INTERNATIONAL BANK FOR RECONSTRUCION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION MAHARASHTRA AGRICULTURAL CREDIT PROJECT INDIA

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED Report No. This report is for ofricial use onl by the Bank Group and specificaly authorized orpnizations or persons. It may not be published, quoted or cited without BDtk Group authorization. The Bank Group does not accept respondbility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCION INTERNATIONAL DEVELOPMENT ASSOCIATION MAHARASHTRA AGRICULTURAL INDIA February 14, 1972 PA-116a AND DEVELOPMENT CREDIT PROJECT Agriculture Projects Department

2 CURRENCY EQUIVALENTS US$1 - Rs 7.28 Rs1 - US$ 0.14 Rs 1,000 US$ Rs 1,000,000 - US$137,376 WEIGHT AND MEASURES Hetric System ABBREVIATIONS ARC - Agricultural Refinance Corporation GOI - Government of India GSDA - Maharashtra Groundwater and Development Agency LDA - Maharashtra Land Development Agency LDB - Maharashtra State Cooperative Land Development Bank RBI - Reserve Bank of India FISCAL YEAR (ARC AND LDB) July 1 - June 30

3 INDIA MAHARASHTR AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS i-iii I. INTRODUCTION... 1 II. BACKGROUND A. India B. The State of Maharashtra...*... 2 General Description Agricultural Structure Agricultural Development Priorities... 3 Introduction Minor Irrigation...*... 3 Land Development Mechanization Agricultural Inputs and Services... 5 Credit Services III. THE PROJECT... 6 A. Definition... 6 B. Detailed Features Minor Irrigation... 6 Land Development Consultancy Services Groundwater C. Cost Estimates and Financing... 8 D. Procurement E. Disbursements IV. ORGANIZATION AND MANAGEMENT Introduction Agricultural Refinance Corporation This appraisal report is based on the findings of a mission which visited India in March/April 1971 and was composed of Messrs. C. H. Walton, G. Luhman, and P. K. Pohland (IDA) and D. I. Allen and J-M. Daniel (Consultants), all of whom contributed to this report.

4 -2- Page No. Maharashtra State Cooperative Land Development Bank Organization and Management Resources Operational Results Rehabilitation of LMB System Lending Policies and Terms Accounts and Auditing Commercial Banks Groundwater Surveys and Development Agency Land Development Agency V. PRODUCTION, MARKETS, PRICES AND FARMERS' BENEFITS Production Markets Prices... * Farmers' Benefits VI. BENEFITS AND JUSTIFICATION vii. RECOMMENDATIONS SCHEDULE A - Minor Irrigation: Appraisal Criteria and Procedures SCHEDULE B - Project Lending Terms and Conditions SCHEDULE C - Participating Primary Banks ANNEXES 1. Minor Irrigation Appendix Appendix Basins and Gaging Stations for Minor Irrigation Development Terms of Reference for Proposed Consultancy Services to Groundwater Surveys and Development Agency 2. Land Development Appendix Schemes in Land Development Program Appendix Land Development Cost Phasing Appendix Land Development Area and Cost Estimates by Activity

5 -3-3. The Agricultural Refinance Corporation Appendix Condensed Statements of Net Income Appendix Projected Statements of Net Income Appendix Condensed Balance Sheets Appendix Projected Balance Sheets 4. Maharashtra State Cooperative Land Development Bank Ltd. and Primary Land Development Banks Appendix Appendix Appendix Appendix Appendix Appendix Borrowers' Overdues to Primary Banks Overdues Collection Program Condensed Statements of Net Income Projected Statements of Net Income Condensed Balance Sheets Projected Balance Sheets 5. Commercial Banks Operating in Maharashtra 6. Project Cost and Disbursements Appendix Appendix Appendix Details of Estimated Project Cost Details of Project Equipment and Consultancy Services Costs Estimated Schedule of Disbursements 7. Present and Proposed Interest Rates for Project Institutions 8. Farm Incomes and Financial Rates of Return on Investments Appendix Farm Models: Financial Appendix Financial Rates of Return by Type of Investment Appendix Estimated Increases in Cropped Area and Production 9. Economic Rate of Return Appendix Appendix Farm Models: Economic Economic Rates of Return by Type of Investment 10. Comparison of Alternate Transport Means for Sugarcane MAP Appendix Net Present Worth of Cost Streams for Transport Alternatives

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7 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises an agricultural credit project in the State of Maharashtra for which an IDA credit of US$30 million is proposed. It would support a three-year lending program, primarily for investments in minor irrigation but also for land development, and would assist in financing equipment required for project implementation and consultancy services. ii. Maharashtra is emphasizing agricultural development and is giving special attention to increasing production through the expansion of irrigation facilities and the use of high-yielding varieties and fertilizers. Since the possibilities for the construction of additional large surface water irrigation schemes are limited, efforts will be centered on the development of smaller units such as wells and lift schemes, and on land development operations (levelling, grading, etc.) to permit the more efficient use of water from existing surface schemes. Maharashtra's groundwater resources are generally adequate to sustain a further program of exploitation, but it would have to be accompanied by new techniques of analysis and appraisal by the State Groundwater Surveys and Development Agency (GSDA) and the banking system in order to arrest the overinvestment and overexploitation which have already occurred in some areas. Consultancy services would be included in the Project to assist GSDA in fulfilling its role. Until such time as Maharashtra has introduced comprehensive groundwater legislation, now under consideration, control over development will rest with the lending program and with administrative actions undertaken by the State. iii. The Project would assist in financing farm investments, Project equipment, and consultancy services estimated to cost US$51.9 million equivalent: US$41.5 million for minor irrigation, US$4.8 million for land development, US$5.3 million for Project equipment (well-drilling, earthmoving and hydrological equipment), and US$0.3 million for consultancy services. The foreign exchange component is estimated at US$9.2 million equivalent or about 18% of total Project cost. IDA would finance US$30 million equivalent, representing the foreign exchange component and about one-half of the local currency costs. iv. Farmers' contributions, in the case of loans from the Maharashtra State Cooperative Land Development Bank (LDB), would be 10% of the cost of individual investments, with the exception of small farmers as defined, who would not be required to make a downpayment for special minor irrigation investments. However, in addition to the investment contribution, farmers would make a share contribution to LDB capital equal to 10% of their loans. In the case of loans from commercial banks, farmers' contributions normally would be 20% of the cost of individual investments, but 10% for small farmers. The IDA credit would cover 58% of total Project cost. The remainder of the financing would be provided by the LDB, participating commercial banks, and the Agricultural Refinance Corporation (ARC). ARC would be the channel for

8 - ii - IDA finance. ARC is already acting in this capacity for IDA-supported agricultural credit projects in six other States of India. 1/ It would also be responsible for supervising Project operations. v. Because of a serious overdue position faced by the Primary Banks, :Lnclusion of the LDB system in the Project, and thus implementation of the Project, would depend on a financial and managerial rehabilitation of the Primaries according to a program agreed upon during negotiations. This program is expected to be completed by September 30, 1972, the proposed date of credit effectiveness. vri. The portion of the IDA credit corresponding to the lending program would be made available to ARC by the Government of India (GOI) with the :Latter bearing the exchange risk. About 70% would be repayable by ARC to (OI after 9 years at an interest rate of 5-1/4% and the balance after 15 rears at 5-3/4% per annum. ARC would refinance at 6-1/2% per annum the lending operations of LDB and such participating commercial banks as would meet the criteria laid down by ARC. Loans to individual borrowers would bear interest per annum and would be repayable over periods up to 10 years, ilncluding two years of grace for land development loans, but extending in some cases to 15 years for small farmers as defined. vii. Implementation would be by local contractors or hired labor in t:he case of minor irrigation schemes, and by the State Land Development Agency (LDA), assisted by local contractors, in the case of land development fschemes, utilizing local materials. About 45,000 individual small and widelyiscattered farm investments would be made, and international competition therefore would not be appropriate. Drilling rigs, earth-moving equipment alnd hydrological equipment would be procured under international competition with Indian manufacturers receiving a preference of 15% or the prevailing customs duty, whichever is lower. viii. ARC is competently managed and financially sound, and would, t:ogether with LDB (assuming the Primary Banks are rehabilitated as indicated in para v) and the commercial banks, provide a good framework for Project lending. Financial returns to farmers are estimated at 40% to 73%. The rates of return to the economy are estimated at 33% to 55% for minor irrigation and 39% for land development. ix. Apart from difficulties which may be encountered in gaining farmers' scceptance and use of unproved production practices (including a full use of irrigation water), the principal issue affecting the soundness of the E'roject is that of the financial and managerial capabilities of the Primary Banks. As in the case of the recently approved Mysore agricultural credit project, the weaknesses of the banking system in Maharashtra present greater risks than those encountered in the earlier credit projects. Providing, blowever, the rehabilitation program can be carried through sucessfully and al satisfactory collection record maintained in future, the Project would 1! Gujarat, Punjab, Anadhra Pradesh, Tamil Nadu, Haryana and Mysore.

9 - iii - have made an important contribution to institutional development in India using procedures which could later be followed in other states where similar banking difficulties are expected. The undertakings received on the rehabilitation program indicate that the Project can be fully implemented and with these and other assurances, the Project is suitable for an IDA credit of US$30 million.

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11 INDIA MAHARASHTR AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 In 1968, an IDA mission, with assistance of the FAO/IBRD Cooperative Program, reviewed agricultural credit institutions and farm investment requirements in selected parts of India and identified high priority agricultural credit projects. Projects in the six states of Gujarat, Punjab, Andhra Pradesh, Tamil Nadu, Haryana, and Mysore already have been approved by IDA: this proposed Project for Maharashtra would be the seventh. Institutional credit, partly financed by IDA, would enable farmers to make investments in minor irrigation and land development and thus obtain increased production and other benefits from the new high-yielding seed varieties, fertilizer use, and surface water irrigation schemes Bank Group lending for India's agricultural sector (excluding US$23 million for the Beas equipment project under the Indus Treaty) totals US$392 million. While previous lending has concentrated on large irrigation schemes, the current series of credit projects supports the Government of India's (GOI) agricultural strategy of giving increased emphasis to farm investments. With the inclusion of this Project, credit project approvals would total nearly US$217 million The Project is based on a proposal by the Maharashtra Government and follows the pattern of previous agricultural credit projects in India. It was appraised in March/April 1971 by Messrs. C.H. Walton, G. Luhman and P.K. Pohland (IDA), and D.I. Allen and J-M Daniel (consultants), and this report is based on the mission's findings. The mission could not however justify the proposal for inclusion in the project of 1,000 tractors for utilization on sugar cooperatives. II. BACKGROUND I/ A. INDIA-/ 2.01 Since 1965, India has shifted the emphasis of its development efforts from industry to agriculture. As a result, priority has been given in recent years to accelerating the introduction of modern agricultural technology through increasing the availability of improved inputs such as high-yielding seed varieties and fertilizers, particularly in combination with irrigation, and by providing financial incentives to farmers Although 70% of India's labor force is engaged in agriculture (providing half of India's GDP), only a small proportion of farmers have 1/ A detailed discussion of the present situation and prospects of agriculture in India is given in "Economic Situation and Prospects of India", report number SA-25a of May 11, 1971.

12 - 2 - benefited from the recent agricultural advance: primarily those with access to irrigation and to the knowledge and capital necessary to adopt modern technology. However, a large number of additional farmers could take advantage of the new techniques if credit were made available to them. Thus an increased supply of credit for farm investment is important to the continued growth of agricultural production The Reserve Bank of India (RBI) estimates that credit institutions will require Rs 15,000 million (US$2,100 million) for agricultural investment during the Fourth Plan (1969/ /74), or an annual average of Rs 3,000 million, compared with about Rs 600 million invested in the crop year 1966/67. The short-term credit requirements would increase by an estimated 11% annually, rising to about Rs 20,000 million (US$2,700 million) by 1973/74. Overall agricultural credit requirements. are expected to increase five-fold from the mid-60's to the end of the Plan period. If these substantial credit demands are to be met, India will neadvto mobilize more of its own, particularly rural, savings and increase external borrowings. General Description B. The State of Maharashtra 2.04 Maharashtra borders the Arabian Sea in the central part of India's West Coast and has its capital at Bombay (see Map). It is the third largest state in the country with an area of about 306,000 km 2 and an estimated population (1971) of about 53 million (each about 10% of the total for India). Approximately 72% of the population depend on agriculture for their living, and this sector provides 39% of the State's income. Administratively, the State is divided into 26 districts which are subdivided into 231 taluks The State has two main geographical regions: the coastal plain, about 50 km wide, which extends to the Western Ghats in the east, and the Deccan Plateau which has a mean altitude of 550 m and covers the remainder of the State to the east of the Western Ghats. The coastal plain contains mainly tropical red soils and receives an average annual rainfall of about 2,500 mm while the Deccan Plateau is composed primarily of black soils on volcanic rock formations, and has an annual rainfall which varies from about 700 mm in the west to over 1,200 mm in the east. The Deccan Plateau contains :wo major river basins, the Tapi and Godavari, the former draining to the west and the latter to the east. There are three seasons: the dry season, or early kharif, from March to May; the southwest monsoon, or kharif, from June to October; and the northeast monsoon, or rabi, from November to February. About two-thirds of the total rainfall occurs during the southwest monsoon. Temperatures vary from a low of 8C in December to 45C in May. ALgricultural Structure 2.06 The net sown area is about 18.3 million ha (59% of total area) mnd, with an average cropping intensity of 105%, gross sown area is about

13 19.2 million ha. An additional 4.6 million ha (15% of total area) is classified as pasture, fallow, or cultivable wasteland. About 1.2 million ha (6% of cultivable area) is irrigated, primarily by wells (58%) and partly by canals (21%), tanks 1/ (17%) and lift irrigation schemes (4%) Approximately 48% of holdings in Maharashtra are smaller than 2 ha (8% of total farmland), 23% are between 2 and 6 ha (23% of farmland), and the remaining 29% are larger than 6 ha (69% of farmland). Operational holdings are often larger than these statistics would imply, since land ownership is often divided among several members of the same family and farmed as one unit. This process has also limited the effectiveness of ceilings on individual land ownership Foodgrains account for about 67% of gross sown area, while 18% is under oil seeds, 14% is under cotton, and the rest (1%) is under other commercial and subsistence crops. Sorghum is the most important single crop with 30% of gross sown area. The other foodgrains include millet (10% of gross sown area), rice (7%), wheat (5%), and various pulses (15%). Current production (1968/69 figures) is as follows: foodgrains 7.0 million tons, oil seeds (mainly groundnuts) 735,000 tons, cotton 243,000 tons, and sugar cane 12.6 million tons. Agricultural Development Priorities Introduction 2.09 The primary objectives of the State in the agricultural sector are to contribute to India's attainment of self-sufficiency in foodgrains and to expand the production of commercial crops. Since possibilities for extending the area under cultivation are limited, further increases in production will have to be achieved through improvements in land productivity involving additional irrigation facilities and the introduction of increased amounts of improved current inputs, more efficient farm management, and improved implements. Since the scope for the development of additional large surface water schemes is limited, emphasis is being placed on minor irrigation and on land development (to permit more efficient use of water currently available from surface schemes). Special attention is being given to small farmers, particularly with regard to assisting them in utilizing the benefits of the new technology. Minor Irrigation (Annex 1) 2.10 Water availability in Maharashtra will enable only about 30% of total cultivable area to be irrigated at ultimate development. However, with present irrigated area about 6% of cultivable area, the scope for further development is substantial. Wells, presently the major source of irrigation water, have accounted for about 80% of the increase in irrigated area over the past 15 years. They now number approximately 750,000, about 35% of which are supplied with electric or diesel pumpsets. Almost all the wells are dugwells, although a few tubewells are found in the Tapi/Purna basin to the north. 1/ Small reservoirs.

