Power Transmission 250.7 - 250.072295-IN 1983 Himalayan Watershed Management 46.2 - 44.831383-IN 1983 Maharashtra Hater Utilization - 32.0 22.292308-IN 1983 Maharashtra Water Utilization 22.7 - 22.642329-IN 1983 Madhya Pradesh Urban 24.1 - 22.691397-IN 1984 Orissa Irrigation II - 105.0 60.351424-IN 1984 Rainfed Areas Watershed Dev. - 31.0 33.301426-IN 1984 Population III - 70.0 63.611432-IN 1984 Karnataka Social Forestry - 27.0 21.122387-IN 1984 Nhava Sheva Port 250.0 - 235.412393-IN 1984 Dudhichua Coal 151.0 - 141.882403-IN 1984 Cambay Basin Petroleum 242.5 - 227.942415-IN 1984 Madbya Pradesh Fertilizer 203.6 - 169.391454-IN 1984 Tamil Nadu Water Supply - 36.5 39.58SF-12-IN 1984 Tamil Nadu Hater Supply - 36.5 40.181468-IN 1984 Periyar Vaigai II Irrigation - 17.5 8.47SF-16-IN 1984 Periyar Vaigai II Irrigation - 17.5 18.901483-IN 1984 Upper Ganga Irrigation - 125.0 126.671496-IN 1984 Gujarat Medium Irrigation - 172.0 140.322416-IN 1984 Indira Sarovar Hydroelectric 157.4 - 154.92

ANE IIPage 3 of 4

US$ millionLoan or Fiscal (Net of Cancellations)Credit Year ofNo. Approval Purpose Bank IDA 1/ Undisbursed 2/

SP-20-IN 1984 Indira Sarovar Hydroelectric - 129.8 138.512417-IN 1984 Railways Electrification 280.7 - 280.002442-IN 1984 Farakka II Thermal Power. 300.8 - 295.242452-IN 1984 Fourth Trombay Thermal Power 135.4 - 131.701502-IN 1984 National Cooperative

Development Corporation III - 220.0 201.591514-IN 1985 Kerala Social Forestry - 31.8 31.951523-IN 1985 National Agric. Extension I - 39.1 43.941544-IN 1985 Bombay Urban Development - 138.0 136.892497-IN 1985 Earmada (Cujarat) Dam and Power 200.0 - 200.001552-IN 1985 Nartmda (Gujarat) Dam and Power - 100.0 97.781553-IN 1985 Narmada (Cujarat) Canal - 150.0 161.291569-IN 1985 Second National Agricultural Ext. - 49.0 55.771611-IN 1985 National Social Forestry - 165.0 189.411613-IN 1985 3"tdira Sarovar Hydroelectric - 13.2 14.112498-IN 1985 Pharia Coking Coal 248.0 - 248.002505-IN 1985 Maharashtra Petrochemical 300.0 - 293.112534-IN 1985 Second National Highway 200.0 - 200.002544-IN 1985 Chandrapur Thermal Power 300.0 - 277.292555-IN 1985 Rihand Power Transmission 250.0 - 249.392582-IN 1985 Kerala Power 176.0 - 176.001619-IN 1986 West Bengal Minor Irrigation - 99.0 114.971621-IN 1986 Maharashtra Composite Irrigation - 160.0 186.901622-IN 1986 Kerala Water Supply and Sanitation - 41.0 48.601623-IN 1986 West Bengal Population - 51.0 55.641631-IN 1986 National Agricultural Research II* - 72.1 72.102629-IN 1986 Industrial Export Dev. Finance* 90.0 - 90.002630-IN 1986 ICICI-Indus. Exp. Dev. Finance* 160.0 - 160.0

Total 8,734.6 13,808.8of which has been repaid 1,385.2 247.3

Total now outstanding 7,349.4 13,561.5Amount Sold 133.8of which has been repaid 133.8 - -

Total now held by Bank and IDA 3/ 7,349.4 13,561.5

Total undisbursed (excluding *) 4,780.27 3,963.07

1/ IDA Credit amounts for SDR-denominated Credits are expressed in terms of theirUS dollar equivalents, as established at the time of Credit negotiations and assubsequently presented to the Board.

2/ Undisbursed amounts for effective SDR-denominated IDA Credits are derivedfrom cumlative disbursements converted to their US dollar equivalents atthe SDR/US dollar exchange rate in effect on March 31, 1986.

3/ Prior to exchange adjustment.

* Not yet effective.

ANNEX IIPage 4 of 4

B. STATEMENT OF IFC INVESTMENTS(As of March 31, 1986)

Amount (USS million)FiscalYear Company Loan Equity Total1959 Republic Forge Company Ltd. 1.5 - 1.51959 Kirloskar Oil Engines Ltd. 0.8 - 0.81960 Assam Sillimanite Ltd. 1.4 - 1.41961 K.S.B. Pumps Ltd. 0.2 - 0.21963-66 Precision Bearings India Ltd. 0.6 0.4 1.01964 Fort Closter Industries Ltd. 0.8 0.4 1.21964-75-79 Mahindra Ugine Steel Co. Ltd. 11.8 1.3 13.11964 Laksbmi Machine Works Ltd. 1.0 0.3 1.31967 Jayshree Chemicals Ltd. 1.1 0.1 1.21967 Indian Explosives Ltd. 8.6 2.9 11.51969-70 Zuari Agro-Chemicals Ltd. 15.1 3.8 18.91976 Escorts Limited 6.6 - 6.61978 Housing Development Finance

Corporation 4.0 1.2 5.21980 Deepak Fertilizer and

Petrochemicals Corporation Ltd. 7.5 1.2 8.71981 Coromandel Fertilizers Limited 15.9 - 15.91981 Tata Iron and Steel Company Ltd. 38.0 - 38.01981 Mahindra, Mahindra Limited 15.0 - 15.01981 Nagarjuna Coated Tubes Ltd. 2.9 0.3 3.21981 Nagarjuna Signode Limited 2.3 - 2.31981 Nagarjuna Steels Limited 1.5 0.2 1.71982 Ashok Leyland Limited 28.0 - 28.01982 The Bombay Dyeing and

Manufacturing Co. Ltd. 18.8 - 18.81982 Bharat Forge Company Ltd. 15.8 - 15.81982 The Indian Rayon Corp. Ltd. 8.1 - 8.11984-86 The Gwalior Rayon Silk Manu-

facturing (Weaving) Co. Ltd. 15.2 - 15.21985 Bihar Sponge 11.9 0.8 12.71985 Bajaj Auto Ltd. 22.8 - 22.81985 Modi Cement 12.7 - 12.71985 India Lease Development Ltd. 5.0 0.4 5.41986 Larsen and Toibro Ltd. 19.0 - 19.01986 India Equipment Leasing Ltd. 2.5 0.3 2.8

TOTAL GROSS COMMITMENTS 296.4 13.6 310.0

Less: Cancellations, Terminations,Repayments and Sales 178.3 7.9 186.2

Now Held 118.1 5.7 123.8

Undisbursed 65.1 1.5 66.6

ANNEX III

INDIA

COOPERATIVE FERTILIZER INDUSTRY PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I: Timetable of Key Events

(a) Time taken by the country to prepare the project

About one year.

(b) The agency which has prepared the project

Ministry of Agriculture, IFFCO

(c) Date of first presentation to the Bank and date offirst mission to consider the project

December 1984

(d) Date of departure of appraisal mission

June 1985

(e) Date of completion of negotiations

May 1986

(f) Planned date of effectiveness

October 1986

Section II: Special Bank Implementation Actions

None

Section III: Special Conditions

(a) GOI guarantees to provide adequate supplies of gasto the project by July 31, 1987 (para 60);

(b) IFFCO and GAIL would enter into an agreement on theconditions of supply of gas to the project by June 30,1987 (para 60).