14 While global water availability is adequate to support substantial iurther irrigation development, overinvestment and overexploitation in localized areas has resulted from an absence of controls over groundwater development and a lack of appropriate water management. Model groundwater legislation has been prepared by the Government of India (GOI) and is uinder consideration in several states, including Maharashtra, but until this legislation is promulgated, control will have to depend on lending criteria of the banking system and administrative actions by the State Government. Under the Project, new methods of investment appraisal would bye introduced which would be based on an analysis of hydrogeological units from river basins down to elementary watersheds, involving an investigation of total water inflow, present utilization, and availability for future dlevelopment (para 3.03). The analysis would be undertaken by the Groundwater Surveys and Development Agency (GSDA) which would establish regulations for minor irrigation development according to the criteria set forth in the Project and would participate in the appraisal of investment schemes. The State is in the process of establishing GSDA within the Department of Industries. It will comprise a nucleus of competent groundwater staff from the Diepartment of Agriculture, but additional staff appointments and specialist consultancy services would be required (para 3.07) The appraisal criteria would include a minimum distance between wells and a maximum density of wells per hydrogeological unit (Schedule A) in order to guard against overexploitation and the related problem of overinvestment, particularly in dugwells, which has resulted in large part from the prevalence of small farms and the unwillingness of farmers to rely on watersharing arrangements. It is estimated that the existing dugwells would be sufficient, given the appropriate technical and managerial framework, to irrigate twice the present area (Annex 1) and despite the constraints, the State Government should give increased attention to the better use of these existing assets. In order to encourage an efficient use of capital, the lending criteria would stipulate a minimum irrigated area per well (Schedule A) Well construction is carried out primarily by hired labor or private contractors, and partly by GSDA. Prices are reasonable and implementation capacity is generally adequate for present requirements, but additional units would be needed to carry out the Project (para 3.04). Land Development (Annex 2) 2.14 Land development (involving levelling, grading, ditching, and bunding) to permit the efficient utilization of irrigation water traditionally was carried out by family labor. However, with the construction of several large surface water schemes in recent years commanding a total of 243,000 ha, the magnitude of the work involved and the necessity of completing land dievelopment quickly to obtain maximum benefit from available irrigation water necessitated different methods of implementation and the provision of financing for farmers. Operations presently are carried out by hired liabor, sometimes assisted by bullocks, or by earth-moving equipment. Nevertheless, Maharashtra has had great difficulty mobilizing sufficient labor to perform this type of work in rural areas, and it does not have

15 -5- adequate earth-moving equipment. As a result, land development remains to be completed on most of the area recently brought under command of large surface water schemes, and substantial inputs of machinery will be necessary if the work is to be finished expeditiously (para 3.06) Because of the nature and conditions of land development work in Maharashtra, the State is establishing a Land Development Agency (LDA) within the Department of Agriculture to carry out the program with the assistance of local contractors (para 4.21). LDA will take over the Department of Agriculture staff now working on land development, but additional staff and specialist assistance would be needed (para 4.22). Since no comprehensive schedule of land development charges exists at present, the State would establish rates sufficient to cover all costs (para 4.23). The program of land development carried on outside the Project would be modified to conform to the procedures and terms in effect under this Project (para 4.23). Mechanization 2.16 As in the case of the other Indian states, tractor mechanization has begun in Maharashtra. Nevertheless, with irrigated area a small proportion of cultivable area (para 2.10), the tractor fleet now operating is only about 5,000 units. Future demand is estimated at approximately 2,000-3,000 per annum and is expected to be met by Maharashtra's share of domestic production and imports under bilateral arrangements In addition to their use for general cultivation purposes, tractors are also utilized in the sugar industry, and the project proposal submitted by Maharashtra included a request for 1,000 tractors to be employed on sugar cooperatives, primarily for haulage of sugar cane and secondarily for tillage. However, the harvesting and crushing season for sugarcane covers most of the periods during which the tractors could be used for tillage, and therefore the benefits to be expected from this activity are minimal. With respect to their use for haulage, tractors were found to be less efficient than trucks over the distances involved and consequently were deleted from the Project (Annex 10). Agricultural Inputs and Services 2.18 The growth rate of agriculture projected under the State's Fourth Plan (1969/ /74) is 5% per annum, and about 38% of planned public expenditures (Rs 3,750 million) have been allocated to this sector. As of 1965/66, improved seeds were utilized on about 15% of the gross sown area. By 1968/69, this figure had increased to 33%, and it is expected to reach 52% in 1973/74. Consumption of nitrogenous fertilizers increased from about 3 kg/ha per gross sown ha in 1965/66 to approximately 10 kg/ha in 1968/69 and is expected to reach about 18 kg/ha in 1973/74. Use of phosphatic and potassic fertilizers is expected to increase correspondingly. Credit Services 2.19 The major portion of institutional agricultural credit is provided by the cooperative movement. The State Cooperative Bank provides mainly

16 short-term loans, while LDB provides medium- and long-term financing. Commercial banks, which lend on terms up to 5 years, have played a limited role to date in agriculture but are now increasing their operations with the encouragement of the Government Perhaps two thirds of the farmers' credit requirements are met by private money lenders who charge rates of 20% and more (in comparison with about 9% from institutions). These figures suggest that institutions must make increased efforts to attract a larger proportion of rural savings. 'Until they are able to make substantial progress in this direction, cooperative institutions, in particular, will continue to depend heavily on public sector and external financing. III. THE PROJECT A. Definition 3.01 The Project would be part of a lending program of the Land Development Bank (LDB) system and commercial banks in Maharashtra and, over a period of three years, would help finance farmers' investments in minor irrigation (87% of total farmers' investment) and land development (13%). It would also include the financing of some equipment required for project execution and consultancy services for GSDA. The investment program would be Lmplemented through the Maaharashtra banking system under refinance arrangements with ARC and would involve about 45,000 loans to farmers and cooperaitives. The total Project cost is estimated at Rs (US$51.9 million), and IDA's contribution would be US$30.0 million. Minor Irrigation B. Detailed Features 3.02 Investments in minor irrigation would include the following: (a) About 300 tubewells, at a cost of Rs 18 million (US$2.5 million), in specifically defined areas of five districts and approximately 175 lift irrigation schemes, at a cost of Rs 84 million (US$11.5 million), on major rivers throughout the State (Annex 1). The tubewells would irrigate about 6,000 ha while the lift schemes would supply about 40,000 ha. Since the lift irrigation schemes would involve substantial individual investments, any scheme having an investment cost greater than Rs 2,000,000 (about five) would be submitted to IDA for prior approval (Schedule A). (b) A sum of Rs 200 million (US$27.5 million) for dugwells, dugwell improvements, and electrification in major river basins encompassing 17 districts on the Deccan Plateau (Annex 1), resulting in the irrigation of about 60,000 ha. While the sum represents the estimated total cost of such

17 -7- investments likely to be justified in these areas (it would finance the equivalent of about 11,000 new energized dugwells), present information is inadequate to quantify accurately the respective numbers of each type of investment. Identification of specific investments would thus depend on individual field appraisals. Assurances were obtained that the State Electricity Board would give priority to the electrification of these wells, and the cost estimates include a provision of Rs 2,500 for the connection Since Maharashtra does not yet have legislation controlling groundwater development (para 2.11), it is essential that the State undertake pragmatic measures to combat the problems of overexploitation and overcapitalization. As a large portion of minor irrigation development is financed through institutional loans, minimum standards can be introduced through specific lending criteria implemented through the banking system and supported by the State. The basis would be by GSDA analysis of integral hydrogeological units from river basins down to elementary watersheds (para 2.11). Included would be requirements with regard to density, spacing and irrigated area, which would permit investment in minor irrigation to proceed under reasonable control until such time as effective legislation were passed (Schedule A). Furthermore, the efficiency of individual investments would be increased through this analysis and through improved financial appraisal (para 4.11) To complete the proposed program within a three-year period, additional drilling units would be required. Provision has, therefore, been made in the Project for 4 hammer drills with initial spare parts at a cost of Rs 3.6 million (US$0.5 million). They would be purchased by the State Government or its agency. Land Development 3.05 Investments in land development would involve levelling of about 9,000 ha, grading 1/ of 24,000 ha, bunding of 47,000 ha, and construction of water courses and field drains on 115,000 ha, 2/ on six major irrigation schemes: Purna 3/, Bor, Ghod, Nalganga, Gangapur, and Girna (Annex 2). The total cost would be Rs 46.1 million (US$6.3 million) Work is presently performed by manual labor, bullocks and some bulldozers, but the shortage of labor and equipment result in a very slow 1/ Removal of uneven features without altering the basic slope of the land. 2/ Since all activities are not carried out on every unit of land to be developed, it is not possible to quote total figures for land development. 3/ Purna Irrigation Project, Credit 23-IN. This Purna River is a tributary of the Godavari, not the tributary of the Tapi by the same name which is included in the proposed Project area for tubewells.

18 mnd haphazard development (para 2.14 and Annex 2). In order to accomplish t:he land development program efficiently and expeditiously, the Project provides for the purchase of 48 self-loading scrapers, 20 land planes, and 20 bulldozers for use in bunding, at a cost of Rs 34 million (US$4.7 million). ]:nitial spare parts would be included. All equipment would be purchased by the State Government or its agency. C:onsultancy Services Groundwater 3.07 The effective implementation of minor irrigation investments both within the Project and outside of it, will depend in large measure on the capability of GSDA to gather and analyze pertinent data, and to provide guidance to LDB regarding constraints imposed by water availability on minor irrigation development. In order to assist with the implementation of water availability investigations and the application of appraisal criteria, the Project would include provision for the services of two qualified and experienced consultants over two years, at a cost of Rs 2.3 million (US$0.3 million). The consultants would comprise a hydrologist and a specialist in water management. It was agreed during negotiations that these specialists would be appointed in consultation with IDA on terms and conditions satisfactory to IDA, as a condition of credit effectiveness (para 3.13). C. Cost Estimates and Financing 3.08 Estimated Project cost, together with the foreign exchange requirement, is detailed as follows: Rs (millions) US$ (millions) Foreign Local Foreign Total Local Foreign Total Exchange 1. Minor Irrigation /1 Land Development Project Equipment (a) Drilling Rigs '(b) Earth-moving Machinery (c) Hydrological Equipment Consultancy Services Total Project Cost /11 Excludes depreciation on earth-moving machinery since total cost of machinery is included in Project cost. Details of the cost estimates are shown in Appendices 6-1 and 6-2. Estimates are based on present prices including a 10% allowance for cost increases.

19 The total cost of Rs million (US$51.9 million) would be financed from the following sources: Lending/i /2 Total IDA Farmers Banks ARC-- Financed Credit Funds % of X of % of % of Rs M Total Rs M Total Rs M Total Rs M Rs M Total 1. Minor /3/4 Irrigation / Land De- /3 velopment 4.6 O k Total Lending Program Project Equipment (a) Drilling /6 Rigs (b) Earthmoving /6 Machinery (c) Hydrological /6 Equipment Consultancy / 7 Services l Total Financed Depreciation on Earth-moving Machinery (11.3) Total PProject Cost /1 In the case of LDB, financed by the State Government. /2 All items relate to ARC except as indicated. /3 In addition, farmers are required to make an equity contribution to the LDB system of 10% of the loan. /4 Takes into consideration the lower contribution required from small farmers in certain investments (para 4.13). /5 Includes depreciation on earth-moving machinery as a cost to the farmer. The IDA contribution represents 57% of Project cost but only 43% of total cost of this item. /6 For purchase by State Government. /7 GOI.

20 The proposed IDA credit of US$30.0 million (Rs million) would finance about 58% of total Project cost and its refinance of the lending program (Rs million) would supply about 66% of ARC support of the Project (Rs million). IDA financing would be based on (a) the foreign exchange cost of Project equipment and consultancy services and (b) the foreign exchange cost plus one-half the local cost of minor irrigation tnd land development investments. IDA financing of foreign exchange items would amount to Rs 67.1 million (US$9.2 million) or 31% of its total contribution while local currency financing would total Rs million (US$20.8 million) The IDA credit would be on standard terms to GOI. GOI would make the proceeds relating to the lending program available to ARC on the basis of repayment at the end of 9 years with an interest rate of 5-1/4% per annum in the case of loans to ultimate borrowers not exceeding this period (estimated at about 707 of the total) and at the end of 15 years with interest gt 5-3/4% per annum in the case of the longer maturities (in each case this is after deducting 1/4% allowable for prompt payment). These are the rates which since June 1971 have applied to GOI lending to ARC. GOI wrould bear the exchange risk. ARC would on-lend the proceeds to LDB and participating commercial banks (para 4.01) at an interest rate of 6-1/2% per annum on the outstanding balance, and these banks would in turn on-lend to ultimate borrowers at 9%. ARC refinancing would be repayable in installments set to coincide approximately with collections from ultimate borrowers. The balance of the IDA credit, f-or Project equipment and consultancy services, would be made available by GOI to the Maharashtra State Government. Assurances on these arrangements were obtained during negotiations. D. Procurement 3.12 Minor irrigation and land development investments involve generally small and labor intensive operations carried out seasonally on widely scattered individual farms, for which international competition would not be a.ppropriate. They would be carried out primarily by hired labor or local contractors and partly by GSDA, in the case of minor irrigation and by LDA with the assistance of local contractors, in the case of land development, using local materials. Competition among contractors is satisfactory and supplies are adequate. For tubewells and lift irrigation schemes, local competition would be adopted, while for dugwells, arrangements by individual farmers with the advice of the Primary banks would be the rule The drilling rigs and earth-moving equipment included in the Project would enable Government agencies providing well drilling and land development services to reach the capacity necessary to execute the amount of work envisaged. Some drilling and earth-moving equipment is manufactured in India and it was agreed that such procurement would be under international competition with Indian suppliers receiving a preference of 15% or the prevailing customs duty, whichever is lower. Bits for hammer drills and hydrological equipment would also be procured under international competition. Because of the rapid expansion of groundwater programs which has absorbed considerable manpower and the resultant shortage of groundwater specialists in the co2lntry, the consultants for GSDA would have to come from outside India.

21 E. Disbursements 3.14 IDA disbursements are expected to extend over about 3-1/2 years (Appendix 6-3). Against appropriate documentation, disbursements would be 60% of loans for minor irrigation and 48% of loans for land development, the CIF cost of drilling and earth-moving machinery, and the foreign exchange cost of consultancy services. Any savings would be reallocated only on the basis of agreement between the Government and IDA. IV. ORGANIZATION AND MANAGEMENT Introduction 4.01 Financing and organization arrangements would generally follow the pattern established under five existing IDA-supported agricultural credit projects. The IDA credit to the Government of India (GOI) would, in respect of the lending program, be channelled to the Agricultural Refinance Corporation (ARC) which would refinance part of the lending to ultimate borrowers of the Maharashtra State Cooperative Land Development Bank (LDB) and its federated Primary Banks, and of participating commercial banks. At present, most of the Primaries which would be involved in the project have financial difficulties and some are encumbered with managerial problems. To rectify this situation, the State Government and LDB in consultation with ARC are now implementing a rehabilitation program acceptable to IDA and it is expected that this program will be completed by September 30, 1972, the date proposed for credit effectiveness (para 4.10). Agricultural Refinance Corporation (ARC) (Annex 3) 4.02 ARC, a subsidiary of the Reserve Bank of India (RBI), is the channel for the five existing agricultural credit projects and is therefore well known to IDA. It is a competently-managed organization with a sound financial structure, and its role is important not only as a channel for development funds but also for its influence on the lending policies and operational procedures of the agencies it assists. It is therefore a suitable institution for the overall supervision of the Project's implementation. As in previous credits, assurance was obtained that ARC's accounts would continue to be audited by auditors acceptable to IDA ARC would ensure that all lending banks follow the policies, terms and conditions agreed with IDA (Schedule B). The execution of a loan agreement between GOI and ARC on such terms and conditions would be a condition of credit effectiveness and subsidiary loan agreements between ARC and lending banks would be subject to IDA approval. ARC would further ensure that lending banks adhered to the appraisal criteria relating to minor irrigation as set forth in Schedule A. Assurances on these matters were obtained at negotiations.

22 Maharashtra State Cooperative Land Development Bank (LDB) (Annex 4) 4.04 Organization and Management. The LDB was registered in December and, until the post-independence boundary revisions, its operations also covered parts of the present States of GuJarat and Mysore. With its four divisional offices, LDB is the apex organization for 26 federated Primary flanks which are organized on a district basis. The Primary Banks in turn work through a total of 252 branches. Since LDB is the sole source of long-term financing for the Primary Banks, the relationship is similar to that of a bank head office to its branches LDB 's operations are regulated by the Maharashtra Cooperative Societies Act Its 30-member Board includes 20 representatives of the Primary Banks, 5 representatives of non-borrowing shareholders, and 5 members ex-officio, including LDBts Managing Director (at present on secondment from RBI). The Primary Banks, with a voting membership of about 750,000, also elect their own boards which control operations and appoint staff. In order to borrow, a farmer must hold shares in his Primary equal to 10% of the loan; this is the largest equity requirement of any land mortgage/development bank in India. The Primaries retain one-half of the equity contribution and invest the balance in LDB so that their equity holding in the apex bank is 5% of their borrowings therefrom. Loans, which may be granted for most medium- and long-term investments in agriculture, at present may not exceed 50% of the developed value of land required as security. This criterion could be an unreasonable constraint in the case of farmers with small landholdings, and an assurance was obtained during negotiations that the limit would be increased to 60% of the developed value of land Resources. LDB obtains its resources from share capital contributed by the Primary Banks and State Government, the issue of ordinary, rural and special debentures and short-term borrowings from the Maharashtra State Cooperative Bank. As of June 30, 1971 paid-up share capital was Rs 89 million of which the members' contribution was Rs 78 million (88%) and the Sitate Government's contribution Rs 11 million (12%). Ordinary debentures (subscribed mainly by RBI, the State Government and other institutions) outstanding at this date were Rs 1,320 million, rural debentures (subscribed by farmers and RBI in the ratio of 8 to 9) were Rs 44 million and special debentures (subscribed by ARC) were Rs 85 million. The relatively small amount oil special debentures is indicative of the limited influence which ARC hitherto has exercised on LDB policies Operational Results. LDB has maintained an exceptionally high growth rate over recent years, its loan portfolio more than doubling (from Rs 563 million to Rs 1,156 million) over the four years from June 30, 1967 to June 30, It now has the largest portfolio of any land mortgage/ development bank in India. LDB is a generally sound institution, although profits have been low compared with similar banks in other States. Its primary weakness, however, has been in the inadequate control it has exercised over the Primary Banks The most serious aspect of the LDB system in Maharashtra is the continuing high level of overdues. As of June 30, 1971, farmers' arrears to

23 Primary Banks at Rs 136 million represented about 53% of the total amounts due, and of the 21 Primary Banks which would be involved in Project lending, only 1 had overdues of 25% or less (Appendix 4-1). Arrears to Primaries had decreased from a high of 62% in 1961/62 to 24% in 1968/69 but then inlcreased again to 30% in 1969/70. In 1970/71, however, they jumped markedly to 53%, a situation partly attributable to the extensive drought conditions prevailing in the State during that year. Because the Primaries have substantial resources as a result of the retention of half the farmers' equity contributions (para 4.05), their repayment record to LDB had been maintained at a higher level: as of June 30, 1970 arrears were 9% of payments due (having dropped back from 7% the previous year) and amounted to Rs 14.6 million (LDB reserves at that date were Rs 13.2 million). However, the crop losses in 1970/71 had important repercussions at the apex also, and the arrears at June 30, 1971 were 34% of total amounts due The unsatisfactory condition of the Primaries, which was made critical by the extraordinary weather conditions of 1970/71, resulted from a variety of factors including weak management (in some cases); loan ceilings which often led to the underfinancing of investments; inadequate technical criteria which resulted in investments in underproductive wells; financial analysis based on total, rather than incremental, returns; insufficient emphasis on collections; and the granting of loans on the basis of political, instead of technical, financial, and economic considerations Rehabilitation of the LDB System. In order to provide the LDB system with a sound structure adequate to administer the Project and channel IDA funds, the State Government and LDB in consultation with ARC are implementing a financial and managerial rehabilitation program, satisfactory to IDA. The principal features of the program are as follows: (a) Financial Rehabilitation The main purpose is to reduce overdues to not more than 25% of the June 30, 1971 demand after deducting overdues attributable to drought. To this end the State Government has agreed to contribute capital to all 21 Project Primary Banks to the extent necessary to meet this criterion as at June 30, In addition, however, the 25% maximum overdue position must also be met against the current year's demand and the State Government will similarly contribute capital to the extent necessary that at least 15 of these Primaries qualify (including specifically the Jalgaon, Nanded and Parbhani Banks through which much of the Project lending will be concentrated). Based on the June 1971 overdues, the State Government's contribution is estimated at Rs 34 million (US$4.7 million) and in addition it will provide guarantees of Rs 21 million (US$2.9 million) to cover half the amount of drought overdues (Appendix 4-1). The capital contributions will be redeemed and the guarantees reduced as recoveries are made.

24 (b) Collection Program With the cooperation of the State Government including the provision of additional recoveries staff and improved foreclosure procedures, the LDB system has started a collection campaign to recover past overdues in accordance with scheduled timetables (Appendix 4-2) and ensure satisfactory repayment levels in future. ARC will review the recovery performance of each Primary and, subject to IDA agreement, will withhold Project refinance from any Primary which fails to make satisfactory progress on recovering amounts overdue on June 30, 1971 or which incurs a default rate of more than 25% of payments becoming due in any subsequent year. (c) Managerial Rehabilitation Where necessary, boards of directors would be reconstituted and management would be replaced in Primaries according to a plan to be sent to the Association by April 30, LDB would employ all managers and, as appropriate, other staff of Primaries. Training courses are being established for managers and staff of the LDB system to introduce new appraisal and lending techniques. Those for senior executives of LDB and key officers of the Primaries would be completed by the date of credit effectiveness. The above measures, which were agreed at negotiations are expected to result in a satisfactory rehabilitation of the LDB system by September 30, 1972, the proposed date of credit effectiveness. By that date all 21 of the Project Primaries would in effect have had their overdues reduced to acceptable levels and the proposed capital injections would have enabled thiem to reduce the amount of their overdues to the apex bank to not more than 19%. Improved collection methods described above should have resulted in all the 21 Primaries meeting the 25% criterion on current year's demand without further capital contributions from the State Government. However, in the event of only the minimum of 15 Banks qualifying, there would be sufficient banking facilities to permit the Project to proceed and with good prospects of tlne remaining Banks participating soon thereafter. The completion of the riehabilitation program as outlined above would be a condition of credit effectiveness Lending Policies and Terms. Investments would be evaluated in terms of incremental returns in accordance with methods developed by ARC, and loans would conform to the agreed appraisal criteria and terms as set oult in Schedule B. Minor irrigation investments would, in addition, conform to the technical criteria and areas specified in Schedule A. Assurances on these matters were obtained at negotiations The primary modifications in lending terms (Schedule B) which would be introduced under the Project involve interest rates, contributions from borrowers, and loan maturities. With respect to the first, the rate from LDB to the Primaries would be increased from 7-1/4% to 7-1/2%, raising LDB's

25 margin on ARC approved schemes from 3/4% to 1% and decreasing the margin of the Primaries from 1-3/4% to 1-1/2%. This change is justified in view of the need for LDB to meet the cost of increasing staff requirements and the high margin of the Primaries in relation to their costs. The Primaries would retain the proceeds of the 1/2% evaluation fee to be charged on the cost of individual investments The contributions required from Borrowers and the maturities of loans would be set as follows: Minimum Borrowers /1 Maximum Contribution/- Grace years of (% of Cost of Investment Period Repayment Total Investment) Minor Irrigation - / Land Development /1 Inncludes value of farmers' own labor. In addition, farmers would make a contribution to LDB capital equal to 10% of the loan. /2 Repayment would commence in year following completion of construction. The maturity for minor irrigation, especially in the case of dugwells, represents some reduction over existing maturities but 9 years is well within the repayment capacity of borrowers, provided the investments conform to proper technical criteria. To help meet the needs of small farmers, defined in Schedule B, no investment contribution would be required (although farmers would still make the contribution to LDB capital equal to 10% of the loan), and repayment periods would be extended to 15 years for minor irrigation investments costing less than Rs 10,000 (except in the case of pumpsets where repayment periods would not exceed 7 years). Repayment periods also would be extended to 15 years including two years grace for land development investments (Schedule B). Assurances were obtained on the above at negotiations and it was agreed that, except for schemes submitted under the aegis of the Small Farmers Development Agency, LDB and the Primary Banks would apply the same contribution and maturity requirements to all their similar lending operations, and the same interest rates, evaluation fee, and collateral requirements to all their lending operations Accounts and Auditing. The LDB accounting system is adequate and, in accordance with the usual Indian practice, the accounts are audited by independent auditors from the State Cooperative Department. Assurances were obtained that the accounts of LDB would be audited by independent auditors acceptable to IDA and would be submitted to IDA within 4 months of the close of the fiscal year. Commercial Banks (Annex 5) 4.15 There are 50 commercial banks operating in Maharashtra, of which 21 are nationalized. Together they provide nearly 1,350 branches, the most important banks being the State Bank of India (221 branches), the Bank of Maharashtra (179 branches) and the Central Bank of India (105 branches).

26 f. The comnercial banks' participation in long-term agricultural lending in the State so far has been negligible. On the basis of their present. experience and organization they could not, in the near future, provide a comprehensive banking alternative to LDB on any appreciable scale. A few of -he commercial banks might, however, be in a position to undertake part of the Project's lending program, thus supplementing the operations of the LDB system and providing alternative banking facilities to farmers Commercial banks usually require farmer contributions of 25 to 40% and charge interest ranging from 9 to 10 1/2% per annum. Commercial banks participating in Project lending would be required to conform to the same lencling terms, conditions and criteria as applied to LDB (except in the case of farmer contributions - see Schedule B). ARC would invite commercial banks to participate in Project lending and subsequently would select the banks which would satisfy its criteria. Participating banks, assisted by ARC, ;IouJLd carry out training courses for the staffs of their branches on the procedures and criteria applying to the Project ARC would require participating commercial banks to maintain separate accounts for Project lending and would ensure that such accounts were audited by auditors acceptable to IDA. In order to guard against overinvestment in minor irrigation schemes in relation to known water resources, ARC also would ensure that commercial banks would only lend for minor irr:lgation investments where a certificate of nonobjection from GSDA had been received and would adhere to the criteria of Schedule A (in the case of Lending outside the Project areas, the criteria would apply from one year after the date of credit effectiveness). Groundwater Surveys and Development Agency (GSDA) Maharashtra is establishing the Groundwater Surveys and Development Agency (para 2.11). It will have as its nucleus the competent groundwater staff from the Department of Agriculture, but additional personnel would be needed under the Project (Annex 1), particularly senior personnel who would work closely with the consultants to be obtained (para 3.07). A plan for completing the organization of GSDA, with clearly defined authority and adequate staffing, has been reviewed by IDA, and it was agreed during negotiations that the implementation of this plan would be a condition of credit effectiveness GSDA would carry out water availability investigations on the basis of integral hydrogeological units and would specify regulations for investment in minor irrigation according to the criteria set out in Schedule A. It would also participate in the group appraisal of dugwells as well as the individual appraisal of tubewells and lift schemes. In the case of each investment, it would issue a certificate indicating that the loan application met the specified criteria, and no loan would be granted without this certificate. During negotiations, the State Government agreed to apply the same criteria (Schedule A) to all minor irrigation development under its direct or indirect control (in the case of development outside the Project areas, the criteria would apply from one year after the date of credit effectiveness).