ANNEX IV

INDIA

PROCUREMENT METRODS FOR THE PROJECT COMPONENTS a/(US$ Million)

TotalICB LIB LCB Other N.A. Cost

- Imports Component 150.0 - - - - 150.0(150.0) (150.0)

- Equipment & Materials 101.5 150.9b/ 48.1 - - 300.5(92.5) (13.51 - - (106.0)

- License/Engineering and - 33.1c/ 8.7 - - 41.8Consulting Services (13.77 (13.7)

- Project Management & - - - 20.5 - 20.5Insurance

- Land & Development & 17.2 - 56.6 - - 73.8Civil Works (17.2) (17.2)

- Erection & Comissioning - 4.4d/ 37.3 - - 41.7(3.57 - - - (3.5)

- Township & Infrastructure 0.9 - 30.9 - - 31.8(0.9) - - - - (0.9)

- Local Handling 12.8 - 4.3 - - 17.1(10.9) - - - - (10.9)

- Customs & Excise Duties - - - - 38.4 38.4and Taxes

Total Cost 282.4 188.4 185.9 20.5 38.4 715.6(271.5) (30.7) - - - (302.2)

a/ Figures in parenthesis indicate amounts to be financed by the Bank.

b/ Includes US$126.2 million eqivalent of financing from OECF andUS$10.2 million equivalent of other bilateral financing for goods to besupplied from Japan, India and cetain other countries.

c/ Includes US$18.9 million equivalent of bilateral financing for worksby the foreign project consultants.

d/ Includes US$0.6 million equivalent of financing from OECF.

INDIA

COOPERATIVE FERTILIZER INDUSTRY PROJECT

Initiatives in the Fertilizer Sector

1. In connection with the Cooperative Fertilizer Industry Project,GOI agrees to aim at achieving a series of performance targets and to takea number of measures spelled out below.

Performance Targets

2. Plant capacity utilization: A gradual increase in the averagecapacity utilization and production of existing nitrogen fertilizer plantsfrom their present levels, both in the aggregate, as well as for thepublic sector plants alone, as shown in the following table:

Targets for Capacity Utilization and Production ofExisting Nitrogen Fertilizer Plants

Actual Targets1984/85 85/86 86/87 87/88 88/89 89/90

Plant Capacity (Z)

All India 74 75 76 78 80 82Public Sector 60 61 63 65 69 73

Fertilizer Production(million nutrient tons)

All India 3.8 3.8 3.9 4.0 4.1 4.2Public Sector 1.8 1.8 1.9 2.0 2.1 2.2

GOI will provide the Bank, by June 1986, with plant-by-plant capacityutilization and production data for 1984/85. Similar data will beprovided to the Bank annually through completion of the project by Junefollowing the end of each fiscal year.

3. Feedstock and Energy Consumption: Reduction of the overallaverage feedstock and energy consumption per unit of output, as follows(in approximate million kcal per ton of ammonia):

-2-

Actual. - Targets1984/85 87/8 8 89/9t

Natural Gas 10.0 9.5 9.0Fuel Oil 16.0 15.0 14.0Naphtha 12.0 11.0 10.5Coal 18.0 18.0 15.0 a/

a/ Assuming completion of the coal-based plants rehabilitation.

GOI will provide the Bank, by June 1986, with plant-by-plant consumptiondata for 1984/85. Similar data will be provided to the Bank annuallyuntil the completion of the project by June following the end of eachfiscal year.

4. Distribution Efficiency: Steps are being taken by GOI tofurther gradually reduce the average haulage distance of fertilizers frompresently about 900 km to at most 800 km by 1990 and a 10X real reductionover the same time of the average fertilizer unit transportation andrelated costs, as reflected in the Government's "equated freight' paymentsto producers, which in 1984/85 amounted to an average of Rs 173 per ton ofurea. In addition, despatch delays and production stoppages at principalplants resulting from or necessitated by lack of railroad haulagecapability, is expected to be eliminated by 1989.