27 Land Development Agency (LDA) 4.21 Maharashtra is establishing the Land Development Agency within the Department of Agriculture, utilizing the staff of that department which is currently involved with land development work as the foundation for the new unit (para 2.15 and Annex 2). Because of the problems of timing, coordination and control caused by the need to determine the participation of farmers prior to formulating the work programs, the necessity of implementing the work in a short period of time, the maintenance of close tolerances on levelling and grading operations, the seasonal and scattered nature of the work, and the need to protect standing crops, the main components of the land development program would be executed by LDA. Where necessary, however, LDA would subcontract selected parts of the work, particularly those which would be labor intensive, to be constructed under its supervision. An assurance was obtained on this latter point In view of the magnitude of the work and the wide dispersion of operations throughout the State, it is essential that the establishment of LDA be completed before the Project is undertaken. While the State Government has little experience in the planning of machine operations, the deployment of machines and the implementation of work and maintenance schedules for a large fleet of earth-moving machines, this experience does exist elsewhere in India and the State Government should obtain the services of specialists from this sector to assist in the execution of the land development program. It was agreed during negotiations that, as a condition of credit effectiveness, Maharashtra would complete implementation of a plan, acceptable to IDA, for the establishment of LDA with clearly delineated powers and adequate staffing, including the employment whenever necessary of specialists in land development There is at present no comprehensive schedule of charges for land development, and therefore the State Government would establish, as a condition of credit effectiveness, rates sufficient to cover all costs. In the case of work already performed, the Government would charge farmers for the cost of work and would make collections from farmers according to the prescribed repayment schedules. For future land development work outside the Project, Maharashtra would modify its program to conform substantially to the procedures and terms relating to the Project. Assurances to this effect were obtained at negotiations. Production V. PRODUCTION, MARKETS, PRICES AND FARMERS' BENEFITS 5.01 Indicative farm models have been developed which demonstrate that Project investments would enable farmers to increase their production through higher cropping intensities (increasing from a current range of 100%-128% to 136%-153% at full development) and improved yields (Appendix 8-1). The increase in cropped area resulting from the Project would be about 61,000 ha of which about 40,000 ha would be attributable to minor irrigation and the remainder would come from land development within existing irrigation schemes (Appendix 8-3).

28 Tn response to the prevailing price framework, which involves support prices for certain crops, farmers are likely to expand their production in the direction of foodgrains (mainly sorghum and wheat), cotton, sugarcane, and bananas (Appendix 8-3). The increase in production (at full development) would be about 247,000 tons of foodgrains, 50,000 tons of seed cotton, 23,000 tons of groundnuts (unshelled), 400,000 tons of sugarcane, and 215,000 tons of bananas. (The current state-wide production of these crops is as follows: 7.0 million tons of foodgrains, 243,000 tons of cotton, 694,000 tons of groundnuts, 12.6 million tons of sugarcane, and 875,000 tons of bananas.) However, any alteration in the price framework, either as a result of market forces or of administrative decision, would cause a change in the production response of farmers. Markets 5.03 The State of Maharashtra is deficit in foodgrains, especially in sorghum (jowar)- the staple food - and rice. It is therefore expected that the ProJect's incremental foodgrain production would be consumed within the State while part of the commercial crops would be retained and the balance either sold to other States or exported. Apart from sugar, India is not yet self-sufficient in the commodities to be produced under the Project. It is expected that sugar refining capacities would be expanded to match estimated production in Maharashtra A total of 346 regulated markets for agricultural products have been established throughout the State to ensure that fair marketing pralctices prevail. Investments to establish another 55 markets as well as storage and grading facilities have been included in the State's current Development Plan. Most food crops and some commercial crops are marketed through the State's Cooperative Marketing Federation, which operates through a network of 316 primary marketing societies. The Federation acts as the State's purchasing agent for sorghum and rice. Prices 5.05 Foodgrain prices are somewhat higher in Maharashtra than in surplus States and some general decline in price levels must be expected as India progresses towards the aim of becoming self-sufficient in foodgrains during this decade. In addition, prices of various crops are considerably above world market levels (para 6.02). While it remains India's policy to encourage the agricultural sector through price incentives, uncertailnties over future food policies make price forecasting particularly difficult and, therefore, the Project's financial and economic rates of return have been tested against percentage changes in prices (paras 5.06 and 6.02). Fa_mers' Benefits 5.06 Farmers' estimated benefits have been based on five indicative types of farm enterprises that would be financed under the Project (Annex 8). Based on investment costs, estimated yields and present prices assumed for these farm models, and after debt service on proposed lending terms (para 4.13), increases in farm incomes would range from Rs 1,720 to Rs 7,332 per annum as follows:

29 _ 19 - Model I II III IV V Type of Improved New Lift- Land Investment Dugwell Dugwell Tubewell irrigation Development Area Cultivated 4 ha 5 ha 4 ha 5 ha 2.5 ha Investment /1 /2 Costs Rs 4,000 Rs 15,500 Rs 11,500-- Rs 10,500L-- Rs 4,500 Annual /3 Net Income- At Present: Family A 4,276 1,619 1,285 1, Per Capita At Full Development: Family A 6,609 9,581 B,853 10,627 4,279 Per Capita- 1,101 1,597 1,476 1, Increment 2,333 7,962 7,568 8,940 3,467 Debt Service ,374 1,762 1, Increment after Debt Service 1,720 5,588 5,806 7,332 2,722 /1 Share of total tubewell investment cost of Rs 57,500. /2 Share of total lift-irrigation investment cost of Rs 480,000. /3 Family labor excluded from production costs. /4 Assumes 6 members per family. /5 On 90% of the investment cost. These indicative types of farm enterprise show that substantial increases in the net incomes of such farmers, or groups of farmers, would result from the proposed investments, and the financial rate of return on incremental investment is estimated at present prices and costs to range from 40% to 73% for minor irrigation investments and to be about 60% in the case of land development. However, it must be recognized that these rates of return are dependent, in particular, upon assumptions made with respect to prices, cropping intensities, yields, the use of improved current inputs, the availability of casual labor during peak periods, adequate farm management, and the rate at which development would occur. In order to test the sensitivity of the returns against deficiencies in these factors, the gross production value was decreased by 20%. The financial rates of return then would range from 24% to 39% (Appendix 8-2), indicating that the investments would still be viable Farmers at income levels under Rs 36,000 (US$4,900) pay only a minimal fixed land revenue tax, education cess and local fund cess which are not based on income. As it is not anticipated that farmers participating in the Project would have incomes exceeding Rs 36,000, the Project would not generate any direct tax to be collected from incremental income. Revenue would be derived from indirect taxes such as the purchase tax on sugarcane and excise duties on refined sugar and, through corporation taxes payable by institutions involved in the Project.

30 VI. BENEFITS AND JUSTIFICATION 6.01 The Project would benefit at least 45,000 Maharashtra farmers and their dependents, a total of about 270,000 persons, through investment in minor irrigation and land development. Direct benefits to the Indian econcmy would include: first, a higher cropping intensity, which would increase the production of foodgrains and other commercial crops (para 5.02); second, the assured availability of water; and third, higher yields, which would be obtained by applying irrigation facilities and timely cultivation practices thus enabling better use of high-yielding seed varieties and fertilizers. Since yields would no longer depend on uncertain rainfall, production on participating farms would not fluctuate as widely as in the past. India is at present not self-sufficient in foodgrains, vegetable oil and cotton, and thus increased production of these commodities would result in foreign exchange savings. The value of annual crop production at full development would increase by about US$23 million equivalent The rates of return to the economy would be higher if the value of the incremental crops were calculated on present Maharashtra prices. Cot:ton, groundnut and wheat prices for example are some 35 to 45% above projected world market prices. Making the appropriate adjustments in respect of taxes, and using projected world market prices, the economic rates of return on incremental investment would range from 33 to 55% for minor irrigation and 39% for land development. As indicated in paragraph 5.06, these returns are dependent upon assumptions made with respect to various essential factors. In order to test the sensitivity of the returns against deficiencies of these factors, the gross production value was decreased by 20%, and the economic rates of return were then found to range from 15 to 30%. Additional factors which would have an influence on the Project as a whole are the success of the financial and managerial rehabili:ation of the Primary Banks and rate of implementation of the land development program In calculating Project benefits, no account has been taken of the indirect benefits accruing from increased knowledge of groundwater resources which, together with the new minor irrigation appraisal methods and criteria to be introduced, would provide the framework for better groundwater use throughout Maharashtra. In addition, there would be other indirect benefits such as the domestic value added and employment from product processing and marketing activities, demonstration effects on other farmers, and strengthening of lending institutions. Further, increased cropping intensity would make better use of family labor and would mean more employment opportunities for farm workers. Though not qujntifiable, these factors would enhance the Project's already satisfactory economic justification In order to improve future project appraisal, it is necessary to measure the financial and economic benefits which actually result from the investment. Consequently, an assurance was obtained at negotiations that ARC would establish a mechanism for monitoring and evaluating the financial andl economic benefits resulting from the agricultural credit projects.

31 VII. RECOMMENDATIONS 7.01 During negotiations, the following main assurances were obtained: (a) lending banks would follow agreed appraisal criteria and lending policies as set out in Schedules A and B (para 4.03); (b) LDB would increase its loan limit to 60% of the developed value of land offered as security (para 4.05); and (c) ARC would, subject to IDA agreement, withhold refinancing under the Project from any Primary which fails to make satisfactory progress on recovering amounts overdue as of June 30, 1971 or which incurs a default rate of more than 25% of total payments due for any subsequent year (para 4.10) Conditions of effectiveness of the credit would be: (a) the appointment of specialists for GSDA in consultation with IDA and on terms and conditions satisfactory to IDA (para 3.07); (b) the execution of a loan agreement between GOI and ARC acceptable to IDA (para 4.03); (c) the completion of the rehabilitation program of the LDB system (para 4.10); (d) the establishment of the Groundwater Surveys and Development Agency (GSDA) with well-defined authority, and staffing acceptable to IDA (para 4.19); (e) the establishment of the Land Development Administration (LDA) with clearly delineated powers and staffing acceptable to IDA, including the services of specialists (para 4.22); and (f) the establishment of rates for land development work sufficient to cover all costs (para 4.23) The proposed Project is suitable for an IDA Credit of US$30 million under standard IDA terms. February 11, 1972

32

33 SCHEDULE A Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT MINOR IRRIGATION: APPRAISAL CRITERIA AND PRDCEDURES I. Investment Requirements Tubewells 1. Area; Tapi/Puraa basin (sedimentary areas) falling within the districts of Dhulia - Jalgaon - Buldhana - Akola - Amravati Investment: Pump: Minimum peak discharge: 300 tubewells 10 hp submersible or turbine (guideline) 15 1/sec Minimum irrigated area: 20 ha Minimum spacing (any other energized well): 1,000 m Maximum density: 0.4 tubevell/km 2 Dugwells and Dugwell Improvements 2. Construction of new dugwells and the improvement of existing dugwells would involve an investment of Re 200 million in the following regions: (a) Area: (b) Area: Tapi/Purna basin falling within the districts of Nasik - Dhulia - Jalgaon - Buldhana - Akola - Amravati Penganga basin falling within the districts of Yeotmal - Nanded - Akola - Parbhani

34 SCHEDULE A Page 2 (c) Area: (d) Area: (e) Area: Punp: KLnimum instant discharge: Godavari/Manjra basin falling within the districts of Aurangabad - Ahmednagar - Bhir - Osmanabad - Parbhani - Nanded Bhima Basin falling within the districts of Sholapur - Satara - Poona - Osmanabad - Ahmednagar Wardha/Wainganga basin falling within the district of Nagpur 5 hp centrifugal (guideline) 10 1/sec KLnimum discharge (December): 3 Dugwell: 150 m 3 /day Dugwell improvement: 120 m /day KiLnimum irrigated area: Dugwell: 5 ha Dugwell improvement: 4 ha M,3ximum density of wells: d - r x 100 R x A x c 100 Where: d - density (wells/km ) r - recharge in basin (mm) R - water requirement for the average cropping pattern (mm) c - cropping intensity (%) A - average area irrigated by a well (ha) Minimum spacing of wells: s R x A x 100 r x 100 where: s - spacing (i) Overall minimum spacing m

35 SCHEDULE A Page 3 Lift Irrigation 3. Any scheme having an estimated investment cost greater than RS 2,000,000 would be submitted to IDA for approval. A detailed appraisal would be prepared for each individual scheme, with particular attention being given to water availability, appropriate design, and installation of - adequate pumping capacity. II. General Lending Requirements 4. (a) If adequate irrigation and drainage channels did not already exist on farms to benefit from the investment, the provision of such facilities would be a condition of lending and could be included in the Project financing. (b) All minor irrigation investments would include energization by electricity as far as practicable. (c) All minor irrigation investments would require a certificate of nonobjection from the Groundwater Surveys and Development Agency (GSDA) before a loan were made. (d) All investments in land development would be preceded by loan approvals in respect of individual farmers. III. Guidelines for Organization and Appraisal Organization 5. (a) To the extent compatible with the responsibilities of ARC under the Project as the refinancing agency, GSDA would advise on minor irrigation development. (b) The field offices of GSDA would establish a census grid map (1:8000) of their respective areas showing existing wells (with an indication of source of power), farms and area served by each well, reservoirs, canals, lifts and electricity lines. They would issue to the lending banks copies of the grid map covering the banks' lending areas. They would guide and coordinate the activity of bank appraisal teams working in their areas. Appraisal Procedures 6. (a) Primary Banks would advertise, seeking applications for loans and setting out lending terms and an explanation of appraisal methods. Invitations for applications could be staggered according to taluk or block.

36 SCHEDULE A Page 4 (b) A bank appraisal team, normally consisting of a supervisor of the lending bank, a valuation officer and a technical officer (engineer or geologist), would visit applicants' farms on a group basis and in the course of appraisal would sketch the following on the grid map: (i) the well sites proposed for installation or improvement; (ii) farm(s) with owners' name(s) and area to be irrigated by proposed wells; (iii) proposed irrigation channels or pipes to be installed/ improved for distribution from proposed wells. (c) In addition, dugwell appraisal would be assessed against the estimated groundwater resources of elementary watersheds and these watersheds would be the basic unit of group appraisal. Calculations of groundwater recharge would be based on estimated rainfall, runoff, evapotranspiration and soil moisture parameters supported by a qualitative analysis of factors such as gradients, soil structure, vegetation and surface water storage. Field offices of GSDA would be responsible for demarcating the approximate limits of these watersheds and of groundwater reservoir boundaries. In assessing groundwater resources, the appraisal team would consider: ti) the probability of obtaining an adequate December discharge from the proposed development (150 m 3 /day in the case of new dugwells and 120 m 3 /day in the case of improved dugwells); (ii) the probable existence of two or more basalt layers under the groundwater level; (iii) whether irrigation purposes would be better achieved by the installation of a new well, which should uot exceed an investment cost of Rs 18,000, or by the improvement or an existing well, at a cost generally not exceeding Rs 6,000, or by extending the use of water discharged from existing wells. (d) Proposed tubewell and lift irrigation investments would be subject to individual financial appraisal; proposed dugwell investments would be subject to standardized proforma financial appraisal. All appraisals would specifically include proposals on whether: (i) there would be a group loan to farmers who would receive water from the proposed development;

37 SCHEDULE A Page 5 (ii) the owner(s) would enter into an agreement to sell water to farmers other than borrowers; (iii) there would be other cooperative arrangements. (e) Lending banks would submit to the appropriate field office of GSDA a copy of the appraisal map with relevant information and recouiendations. The division would enter the information on its census grid map. (f) GSDA would physically check all doubtful cases and, in addition, 10% of all recommended applications. (g) On receipt of GSDA's certificate of nonobjection, lending banks would complete loan formalities in the usual way and, where appropriate, documentation would include an agreement for the sale of water. IV. Lending Criteria and Procedures Applying to Similar Investments Outside the Project 7. Outside the Project areas, LDB, all commreial banks, and all agencies within the direct or indirect control of the State Government would only lend for minor irrigation investments where: (i) a certificate of non-objection had been received from GSDA and, (ii) such lending conformed to the appraisal criteria and procedures set out in this schedule, frou one year after the date of credit effectiveness. February 11, 1972

38

39 SCHEDULE B Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT PROJECT LENDING TERMS AND CONDITIONS 1. GOI to ARC (a) In respect of ARC refinancing not exceeding 9 years: (i) interest rate of not less than 5-1/2% per annum less 1/4% per annum for prompt payment; (ii) repayment at the end of 9 years; (b) In respect of ARC refinancing for 10 years and above but not exceeding 15 years: (i) interest rate of not less than 6% per annum less 1/4% per annum for prompt payment; (ii) repayment at the end of 15 years; (c) GOI to carry exchange risk. 2. ARC to Lending Banks (LDB and Commercial Banks) (a) Interest rate not less than 6-1/2% per annum; (b) Repayments in installments set to coincide approximately with collections from ultimate borrowers; (c) Refinancing would be by way of purchase of debentures or by loans at the rate of 90% of individual loans for minor irrigation and 75% of individual loans for land development; (d) Repayments to ARC from LDB and participating commercial banks to be deposited in a special account for refinancing ARC - approved agricultural development schemes. 3. LDB to Primary Banks (a) Interest rate not less than 7-1/2% per annum; (b) Repayments in installments set to coincide approximately with collections from ultimate borrowers;

40 (c) Loans would cover the total amount of Primary Banks' lending to individuals. 4. Primary Banks and Commercial Banks Lending to Individuals (a) Interest rate not less than 9% per annum; (b) A once-and-for-all evaluation fee of 1/2% of the cost of individual project costs; (c) Loan Limit: 60% of the developed value of land offered as eecurity; (d) Farmers' contributions (Primary Banks): (i) for normal lending, a minimum of 10% of the cost of Project investments; (ii) for lending to small farmers, 1/ no downpayment in the case of minor irrigation investments costing less than Rs 10,000 each. 2/ SCHEDULE B Page 2 In addition to the investment contribution, farmers would contribute to LMB capital an amount equal to 10% of their loans. (e) Farmers' contribution (Commercial Banks): (i) for normal lending a minimum of 20% of the cost of Project investments; (ii) for lending to small farmers, 1/ a minimum of 10% of the cost of minor irrigation investments costing less than Rs 10,000 each. (f) Maturities, which would not exceed the life of the asset financed, would be: (i) for normal lending, a maximum of: (1) 9 years on loans for tubewells, lift irrigation schemes, dugwells and dugwell improvements; (2) 10 years for land development loans including a two-year grace period in which interest only would be payable; 1/ Small farmers have been defined, in accordance with criteria agreed with IDA, as those farmers cultivating an amount of land which provides them with an annual net income (after cultivation costs but before debt service) of Rs 2400 or less but with sufficient land to permit an incremental income from the proposed investment at least high enough to meet the principal and interest payments on a loan for that investment. This formula is applied on an individual scheme basis by ARC. 2/ The provisions for lending to small farmers for minor irrigation would also apply to small farmers participating in joint investments where their shares of the total investment cost did not exceed Rs 10,000 each.

41 SCHEDULE B Page 3 (3) 7 years on loans for pumpsets, whether financed as individual loans or included in dugwell loans; (ii) for lending to small farmers as defined, a maximum of: (1) 15 years for minor irrigation loans where the investment cost was less than Rs 10,000 each, except for pumpsets where the loan period would not exceed 7 years whether financed as individual loans or included in dugwell loans; (2) 15 years including two-year grace period for land development. In each case repayments would commence in the year following the completion of the investment. 5. Other LDB Lending Operations LMB and Primary Banks would apply the same down payment and maturity requirements to all their similar lending operations, and the same interest rates, evaluation fee and collateral requirements to all their lending operations (except in the case of schemes submitted under the aegis of the Small Farmers and Marginal Farmers Development Agencies in Maharashtra). February 11, 1972

42

43 SCHEDULE C INDIA MAHARASHTR AGRICULTURAL CREDIT PROJECr PARTICIPATING PRIMARY BANKS Ahmednagar Akola Airavati Aurangabad Bhandara Bhir Buldhana Dhulia Jalgaon Kohlapur Nagpur Nanded Nasik Parbhani Poona Sangli Satara ShQlapur Udgir Wardha Yeotmal February 11, 1972

44

45 ANNEX 1 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECr Minor Irrigation Hydrogeological Conditions 1. The major part of Maharashtra is located on the plateau formed by the massive volcanic formation known as the Deccan Trap. It is composed of alternate layers of compact basalt and volcanic ashes, and is estimated to have a thickness of several thousand meters. Near the surface, the basalt layers are 3-10m thick, and 2-3 of them are found interbedded with the volcanic ashes or clay in the first 30-50m. The main physiographic features of the region have been caused by the erosion of the trap resulting in long ranges of basaltic hills dividing the main river basins. There are three groups of river basins in the state: (a) the narrow coastal region with small basins draining from the Western Ghats westward to the Arabian Sea; (b) the Tapi/Purna basin at the northern edge of the Deccan Plateau which also drains to the west; and (c) the Godavari system of the Deccan Plateau, draining to the east. 2. Annual rainfall averages about 2,500 mm in the coastal region, but the Western Ghats give rise to a meteorological shade, the effect of which is to lower the amount of precipitation over the Deccan Plateau and the Tapi basin. The average rainfall in the western part of the plateau is 700 mm. In the central zone, average rainfall is about 900 mm and increases to over 1,200 mm in the east. Temperature varies from a maximum of 45 C in May to a low, in some areas, of 8C in December. For most of the state, about two-thirds of the rainfall occurs during the southwest monsoon, or kharif, from June to October, while the remainder occurs primarily during the northeast monsoon, or rabi, from November to February. March to May is the dry season, or early kharif. Interannual variations in rainfall are greater in the 700 mm zone where even the kharif rainfall is not assured. In the 900 mm region, kharif rainfall is sufficient for grains and other food crops, but rabi crops and perennial crops need irrigation supplements. 3. Following the rainfall distribution, run-off in the rivers is concentrated in kharif: about 85% occurs from July to October. Small basins ( km 2 ) oll the western slopes of the Western Ghats 2 have a run-off of 1,000 to 1,600 mm. For large basins (about 10,000 km ) in the Deccan

46 ANNEX 1 Page 2 Plateau, the run-off ranges from 110 to 560 mm. The base flow, or discharge of the groundwater reservoir, has been estimated at 20 to 40% of the total river flow. 4. Groundwater recharge figures have been calculated for various basins. While they are based on limited data, they do indicate that there are large variations from basin to basin and that recharge is not a constant percentage of rainfall. Under these circumstances, recharge must be determined on a local basis from historical data and field tests in representative basins. 5. There are two types of groundwater reservoirs in the State: alluvial deposits in the valleys (primarily the Tapi Puima) and the basalt layers in the Deccan Plateau. Permeability of the sand and gravel beds in the alluvial formations is generally good (1.2 x 10-3 m/hec), and existing tubewells have specific capacities ranging from 1 to 10 liters per second per meter drawdomn with an average of 5 1/sec/m. Although only a light exploratory progran has been carried out, data is sufficient to indicate that there is scope for further tubewell development, which would be accompanied by complementary investigations such as geoelectrical surveys and additional exploratory drillings, and dugwell construction. 6. Permeability of the basalt layers is related to the particular types of basalt involved (vesicular) and to the fissuration of this material. It is generally low: existing energized dugwells have a discharge of 80 to 180 m3/day. However, the discharge of low-yielding wells normally can be imiproved often doubled - by drilling boreholes through the underlying basalt layers. 7. The hydrogeological conditions described above are not favorable to extensive two- or three-crop cultivation. The high concentration of rainfall in kharif and the variability of rainfall in rabi make it necessary to use every storage possibility for regulation of the outflow, but the topography does not yield many opportunities for the construction of large dams and extended irrigation networks. Although groundwater storage provides substantial capacity for regulation, the permeability of the aquifers does not permit the utilization of high-yielding wells. Therefore, regulation must be achieved through a combination of large dams, small dams (tanks), lift irrigation schemes, and wells. Present Water Use 8. The water resources of Maharashtra are extremely limited. The Government estimates total availability at 74 billion m 3 which it calculates to be sufficient to irrigate only 6 million ha at full development (about 30% of the total cultivable area of 21 million ha). It is therefore critical that utilization of water be as efficient as possible and that wastage be kept to an absolute minimum. At present, about 9 billion m 3, (12X of total available) are being used for irrigation, 5 billion by wells

47 ANNEX 1 Page 3 and 4 billion by surface water schemes (including lift irrigation). The area under irrigation is about 1.2 million ha (6% of total cultivable area), 0.7 miuion from wells and 0.5 million from surface schemes. 9. Over the past 15 years, well irrigat:xon has accounted for about 80% of the increase in irrigated area, and the current rate of development of 60,000 ha/year for wel irrigation and 20,000 ha/year for surface irrigation approximately continues this relationship. There are various reasons for this pattern of development: (a) Topographical conditions are not favorable for the implementation of large surface water schemes, thus limiting the possibilities and increasing the cost of construction in the case of those that do exist; (b) Government financing from budgetary resources has not been sufficient to meet the high costs involved in large surface water schemes; (c) Large surface water schemes generally require agreements between States which are not always forthcoming; and (d) Irrigation development by wells corresponds to the managerial capability of the farmer and, for any given farm unit, can be implemented more rapidly than large surface schemes. 10. These factors have led to the more rapid development of groundwater, even though the unit investment cost is generally higher (2,500 to 4,500 Rs/ha vs. 2,000 to 2,500 Rs/ha). Lift irrigation schemes combine some of the advantages of ground and large surface water projects. Their small size generally fits that of farmers' cooperatives, their unit investment cost is lower than that of surface schemes, and their implementation period is relatively short. Consequently it can be expected that there will be increased development of lift schemes on rivers with a sustained base flow or with adequate storage capacity. 11. Present use of groundwater is quite inefficient. There are currently 743,000 wells (almost all are dugwells) which irrigate a total of 713,000 ha, giving a command area per well of just under 1 ha. Since the average existing well could command an area of about 2 ha, it is apparent that water is being wasted and that wells are not being utilized to capacity. Furthermore, many wells give very low yields or are dry. Some of the principal reasons for this situation are the following: (a) lack of knowledge of crop water requirements on the part of farmers, leading to over-watering of crops;

48 ANNEX 1 Page 4 (b) over-exploitation of groundwater in specific areas, resulting in the poor performance of all wells in those areas; (c) low technical criteria for individual wells with regard to siting and design; (d) lack of endeavor to raise criteria for installation of wells, on the basis that assured irrigation in rabi was not necessary. (However, the farmer does not obtain a reasonable return and is not able to maintain loan repayments unless he gets assured water in rabi as well as in kharif.); and (e) a limit on loans for wells which was imposed by LMB until 1967, resulting in unfinished wells and wells of low standard. While the situation in Hahrashtra is not critical, there are certain areas where exploitation of groundwater should be stopped and others where it should be severely restricted. However, no legislation exists, at present, to control the exploitation of groundwater. Model legislation has been prepared by the Central Government with a view to eventual enactment by the States, but until such time as this legislation has been passed, the Maharashtra Government has agreed to implement various measures through the lending program and through administrative actions. In order to achieve ithe widest control possible, the agreed criteria for investments in minor :Lrrigation would apply not only to Project investments but also to all minor :Lrrigation development within the direct or indirect control of the State Government. ]'roposed Development '12. The Project would include 300 tubewells irrigating a total of 6,000 ha at a cost of Rs 18 million, 175 lift irrigation schemes commanding 40,000 ha at a cost of Rs 84 million, and an investment in dugwells and dugwell improvements of the Rs 200 million (equivalent to about 11,100 new energized dugwells) to irrigate about 60,000 ha. Although the proposal submitted by Maharashtra included 1,000 borewells for the Deccan trap region, they have been excluded from the Project because the feasiblity of this type of well has not been established. It will be necessary for GSDA to carry out a program of experimentation in order to determine the technical and economic viability of such wells. 13. The water utilization involved in the Project would be 1.1 billion m3 (700 million m 3 of groundwater and 400 million m3 of surface water), wrell within the global availabilities. The rate of implementation for groundwater development of 22,000 ha/year compares with a current rate for the State as a whole of 60,000 ha/year, while that of 13,000 ha/year for surface schemes compares with a current level of 20,000 ha/year. 14. While there is over-exploitation of groundwater resources in localized areas, significant potential for further dugwell development

49 ANNEX 1 Page 5 still exists in areas where the well density is relatively low. Even in areas where the density is near the level of maximum utilization, some improvement of dugwells may be warranted by local conditions. Thus, dugwell development would take place in several areas in the State, on the basis of a watershed analysis (paras 20-22). 15. Tubewell development would be restricted to the Tapi/Purna basin and would provide for the installation of 50 in the first year, 100 in the second year, and 150 in the third year. This pattern of construction would be influenced not only by the implementation capacity of the organizations involved but also by the necessity of carrying out complementary investigations during the early stages of the Project (para 24). 16. Lift irrigation schemes would be located in river basins throughout much of the State. With the advantages of small organizational units and low unit investment cost, they show particular promise for future irrigation development. However, particular attention would have to be given to water availability (especially the effect of upstream irrigation developments including wells), efficient water use, and appropriate design of pumping and distribution systems (para 25). Appraisal Criteria and Procedures 17. In order to avoid over-exploitation, to increase the efficiency of irrigation, and to provide additional data on water resources, a new system of appraisal would be adopted which would be based on an analysis of river basins, sub-basins, and elementary watersheds. In this manner, utilization of water resources in a given hydrogeological unit can be planned on a comprehensive basis with the necessary coordination of dugwells, tubewells, lift irrigation schemes, and other surface water schemes. As indicated in Appendix 1-1, the present river gaging network covers basins encompassing about 85% of planned Project investments. Particularly in these basins, the data from the gaging stations and information from existing irrigation installations are sufficient to proceed immediately with a program of development. Even in basins without gaging stations, it would be possible to begin a program based on other sources of data, although at a more cautious rate. 18. The first priority for data-gathering would be to install primary gaging stations in those basins currently without them and to add complementary stations in all basins covered by the Project. They would provide differential gaging of both run-off and base flow. One or more elementary watersheds in each basin would be equipped to provide related data on rainfall, run-off and fluctuations of the groundwater level. They would be selected on the basis of factors such as geology, topography, vegetation and agro-climatic conditions in order to give as representative a sample as possible. Data collected from this network would permit a substantial