5. Ex-Factory Pricing: The review of the retention price systemjust completed has evaluated various options, recommending a series ofactions with a view to (a) improving efficiency in existing facilities;(b) building new capacities for mueeting the growing demand forfertilizers; and (c) providing adequate incentives through an appropriatepricing mechanism in order to develop the sector to its full potential.The Government of India intends to modify and rationalize the existingretention price system to generate adequate signals to plant managementsto take appropriate investment and operating decisions that would saveenergy and reauce costs. The LTFP stateitent recognizes the need tocontain subsidies within a certain level in terms of GDP, recognizing alsothe necessity to ensure that the rate of growth on this account ir lowerthan the rate of growth of GDP. Various steps have been recummended inthis regard by the Study. Based on the above considerations, GOI wouldendeavour to keep the existing retention price constant in real terms, atpresent levels, pending decisions on, and implementation of, therecommendations of the Committee. The Indian delegation informed that themajor recommendations of the Committee are (a) for the existing plants:the retention price for urea would be fixed based on grouping for directcosts, relating to feed-stock and individual capital-related costs; and(b) for new gas-based plants: a system of tariff-adjusted import parityprices based on long range average prices of sample of countries. GOIintends to review the recommendations by September 1986, and thereafterimplemeat an action plan with monitorable targets in regard to ex-factorypricing. In this process, GOI proposes to take into consideration theBank's views on the evolution of an appropriate pricing system forpromoting efficiency and reducing the subsidy burden.

-3-

6. Farmgate Prices: GOI has recognized the budgetary implicationsof maintaining farmgate fertilizer prices at present levels. The ongoingstudy on farmgate prices is expected to De completed by the end of 1986and will address the major issues surrounding the overall fertilizersubsidy. In this process, GOI proposes to take the Bank's views intoaccount.

Measures Currently Under Consideration or Being Taken

7. In order, 'nter alia, to achieve the above targets, a number ofmeasures, as summarized below, will be or are being taken.

(i) Production Efficiencies

8. The following principal actions are envisaged to improve theefficiency and capacity utilization of the public sector plants nowperforming unsatisfactorily:

(a) Technical and Energy Survevs and Subsecuent Rehabilitationof the Barauni, Namrup and Durgapur Plants. Based onongoing reviews of their performance and identification ofdefective equipment, the companies will carry outmodifications or replacements. Feasibility studies to thiseffect are to be initiated by mid-1986. On completion ofthis work, the Government will assess the investmentrequirements. These studies will also evaluate theeconomics of continuing overation of the plants aftercarrying out any needed physical and financialrestructuring.

(b) Energy Audits of Other FCI, RCF, FACT and MFL Plants.In-house audits are under ry at RCF and MFL and will becompleted by mid-1986. Siamlar studies will be initiatedshortly at FCI and FACT and are expected to be completed bylate 1986. Their conclusions will be discussed with theBank.

(c) Rehabilitation of the Gorakhpur Plant. NLecessary studiesare under way and the findings are expected to be availablewith the Government by Trid-May 1986, at which time theGovernment will discuss the findings wich the Bank andreach decisions with regard co their implementation bySeptem6er 1986.

(d) Rehabilitation of the Coal-Based Plants at Talcher andRamagundam. The Bank-financed feasibility study has beencompleted. The Government will review the findings of thestudy wiAth the Bank and reach decisions on actions to betaken by mid-1986.

(e) Closing of the Existing Urea Plant at Namrup. The Namrupfertilizer complex is being rehabilitated and expanded.

-4 -

Following this rehabilitation, the old Naurup I urea plant,being replaced under the current Namrup III Project, isplanned to be closed by late 1987.

Closure of Old Udyogamandal Plant. With the expectedcommissioning of the caprolactam plant at the same site bymid-1988, the existfng gypsum-route ammonium sulfate plantwill cease to operate.

(f) Study of the Economic Viability of Selected FertilJzerPlants. Following completion of the above-mentionedstudies and audits, the Government will initiate a review,under terms of reference to be developed 'n cooperationwith the Bank, of plants selected in view of their highproduction costs and/or retention prices to (i) determinetheir economic production costs and values; (ii) reviewfurther potential, if any, for decreasing their production,operat'ng and financial costs; and (ii,) identify andimplement measures for the purpose.