50 ANNEX 1 Page 6 improvement in the quality of appraisals in the second and third years of the Project. Although the proposal submitted by the Maharashtra Government indicated that dugwell investments would be limited to specified taluks, it would be preferable to include all areas of a district or districts which fall within a given watershed, in order to permit a more integrated developme:nt. 19. In the regions upstream from the gaging stations, the existing del2sity of wells would be determined out to the limits of the watershed boundaries and would be entered on a map of the basin. The maximum well density which the watershed could support then would be calculated according to the formulas given in para 20. A comparison of the actual density with the maximum density for the basin would indicate the scope for further development. 20. Dugwells would be appraised on a group basis following the framework analysis indicated above. General criteria to be observed would be as follows: (a) the areas chosen for installation or improvement of dugwells would comprise at least two underlying basalt layers at a depth no greater than 50 m. Geophysical surveys and in some cases boreholes would be utilized to make this determination; (b) priority would be given to areas where fluctuations of the groundwater level are the smallest. Areas with large fluctuations are likely to have scarce groundwater resources with low dependability; (c) each dugwell would be designed to contain a minimum amount of water at the end of the dry season, even in years when the groundwater level is lowest (100% dependability); (d) all dugwells would be energized (by electricity as far as possible) with motor of about 5 hp (in any case sufficient to provide an instant discharge of 10 1/sec) and would be provided with one or more boreholes; and (e) each new dugwell would irrigate a minimum commanded area of 5 ha while each improved dugwell would have a minimum command area of 4 ha. If the size of holdings in an area were smaller than these figures, appropriate arrangements would be made to share water. The performance of each dugwell is related to its design, location, distance frorm other wells (spacing), and the total number of wells within the hydrogeological unit. With proper siting, appropriate overall design, adequate storage capacity and one or more boreholes (up to 50 m deep), tapping 2 and possibly 3 strata of basalt, an energized dugwell in average conditions

51 ANNEX 1 Page 7 in Maharashtra can sustain a discharge of 150 m /day. The spacing and the number of wells are determined from the elementary water balance which can be written as follows: water availability - potential utilization r x a x R x A x c x n 100 where: r - rate of recharge in m 2 a - area of recharge (watershed) in km R - water requirement for the average cropping pattern in the basin in um A - average size of the area irrigated by a dugwell in ha c - average cropping intensity for the basin in % n - number of dugwells which the watershed could support The number of dugwells which the watershed could support is calculated from the above equation by solving for n: n - r x a x 100 R x A x c 100 The maximum density of dugwells (d) for the watershed (in terms of dugwells per km 2 ) and the spacing (s) between dugwells (in m) are then calculated as follows: d - r x 100 -and R x A x c 100 a a/7 s xaxc 1 1~00 r x The maximum density of dugwells to be used in comparison with actual density would be determined on the basis of average values for the parameters r, R, A, and c. For Maharashtra as a whole, a representative maximum density could be found by taking:

52 ANNEX 1 Page 8 r - 80 m (average recharge) R mm (medium irrigation) c - 140% (semi-intensive cropping) A - 4 ha (irrigated area for an improved dugwell) With this data, the maximum density for the state is 2.0 dugwells/km2 the existing density varies from 0.3 to 7.0 dugwells/km Since it is unlikely that an average density of dugwells can be maintained over the entire area of a watershed, it would be reasonable to permit somewhat narrower spacing in localized areas than would be indicated by the use of average values in the formula for as long as the total number of dugwells in the watershed did not exceed the number indicated by the formula for n (using average values). Thus the minimum spacing allowable would be calculated on the basis of a maximum value for r and minimum values for R, c, and A. Taking r mm (maximum recharge); R 500 mm (light irrigation - supplementary); c - 120% (extensive cropping); and A _ 2 ha (irrigated area for an unimproved dugwell), the formula gives a minimum spacing of s m. 23. In addition to determining, on a systematic basis, the areas with a favorable potential for further dugwell development and implementing investigations to obtain data for improving the quality of appraisals, GSDA would undertake the training of appraisal teams from the LMB system. GSDA would provide them with guidelines regarding density and spacing to be followed in any given watershed and would also give them instructions on siting and design, and on efficient utilization of irrigation water. 24. Tubewells would be located only in the Tapi/Purna basin. Some exploratory work has been performed, and available information indicate that a program for development of tubewells with a minimum discharge of 15 l/sec (sufficient to irrigate 20 ha under an intensive cropping pattern) at 5 to 10 m drawdown is feasible. Care would be taken to locate them outside the areas of high dugwell intensity (over 10/km 2 ) since dugwells often contain boreholes and tap the same reservoir as a tubewell. Complementary investigations, including geoelectrical surveys, some additional exploratory tubewells (to be installed by the groundwater unit of the Central Government), pumping tests, and hydro-chemical analyses, would be carried out in conjunction with the first part of the exploitation program in order to provide data

53 ANNEX 1 Page 9 for more intensified development in the second and third years of the Project. Spacing of tubewells eventually would be based on a Theiss-Jacob analysis, but until such time as GSDA is equipped 2 to perform this analysis, the density of tubewells would be limited to 0.4/km (about 1/sq mi). Tubewells would be located at least 2 km away from any saline water zone (over 2,500 ppm), detected by geoelectrical surveys and electrical logging. Appraisal of tubewells would be performed on an individual basis, taking into consideration the factors mentioned above and utilizing electrical logging techniques to determine the final design of the assembly. Design features would include cement sealing of the upper part of the assembly and utilization of appropriate strainers. 25. For lift irrigation schemes, analyses would be performed to establish the basin-wide relationships between surface and groundwater, insuring that adequate water supplies would be given to regulation capability on the river, present and planned well development in the basin and pumping from small ponds related to groundwater leakage. Care would be given to the proper design of each scheme, and adequate pumping capacity would be installed to provide an instant discharge of 1.6 times the average discharge needed to fulfill the crop water requirements. In general, this criterion would indicate an instant discharge capability of 75 1/sec for 100 ha (1.1 cusec for 100 ac). Organization and Management 26. The State Government is establishing the Groundwater Surveys and Development Agency (GSDA) within the Department of Industries to carry out groundwater investigations and drilling operations. It would have seven field offices throughout the State. The nucleus of the staff for the agency would be the staff of the Agriculture Department's present Groundwater Wing which is well-qualified and headed by a capable and experienced senior official. However, the field personnel have little experience, and it would be necessary to appoint 3 or 4 senior specialists (hydrologists, geophysicists, water management engineers) to assist the head of the agency in planning and implementing the GSDA program, and in providing guidance to the field staff. Since the functions of the present groundwater staff are now mainly exploratory, they would be reoriented to provide more emphasis on guidance and control. The main fields of activity would be as follows: (a) Investigations of water availability on the basis of hydrogeological units; (b) the progressive application of sound water management on all irrigated areas to ensure the efficient utilization of all water resources; (c) the establishment of mapping units to prepare maps for the entire State and gradually to develop a global well census; and (d) the training and supervision of appraisal teams which would be staffed by the LDB system assisted by personnel of the relevant Government departments.

54 AN,i'_'X 1 Pagr. 10 In Lhe case of each investment, GSDA would issue a certificate of nonobjection that it complied with the criteria established for minor irrigation development (Schedule A). No loan would be granted without this certificate. 27. The well construction operations currently undertaken by the Agriculture Department involve primarily the drilling of boreholes in dugwells and the operation of blasting units for deeping dugwells. Since no work has been done on tubewells in sedimentary areas, tubewells would be installed by private contractors. Close coordination would be exercised with the Water Resources Division of the Irrigation Department. Since groundwater and surface water are inter-related factors in global water availability and use, investigation and control of all water resources might usefully be combined in a single entity at some future date. 23. In order to provide GSDA with the benefit of substantial experience in water management and program implementation, two consulting engineers (hydrologist, and water management specialist) over a period of two years would be included in the Project (Appendix 1-2). These specialists would have high technical qualifications and considerable management experience in the operation of programs similar to that proposed. Eq1uipment 29. Four hammer drills would be included in the Project in order to enable GSDA to reach the capacity necessary for implementation of the dugwell program and to experiment with deep boreholes ( m) which might yield good results for constant discharge wells on the Deccan Plateau. In aidition, an amount of US$100,000 would be provided for the purchase of gaging equipment such as river gages, level recorders, rain gages, current meters, etc. A detailed list of the equipment required would be prepared by the GSDA, assisted by its consultants, in cooperation with the Water Resources Divsion of the Irrigation Department. February 11, 1972

55 ANNEX 1 Appendix 1-1 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT Basins and Gaging Stations for Minor Irrigation Development The Project would involve minor irrigation development in the basins listed below with the relevant gaging stations. These basins would encompass about 85% of minor irrigation investments. Some basins included in the Project - Tapi, Wardha and Wainganga - do not have gaging stations and such stations would be established as a first priority. Sufficient data is available to undertake further development in all Project basins, but greater care will need to be taken in those initially without gaging stations in order to guard against over exploitation. Krishna Basin (Panchganga, Tamrapani and Krishna Rivers) Gaging Stations: Terwad, Rajgoli, Shirti Investment : Lift irrigation Districts : Kholapur, Satara, Sangli Bhima Basin: (Bhima River) Gaging Station : Dhond Investment : Lift irrigation Districts : Poona, Ahmednagar Gaging Station : Mingangaon Investment : DugwellB Districts : Poona, Satara, Sholapur Gaging Station : Sholapur Investment : Dugwells and lift irrigation District : Sholapur Manjra Basin (Manjra River) Gaging Station : Dhanegaon Investment : Dugwells and lift irrigation Districts : Osmanabad, Bhir Godavari Basin (Godavari River) Gaging Station : Nanded Investment : Dugwells and lift irrigation Districts : Nanded, Parbhani, Bhir

56 ANNEX 1 Appendix 1-1 Page 2 Gaging Station : Mungi Investment : Dugwells Districts : Aurangabad, Ahmednagar Penganga Basin (Penganga River) Gaging Stations: Chikli, Wardha Investment : Dugwells and lift irrigation Districts : Yeotmal, Nanded, Akola Purna Basin (Purna River) Gaging Station : Ghodasgaon Investment : Dugwells, tubewells, lift irrigation Districts : Akola, Amravati, Buldhana February 11, 1972

57 ANNEX 1 Appendix 1-2 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT Terms of Reference for Proposed Consultancy Services to Groundwater Surveys and Development Agency Terms of Reference 1. The responsibilities of experts hired to give technical and organizational assistance to the Groundwater Surveys and Development Agency (GSDA) would be as follows: (a) to review and advise on the work program, organization and staffing of GSDA generally and specifically for the purpose of administering appraisal and recording procedures for proposed minor irrigation investments throughout Maharashtra; (b) to assist in the establishment of map units and methods of recording of information arising from the area census of wells and other relevant data; (c) to assist in coordinating all technical data relating to groundwater exploitation including the results of the aerial survey covering Tamil Nadu, Andhra Pradesh, Maharashtra, and Mysore; (d) to advise on the best methods of groundwater exploitation in trap areas and of well development generally in the State; (e) to advise and assist in the training of staff both within and outside GSDA concerned with the appraisal of minor irrigation investments; (f) to advise on a work program to improve water management and control; (g) to give advice on research matters relevant to the proposed Project investment program; (h) to advise and assist in any other matters relating to the implementation of the Project and agreed criteria; and (i) to select and analyze representative watersheds within the river basins.

58 ANNEX 1 Appendix 1-2 Page 2 peicifications for and Duties of Posts 2. The qualifications and specific duties of the two groundwater experts, who would be engaged for two years, should be as follows: (a) Chief Advisor (i) Background should be in hydrology with at least 10 years relevant experience. Most of his experience should be in groundwater development and planning. He should personally have conducted groundwater investigations in the field and must have a good organizational ability. He should be competent to advise on the mapping and recording of wells and data relevant to groundwater development. If possible, he should also have experience in water management and control; and (ii) He would be responsible for the overall direction of the advisory program, giving policy advice to SGD. He would also take an active part in field analysis aspects of the program. (b) Assistant Advisor (i) The assistant advisor should have a background in water management. It is essential that he should have had at least five years practical experience in groundwater investigation and should be thoroughly familiar with, and experienced in, the methods of recharge determination and aquifer testing. It would be desirable that he should have particular experience with crystalline rock conditions. He should be capable of advising on the organization of field appraisal work and the mapping and recording of data; and (ii) The assistant advisor would be responsible for advising field personnel through normal line channels, in accordance with the terms of reference. February 11, 1972

59 ANNEX 2 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT Land Development Background 1. Land development, involving activities such as construction of water courses and field drains, bunding, grading 1/ and levelling, to permit an efficient utilization of water, has been an integral part of irrigation development since early times. It was not until recently, however, that land development came to be planned and implemented on a centralized basis in order to overcome the difficulties posed by the higher gradients being encountered and to ensure the expeditious and effective utilization of water over large areas as it became available from the storage systems. Because of the magnitude of the work involved for each individual farmer - again as a result of the higher gradients - financing frequently was provided, either directly or indirectly. 2. Land development operations are carried out either by hired labor, sometimes assisted by bullocks, or by earth moving machinery. However, progress in Maharashtra has been greatly hampered by the shortage of labor in rural areas and the lack of equipment. Consequently, the Project contemplates the use of machines for bunding, grading and levelling. The construction of water courses and field drains would be carried out by labor. Long-Term Land Development Program 3. Maharashtra's flow irrigation system presently commands an area of about 243,000 ha, and it is planned to increase this area to approximately 526,000 ha by 1981 on a total of 15 irrigation schemes. While some land development work has been carried out on most of the area now under irrigation, the shortage of labor and lack of equipment have been major constraints, and it is estimated that one or more activities remain to be completed on almost all of the area. Therefore the program for the next ten years is to finish the land development work on the 243,000 ha now under command and to undertake work on the additional 283,000 ha to be irrigated, in accordance with the schedule of water availability. 1/ Removal of uneven features without altering the basic slope of the land.

60 ANNEX 2 Page 2 Prject Land Development h4. The Project would encompass the first three years of the program ( ) and would involve land development work on six irrigation :3chemes, commanding about 175,000 ha (Appendix 2-1). Activities would Lnclude the levelling of 9,000 ha, grading of 24,000 ha, bunding of 47,000 ha, and construction of water courses and field drains on 115,000 ha 1/. Components of Project Land Development The basic components of land development which would be carried out under the project are as follows: (a) Water courses and field drains. Water courses would be constructed to carry water from the 1-1/2 cusec outlets at the lower end of the major distribution system to the individual farms in the command. The courses would have a cross - sectional area of 0.35 m 2 and retaining banks 0.3 m high and 0.15 m wide. Similarly, field drains would be constructed to collect seepage and deliver it to the lowest collection point of the major drainage system. Concrete boxes, drops and crossings would be provided where required. (b) Bunding. Graded bunds would be constructed on gradients of 0.5% or more and would be provided with draw-off channels and outlets. They would be spaced at distances of m, depending on the gradient, and would have a cross - sectional area of 0.5 m 2. (c) Grading. This operation would be limited mainly to removing knolls and filling up holes and gullies, thus leaving the basic gradient of the land unchanged. The major part of the work would be with a slope of 1-2%. It is estimated that, on average, about 75 m 3 of earth per ha would be moved over a distance of about 85 m. (d) Levelling. This operation is proposed for those areas having conditions suitable for paddy. It would be carried out on land having a maximum slope of 2% and would reduce the slope to 0.1%. An average of about 600 m 3 of earth per ha would be moved over a distance of about 85 m. 1/ Since these activities will be implemented in various combinations on land to be developed, the sum of the areas exceeds the total command area.

61 ANNEX 2 Page 3 Equipment Requirements 6. The earth moving equipment proposed for the Project would comprise elevator scrapers (self-propelled) and land planes for the levelling and grading work, and crawler tractors for bunding. 7. The elevator scrapers would be able to operate completely as self-contained units since the elevator loads soil into the carrying bowl of the machine, therefore avoiding the need for a crawler tractor which is often required for use with a non-elevating scraper when operating in hardsoil conditions such as are found in Maharashtra. Also, the elevator scrapers have rubber tires which would enable them to travel on very poor roads and would eliminate the need for a transporter to move them from one area to another. The machines proposed for the Project would be of hp and have a carrying bowl of 7-9 m 3 capacity, a net weight of 14,000-18,000 kg, and a gross weight of 23,000-30,000 kg. 8. The land planes, with a small capacity bucket the full width of the machine, would be used to move earth from high spots to low ones in order to obtain an even finish on fields that are being levelled or graded. Since they are not self-propelled, they would have to be drawn by tractors. 9. The crawler tractors, equipped with hydraulically - operated toolbars, bunding discs, and angledozer blades, would be used for the construction of bunds. The discs would be utilized for heaping earth in the initial operations, and the angledozer blades would be used for compacting and finishing bunds. 10. Assuming an eight-month working season of 2,000 hr and work rates of 0.1 ha/hr for levelling and 0.25 ha/hr for grading, 48 elevator scrapers would be required. Finishing of the levelling and grading operations would require 20 land planes working at 0.4 ha/hr each. For bunding, 20 crawler tractors operating at a rate of about 0.5 ha/hr each would be required. The total equipment needed for the Project would then be as follows: Elevator scrapers 48 Land planes 20 Crawler tractors Bunding 20 Planing The Maharashtra Department of Agriculture presently has about 75 usable crawler tractors (about 60 hp) of several different makes, over half of which are lying idle for lack of implements (primarily angledozer blades). The reliability of this equipment is not high because of the spare parts and general maintenance problems posed by the number of makes. However, it

62 ANNEX 2 Page 4 considered that, in addition to the non-land development work now being jerformed by the machines in operation, they could be used to pull the land planes. They would also be utilized as a complement to the elevator scrapes for those areas too small for the efficient utilization of the more sophisticated equipment, assuming that angledozer blades are acquired for the machines lacking them. Furthermore, they would serve as back-up equipment for the bunding work. Therefore all of the equipment indicated above, with the exception of the 20 crawler tractors for drawing the land planes, would have to be acquired under the Project. The rate of work to be undertaken by machines during the Project period is lower than that planned for the later stages of the program and therefore the Project equipment would be utilized fully throughout its useful life. Cost Estimates 12. Because various combinations of activities will be performed on any given unit of land, and the cost of a given activity will depend on the conditions existing on that particular unit (slope, etc.), umit costs for the area as a whole and covering all activities are not especially meaningful. However, average unit costs for grading and level- Ling can be combined with those for the other activities in order to provide an indication of the principal composites involved. Thus for land which would be graded, bunded, and provided with water courses and field drains, the unit cost would be Rs 880/ha. Similarly, the unit cost for development which would include levelling, bunding, and the provision of water courses and field drains would be Rs 1780/ha. The total cost of Land development would be Rs 46.1 million as indicated in Appendix 2-2 with ;m analysis by Project year and in Appendix 2-3 with a division by activity. Organization and Procedures '13. Maharashtra is establishing the Land Development Agency (LDA) as a semi-autonomous body within the Department of Agriculture. It will be headed by a senior administrative officer and will assimilate the Soil Conservation Wing of the Department. Because of the problems of timing, coordination, and control caused by the need to determine the participation of farmers prior to formulating the work programs, the necessity of implementing the work in a short period of time, the maintenance of close tolerances on levelling and grading operations, the seasonal and scattered nature of the work, and the need to protect standing crops, the main components of the land development program would be executed by LDA. To the extent feasible, however, LDA would sub-contract selected parts of the work to be constructed under its supervision LDA would draw up annual work programs detailing areas, operations schedules, labor recruitment and machinery deployment. It would have offices in each of the Project areas to undertake detailed topographical surveys, prepare maps, determine the quantities of work involved by activity, calculate the machine and labor requirements, and prepare the cost estimates. ]n cooperation with the appropriate extension and development field staff,

63 ANNEX 2 Page 5 the offices would be responsible for informing farmers of the program and obtaining letters of consent from them. Once the costs for individual farmers had been established, loans for farmers who needed them and could meet the banking requirements would be arranged through the LDB Primaries according to the normal procedures. With the financing arranged, the LDA offices would supervise the execution of the physical work program. 15. Under the provisions of the Land Improvement Schemes Act 1942, the State Government has the right to execute land development work and require repayment by farmers over a 15 year period. This program, in areas outside the Project would be modified to conform substantially to the procedures and terms in effect under the Project. Costs for land development work already carried out would be charged to farmers and would be collected according to the prescribed schedules. Maintenance 16. Four workshops are located at strategic points throughout the State, but they would have difficulty servicing a larger fleet of earth moving equipment, particularly one containing the more sophisticated machines contemplated under the Project. Therefore the suppliers would be required to provide most of the maintenance for the equipment. In addition to a complement of spare parts, the suppliers would be directed to provide the specialized items of service equipment, mobile workshops for field repairs, and personnel sufficient to supervise maintenance of the equipment. Training 17. Efficient utilization of the earth moving equipment would require shift operation with three operators per machine. In order to instruct the operators involved on equipment which is in part new to Maharashtra (the elevator scrapers and land planes), the suppliers would be required to institute and run training programs utilizing the same models of equipment which would be supplied for the land development work. The programs would cover operation and field maintenance of the equipment and would take place prior to delivery of the equipment for the field work. Training for all three types of machine (elevator scrapers, land planes and crawler tractors) would be given at the same location(s) in order that all operators would have some familiarity with all machines, thus providing an additional measure of flexibility in the field. 18. In addition to instruction for operators, training would be provided (also by suppliers) to the personnel who would prepare maps, calculate the work quantities involved, and supervise the use of stakes to identify where cut and fill operations would take place. 19. Some assistance also would be required for the management of the land development work, in view of the larger fleet and the more sophisticated equipment involved. This assistance would consist of four specialists with

64 ANNEX 2 Page 6 extensive experience in earth moving operations who would advise on the p:lanning of machine operations, the deployment of machines, and the preparation of maintenance schedules. The advisors would spend most of their tilme in the field at the various Project areas. Since several local firms have had considerable experience with earth-moving machinery, the advisors should be available from within the country. February 11, 1972

65 ANNEX 2 Appendix 2-1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT SCHEMES IN LAND DEVELOPMENT PROGRAM Command Name of the Scheme District(s) Area (ha) Purna Nanded and Parbhani 61,538 Bor Wardha 13,360 Ghod Poona and Ahmednagar 25,263 Nalganga Buldhana 8,747 Gangapur Nasik 16,503 Girna Jalgaon 50,202 TOTAL 175,613 February 11, 1972

66 ANNEX 2 Appendix 2-2 INDIA MAHARASHTR AGRICULTURAL CREDIT PROJECT Land Development Cost Phasing1/ (RB '000) Total Purna 706 9,696 9,696 20,098 Bor 347 3,848 3,848 8,043 Ghod 933 4,823 4,823 10,579 Nalganga 343 1,039 1,039 2,421 Gangapur Girna 965 1,546 1,546 4,057 TOTAL ,253 46,100 February 11, / Costs include depreciation on earth-moving equipment.

67 I li D I A AMA-RASTRAGRICULTURAL CREDIT PROJECT LAND DEMLOPMENT AREA 1/ AND COST ESTIMIATES PY ACTIVITY ;Jater Courses and Drains 2J BuPuding 2/ Grading Levelling TOTAL Area Cost Area Cost Area Cost Area Cost Area Cost (ha) (RsI 0) (ha) (Rs'IOO) (ha) (Rs)0'0) (ha) (Rs,000) (ha) (Rs'00O) Purna [41,751 1,525 10,799 2,750 11,691 7,015 5,873 8,810 70,114 20,100 Bor 13, ,425 77T 3,892 2,335 2,802 4, ,474 8,042 Ghod 15,616 1,653 19,170 3,714 8,059 4, ,096 10,578 Nalganga 6, ,086 1, h 3[ ,[63 2,421 Gangapur 13, , Girna 24,505 2,523 5,813 1,534 30,318 4,057 TOTAL 115,299 8,048 47,184 9,836 23,848 14,309 9,271 13, ,602 46,100 1/ Since all activities are not implemented on every unit of land to be developed, the area totals are not related to the command areas given in Appendix / Category covers multiple activities, not all of which are inplemented on the total area indicated. On-costs of 10% have been included December 6, 1971 i x '._ NA

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69 ANNEX 3 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT The Agricultural Refinance Corporation (ARC) Organization and Management 1. The Agricultural Refinance Corporation (ARC) was established on July 1, 1963, with the objectives of providing medium- and long-term finance to agricultural credit institutions and, at the same time, directing and guiding such institutions toward a development oriented approach in their operations. 2. ARC's shareholders include the Reserve Bank of India (RBI), central and state-level land development and mortgage banks and cooperative banks and other institutions (scheduled banks, the Life Insurance Corporation of India, insurance and investment companies, and others approved by the Government of India). Of the initial 5,000 shares issued, the law provided that RBI shall subscribe to at least 50%, the central land mortgage banks and state cooperative banks to no more than 30%, and other institutions to no more than 20% and future issues of shares would be allocated in the same proportion. The initial shares issued were guaranteed a dividend of 4-1/4% per annum. 3. ARC's management is vested in a Board of Directors of nine members, three of whom are elected and the rest nominated. Three directors represent RBI (a Deputy-Governor is Chairman of the Board), three the Government of India (at present the Secretary, Department of Agriculture, and the Additional Secretary, Department of Cooperation of the Ministry of Agriculture and a Joint Secretary, Department of Banking of the Ministry of Finance), and three directors are elected one each by the central land development banks, by the state cooperative banks, and by the Life Insurance Corporation of India, scheduled banks, and other insurance and financing institutions. 4. The Managing Director is the chief executive officer and is assisted by a managerial staff of nearly 90 (as of June 1971) of whom 65 are based at ARC's head office. Until early 1970, ARC did not employ any specialists, instead relying on a panel of consultants for technical advice in appraisal and supervision work. To supplement consultants' advice, ARC has established a Technical Division which, as of June 1971 comprised three agricultural specialists and an agricultural economist and to which ARC proposes to make further appointments. With the increasing volume of lending, ARC recognizes the need to build up its staff at all levels and has prepared a staff development plan to cover the period to the end of 1973.

70 ANNEX 3 Page 2 ARC's head office is in Bombay. It has 13 regional offices.a½medabad, Bangalore, Bhopal, Bhubaneswar, Calcutta, Chandigarh, Hyderabad, Jaipur, Kanpur, Madras, New Delhi, Patna, and Trivandrum) which asesist banks and State Governments in formulating agricultural development projects for financing, clarify ARC's policies and procedures when required, undertake pre-appraisal of projects submitted and supervise general execution of projects under ARC financing. About 25 managerial staff are employed in the Regional Offices In general, ARC's charter provides that it shall be guided by such directions in matters of policy involving public interest as GOI may, after consulting RBI, give in writing. ARC can extend financial assistance only to central or state-level land development banks, state coopoerative banks, and scheduled banks: in exceptional cases, and with RBI approval, it can also lend directly to a primary cooperative at the farm levfel. Refinance is provided through purchases of special debentures floated by central or state-level land development banks and through loans to state cooperative banks and scheduled banks. 7. Until June 1966, it was not normally ARC's policy to refinance construction and energization of wells by individuals unless the outlay inlvolved was large and development was envisaged through a cooperative society organized for the purpose. In July 1966, however, ARC not only removed this restriction, but also circulated a model scheme for minor irrigation development by farmers in compact areas. Thus, began ARC's policy of financing individual farmers on the basis of project models. 8. At the beginning, ARC's policy was to finance no more than 75% of a project, leaving the balance to be contributed by State Governments. However, the generally strained resources position of most State Governments considerably restricted the extent to which land development banks could avail themselves of refinance facilities from ARC. Accordingly, to stimulate investments in minor irrigation especially, ARC increased its support of such investments to 90%, beginning with all projects sanctioned in 1967/ Special debentures purchased by ARC from central land development banks must be guaranteed by the State Government concerned; in addition, debentures are backed by a charge on all mortgages resulting from loans refinanced under the issue. In the case of debentures, ARC requires that collections from farmers be lodged in a sinking fund. The sinking fund is invested in GOI securities and debentures of other land development banks. It may also be used to repurchase the land development bank's own debentures. Since from the view point of financial returns, the sinking fund arrangements do not benefit a land development bank as issuer of debentures, ARC has decided that repayments of its refinances under IDA supported projects should approximately match those of ultimate borrowers to lending banks.