(g) Perspective Sector Planning. As part of its perspectiveplanning for the fertilizer industry, the Governmentconstitutes a Working Group prior to each Five Year Plan toreview the status of the industry and to formulate theinvestment plans for the five-year period. In view of theimportance of the industry, the Government now plans tocarry out a longer period sectoral perspective studycovering the period up to the year 2000 to be utilized bythe Government's Planning Commission in its overallperspective planning work. This review 's to develop anoptimal scenario for the structure of the fertilizerproduction including aspects of location, feedstock, sizeand sequence of new plants, marketing, distribution andconsumption in India, proposed targets to be reached andstrategy of action needed to be adopted. The Study isproposed to be started by mid-1986 and scheduled forcompletion by December 1986. The Government proposes tocons-der the Bank's suggestions with regard to this studyand discuss its findings with the Bank.

(ii) Public Sector Management

10. The procedures applied for the selection, appointment, tenure,training, incentives and motivation of top managers in the public sectorin general are currently being reviewed by the Government to find ways toensure professional decision-making at the senior management levels, toincrease autonomy and accountability of the managers, and thus to improvepublic sector companies' operational performance and efficiency. In thiscontext, the Government is currently reviewing the recommendations of the1985 Sengupta Study which focuses on improving the Indian public sectorenterprises in general; it is expected that decisions will be reached in1986.

II. The Fertilizer Department of the Government is in the process ofdeveloping a computerized management information system which is expectedto be operational by mid-1986. The Government intends to work with theBank in further ref'ning the system, taking into account internationalexperience to incorporate elements of periodic evaluation of companyperformance, setting up a signalling system pointing to out-of-linesituations, establishing a control over follow-up actions, and alsoproviding appropriate linkages with top management selection, promotionand incentives, In this context, the Government and the Bank have agreedto the provision by the Bank of financing of technical assistance underthe Cooperative Fertilizer Industry Project in the form of consultantswith international experience on the subject.

12. On behalf of the Government, the Fertilizer Association of Indiahas carried out and submitted to GOI a study of the manpower requirementsof the fert'lizer 4ndustry. The Government intends to discuss witn theBank by June 1986 the findings of the study, including the training needsin the public sector fertilizer companies.

13. Regarding the Government's intentions as to ownership offertilizer plants, the delegation has pointed to che size of theinvestment program and the needed growth rate, and also notes theGovernment's policy 4n the last two decades of mobilizing financial andmanagement resources available in all the sectors. As evidence of thispolicy, the Government pointed out that of the six large gas-based plantsnow under study or construction, five are to be owned by the private andcooperative sectors, the only one in the public sector being implementedby National Fertilizers Ltd. which is a very successful and efficientlymanaged company.

(ii.) Marketing and Distribution

14. Given the projected growth in fertilizer consumption and thenecessary consumer diversification, the Government has recognized the needto review its marketing and distribution strategy. In line with thestudies referred to in paragraphs 6 and 8(g), the Ministry of Agricultureintedds to review the projected growth in consumption and production up tothe year 2000 and develop an appropriate strategy of actions to be takento ensure the efficient marketing of the increasing volume offertilizers. This study will include a review of the changes andstrengthening needed in the distribution system, the appropriateness orotherwise of continuing the present syscem of market allocations, theusefulness of increased competition at the market place to achieve betterservices for the farmers, the need for reviewing the distribution marginto ensure farmers better access to supplies, and the need for increasedinstitutional support for promotion, crop insurance and credit supply.

15. The Government has been aware of the need for measures tooptimize fertilizer transportation and distribution. Initial feasibilitystudies focusing on the establishment of a number of nodal railroad pointsin northwest India are being prepared. Furthermore, in view of transportand storage constraints in other parts of India with high consumption

-6 -

intensity, the Government is considering to carry out an all-Indiadistribution project. A decision on this study will be reached by June1986, with completion scheduled within 12 months.

INDIAO 'o cc co co o1o ~iVi(i5, | <COOPERATIVE FERTILIZER

SliOilli / <;INDUSTRY PROJECTO ~~~~~~~~~~~~~~~~~fodili- .. aPl..:

SUOCIOE 000000 JS /FERTILIZER COMPLEXES BASED ON a Fropoped pro/sdeeoc or"' SOUTH BASSEIN GAS Sbi io

i~~~~~~~~PKSA Ht"ustuAe / iNii o.d HU 0>pi iI" : n UDi eojo .,

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