71 ANNEX 3 Page ARC will refinance agricultural development schemes which are technically feasible, financially justified, and are within a reasonably compact area for facility of loan evaluation and supervision. The scheme can involve just one farmer, a group of farmers, or an association of farmers. Preference, however, is given to schemes involving a large number of farmers. 11. Technical evaluation of schemes is carried out by consultants drawn from a panel approved by the Government of India. Services of the Central Ground Water Board (formerly the Exploratory Tubewells Organization), the Geological Survey of India and the various commodity boards are also used and ARC prescribes the terms of reference in every case. Some important points examined in the case of schemes for minor irrigation include, an estimate of the quantum of water proposed to be tapped, annual water recharge, annual water draft, taking into account the existing and proposed wells, and the type of pump sets needed. With the establishment of its own Technical Division, increasing back-up support is now available from ARC's own specialist staff which will provide a foundation of technical expertise for scheme appraisal and supervision throughout India. 12. Economic evaluation of schemes is performed by ARC staff. Some of the important aspects appraised include cost estimates, the suitability of the cropping pattern recommended, inputs available for development, farmer's repayment capacity, efficiency of the project executing agency, arrangements for the provision of short-term credits and marketing arrangements. Preappraisal is done generally by regional offices, but final evaluation is made in Bombay. 13. Periods of refinance are determined after a study of the repayment capacity of farmers based on farm models. Refinance terms for medium-term projects are 3 to 5 years and for long-term projects are noa generally 12 to 15 years. 14. With effect from November 1970 ARC's general lending rate was raised from 6 to 6-1/2% per annum. Scheduled banks are required to charge their borrowers no more than an additional 2-1/2% per annum and while land development (and mortgage) banks are not bound by the same restriction, they nevertheless generally follow the same interest mark-up and none exceeds it. ARC collects a commitment charge of 1/3 of 1% on the amount not used in any one year according to a schedule of expected withdrawals approved for a scheme. Lending (Refinancing) Operations 15. The following table shows the progress in ARC's lending (less subsequent cancellations) during the eight years of its existence:

72 ANNEX 3 Page 4 Number of Schemes Total Scheme ARC Year Approved Costs Commitment Rs M Rs M 1963/ / / / / / / / , , Less reductions or withdrawals , During the initial years, ARC transacted very little business duie to the need for laying the groundwork and bases for its operations mid for building its staff. An important deterrent, however, was ARC's policy, at the time, of refinancing only projects in which development was envisaged through a cooperative society organized for the purpose. In June 1966, this restriction was removed; furthermore, ARC agreed to refinance up to 90% of loans for minor irrigation, against 75% previously. Thus, during the last three years, projects approved for refinancing were more than six times the number during the first four years. 17. As may be expected, most of the schemes sanctioned were for pirojects financed by land development or mortage banks: ARC Commitment Rs M % of Total (a) Land development banks 2, (b) State cooperative banks (c) Scheduled commercial banks Total 2, About 85% of the cost of schemes approved for refinance were for minor irrigation and land development:

73 ANNEX 3 Page 5 Total ARC Schemes Approved Commitment x of % of Number Total RS M Total (a) Minor irrigation , (b) Land development (c) Tractor & Power Tillers (d) Soil conservation (e) Plantations (f) Poultry (g) Fisheries (h) Dairying ti) Storage Source of Funds Total Apart from share capital, ARC can raise funds from the following sources: (a) borrowings from GOI and from any entity approved by GOI; (b) issue and sale of debentures and bonds guaranteed by GOI; (c) borrowings from RBI for periods not exceeding 18 months; and (d) deposits from GOI, the State Government, and local authorities for periods not less than 12 months. Total borrowings and deposits received may not exceed 20 times the sum of ARC's capital and surplus reserves. 20. ARC's borrowings and receipts of deposits during the eight years of its existence are summarized as follows: Borrowings Deposits Year GOI Market RBI Total Received 1963/ / / / / / / / Total Borrowings from GOI, none of which as of June 30, 1971 included IDA funds, have been on the following terms:

74 Rs M Interest P.A. Repayment ANNEX 3 Page None 30 years with 15-year grace /2 At end of 15 years /2 At end of 15 years At end of 9 years With effect from June 1, 1971, GOI interest rates to ARC have been increased by 1/2% per annum and are now therefore 5-1/2% on loans up to 10 years and 6% on loans with longer maturities. Since August 1968, ARC has been allowed a rebate of 1/4% on timely payments of interest on GOI borrowings. The two market issues of ARC bonds are both dated 1982 and are at an interest rate of 5-3/4%. Short-term borrowings from RBI are at bank rate, presently 6% per annum. The special deposits represent dividends payable on ARC's shares held by RBI which, under the law, must be held by ARC as special deposits. No interest is paid on them. 21. A comparative statement of ARC's operating results since its establishment until 1970/71 is given in Appendix 3-1 and is summarized below (in Rs million): Net Income Statutory Surplus Gross Total Net Income Before Dividend or Year Income Expenses Income Tax Dividends Liability Deficit 1963/ / / / / / / / In the first three years of ARC's operations, income was derived mostly from interest on investments. Beginning 1966/67, this pattern changed when ARC began to expand rapidly its refinancing operations (para. 15). In 1970/71 interest received from loans and debentures represented 94% of total income received. 23. Benefitting from cost-free funds available to it during the first four years of its existence, ARC's main items of expense at the time was salaries and employee benefits. Needing more funds for its expanded operation, interest paid on borrowed money has since 1967/68 been an important item of expenses. In 1970/71 interest paid on borrowings and salaries and employee benefits were 86% and 10%, respectively, of total expenses.

75 ANNEX 3 Page Until 1968/69 net income after taxes had not been sufficient to meet the statutory dividend liability of 4-1/4% payable annually to ARC's initial shareholders (para. 2) and the annual deficiency had to be made good by GOI in accordance with its guarantee under the law. ARC will have to reimburse these amounts out of future profits. In 1968/69 however, profits were sufficient to meet the statutory dividend and leave ARC with a small surplus and this position has significantly improved in the subsequent two years. The scale of future profits will largely depend on ARC's future borrowing rates and the extent to which it has to borrow from the market at higher rates than it has hitherto had to pay GOI. To help offset this, steps are now being taken to enable ARC to borrow from the National Agricultural Credit (Long-term Operations) Fund of RBI at concessional rates which, although not yet fixed, might be at about 4-1/4% per annum. This would broadly enable ARC to maintain its interest margin. For illustrative purposes, a five-year projection of ARC's future operating results (Appendix 3-2) assumes an overall lending rate of 6-1/2%; it does not take into account the probability of ARC borrowing at lower rates from the RBI Fund. 25. ARC is in good financial condition (Appendix 3-3). Its equity position as of June 30, 1971, is unimpaired by losses and its assets were in GOI securities and debentures of land development banks, which are guaranteed by State Governments. A five-year projection of ARC's financial condition is given in Appendix In accordance with its charter, ARC's accounts are audited annually by accountants duly qualified under the all India Companies Act of 1956 (the present auditors are Messrs. K. S. Aiyar and Co.). Under the same Charter, GOI can appoint the Comptroller and Auditor General of India to examine and report on the accounts of ARC. To date, GOI has not found the need to exercise this power. February 11, 1972

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77 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT AGRICULTURAL REFINANCE CORPORATION Condensed Statements of Net Income 1964/65 to 1970/71 INCOME 1964/ / / / / / /71 Rs M % Of RsM % of Rs M % of Rs M % of Rs M % of Rs M % of Rs M % of Total Total Total Total Total Total Total Income Income Income Income Income Income Income Interest Received on Loans and Debentures Interest and Other Income on Investments J Total Income EXPENSES Interest Paid Salaries, Allowances, Consultants' Fees, and Employee Benefits General and Administrative Expenses Depreciation of Assets Total Expenses NET INCOME BEFORE TAXES Taxes Paid or Payable NET INCOME AFTER TAXES December 6, 1971 Wtm

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79 INDIA MAHIARASHTRA AGRICULTURAL CREDIT PROJECT AGRICULTURAL REFINANCE CORPORATION CONDENSED BALANCE SHEETS At End of Fiscal Years Indicated ASSETS 1964/ / / / / / /71 Rs M Change from Change from Change from Change from Change from Change from RB M Previous Date Es M Previous Date Rs M Previous Date Rs M Previous Date Rs M Previous Date Rs M Previous Date Cash on Rand and in Banks (0.15) (0.03) 0.04 (0.02) Investments (43.88) (19.42) 8.40 (27.39) 5.14 (3.26) (24.79) Loans Debentures Purchased Other Assets Total Assets , LIBILITIES AND CAPITAL EQUITY Loans from Government of India and Others / / Special Deposits Other Liabilities / Total Liabilities Capital - Paid-up S _ Reserves and Surplus N N N N N N N Total Capital Equity N N N Total Liabilities and Capital Equityies Note 1/ Includes Rs 110 million public bond issue 2/ Includes Rs 85 million public bond issue 3/ Includes Rs 75 million short-tnr borrowings from RBI N = Negligible December 6, 1971

80 IND IA MAHARASHTRA AGRICULTURAL CREDIT PROJECT AGRICULTURAL REFINANCE CORPORATION PROJECTED BALANCE SHEETS As of Dates Indicated June 30, 1972 June June June Rs M Change from 1/ Rs M Change from Rs M Change from Rs M Change from Previous Date Previous Date Previous Date Previous Date ASSETS Cash on hand and in Banks 0.10 (99.91) Investments Loans to Commercial Banks: IDA Projects 2/ (20.00) Others Lending to LMBs for IDA Projects 2/ (85.00) LNB Debentures 1, , , , Other Assets (7.40) , , , , LIABILITIES AND EQUITY Loans from GOI (IDA Funds) 2/ , , Other Loans from GOI and Other Sources 1, , , , Other Liabilities (77.64) , , , , Capital Paid-up Reserves: At Beginning of Year Projected Net Income Total Available Mandatory Dividend Due 3/ At End of Year Total Capital Equity TOTAL LIABILITIES AND EQUITY 1, , / See Appendix 3-3 2/ Gujurat, Punjab, Andhra Pradesh, Haryana, Tamil Nadu, Mysore, and Maharashtra Projects. ' 3/ Although mandatory dividend of 4 1/4% only applies to the initial Rs 50 million equiity capital, this rate of dividend has been included on all issued equity capital in the above table. December 6, 1971

81 ANNEX 4 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT Maharastra State Cooperative Land Development Bank Ltd. and Primary Land Development Banks A. The Structure of the Maharashtra Land Development Bank System 1. The land development banking system in Maharashtra is federal in character with the Primary Banks, which operate at the district level, federated into Maharashtra State Cooperative Land Development Bank (LDB) at the apex level. Although each of the Primary Banks is theoretically independent, LDB has the power to control their operations, as it is the only permitted source of their borrowing and can withhold funds from any Primary which does not meet its requirements. 2. For all practical purposes, therefore, LDB and its federated Primary Banks can be considered as a single entity with an operational relationship similar to that of a bank head office to its branches. The Primaries (under LDB direction and guidance) are responsible for making loans to their members, such lending being wholly refinanced by LDB. As of June 30, 1970 the 26 Primary Land Development Banks had a total membership of about 570, In the paragraphs immediately following, the operations of LDB and the Primary Banks are considered separately in regard to their organization, management and resources. Their lending procedures and operations, being closely integrated, are considered together in the succeeding sections. B. Maharashtra State Cooperative Land Development Bank Ltd (LDB) Organization 4. LDB was registered in December 1935 and its operations originally covered areas which now form parts of the States of Gujarat and Mysore. The remaining outstanding loans in Mysore were transferred to the Mysore Central Cooperative Land Development Bank in 1970, and those in Gujarat to the Gujarat State Cooperative Land Development Bank in LDB's head office is in Bombay, the State capital, and it also controls Primary Bank operations through regional offices based in the divisional headquarters of Bombay, Poona, Aurangabad and Nagpur.

82 ANNEX 4 Page 2 Board and Management 6. LDB is regulated by the Maharashtra Cooperative Societies Act of Under the General Body, with powers equivalent to an annual general meeting of shareholders in a joint stock company, LDB's affairs are directed by a board which may not exceed 40 and which, as of June 30, 1971 had 30 members. These comprised 20 members elected by the Primary Banks, 5 representing non-borrowing shareholders and 5 members ex-officio (the Commissioner aad the Joint Registrar of Cooperative Societies, the Joint Director of Agriculture, the Managing Director of the State Cooperative Bank and the Managing Director of LDB itself). To facilitate administration, most of the Board's power devolves to four committees. 7. The Managing Director is LDB's chief executive officer, the present incumbent being on secondment from the Reserve Bank of India (RBI). Under him is the Manager, on secondment from the State Cooperative Department, and the Chief Technical Officer who recently assumed responsibility for the control of technical staff. While the three appointments were made from outside specifically to strengthen LDB's management, it would be desirable for staff continuity and morale that consideration in future be given to training members of LDB's own staff to fill at least one of these senior positions in due course. LDB has a total staff of 450 of whom 40 are of managerial status; 18 are qualified in engineering or agriculture and these form the technical cell. In addition, the Primary Banks together employ a further 32 qualified technical staff. 8. As in the case of similar banks elsewhere in India, LDB has responded quickly to the idea that it should have sufficient qualified technical staff to help prepare development schemes, to assess the reliability of appraisals made by consultants or staff of Government's technical departments and generally advise management on technical matters. Now there is a danger that such technical staff will become too large and, with ill-defined objectives, will tend to become involved in basic technical appraisal work which properly should remain the responsibility of the State Government. At the same time it is evident that too many of the schemes submitted by the Primaries to LDB for approval (i.e. for loans of over Rs 10,000 each) are formally approved without technical review. It is therefore important that LDB should give careful attention to the functions of both its own and the Primaries' technical staff and organize their activities in such a manner that duplication is avoided and that sound technical advice can be given on schemes which have to be approved by LDB. Source of Funds 9.. As an apex organization, LDB's share capital is contributed by the Primary Banks (at the rate of 5% of borrowings from LDB) and the State Government, the proportions being subject to periodic review by RBI. As of Jime 30, 1971 LDB's total subscribed capital was Rs 89 million (against Rs 100 million authorized), of which the State Government's contribution was Rs 11 million or about 12%.

83 ANNEX 4 Page In addition to the short-term finance provided by the Maharashtra State Cooperative Bank (which is essentially a short-term lending institution), LDB's borrowings derive from the issue of debentures. These are guaranteed by the State Government as to the payment of interest and repayment of principal and are secured by the mortgages financed from the proceeds of a particular debenture issue. As in the case of similar banks elsewhere in India, LDB floats three types of debentures: (a) Ordinary or Regular Debentures. These debentures area purchased mainly by various institutions such as the RII, the Life Insurance Corporation in India, the State Bank of India, land development banks in other states (from their sinking funds) and the State Government, the balance being sold on the open market. In 1969/70 the average cost of borrowing on ten- and fifteen-year debentures was 6.1% per annum and the interest rate on such government guaranteed borrowings was expected to increase by 1/4% during 1970/71. (b) Rural Debentures These are sold only to individuals since their purpose is to encourage the mobilization of local savings. To stimulate their sale, RBI subscribes in the ratio of eight to every seven rural debentures sold to private persons and receives interest at 1% less than the regular rate. Hitherto, as government guaranteed securities, the interest rate was limited to a maximum of 6-1/4% per annum but early in 1971 the RBI agreed to permit land mortgage/development banks to issue bonds on their own security (i.e. without Government guarantee) without interest rate restriction. At the same time the RBI has announced that in future land mortgage/development banks must issue rural debentures to the extent of a prescribed proportion of their ordinary debenture programs or forfeit a part of the official support for these programs. In 1970/71 the prescribed amount of rural debentures is 2-1/2% of the ordinary program, increasing to 5% in 1971/72. (c) Special Debentures. These debentures are issued for financing agricultural projects approved by the Agricultural Refinance Corporation (ARC). They are subscribed by ARC and the State Government in proportions determined by ARC which are currently 9:1 for minor irrigation schemes and 3:1 for other schemes. Interest paid on these debentures is also decided by ARC and the present rate is 6-1/2% per annum. LDB's borrowing may not exceed 20 times paid-up share capital and reserves. 11. The following table shows the growth of LDB's outstanding debenture borrowings as of the dates shown (Rs million):

84 ANNEX 4 Page 4 June 30, 1969 June 30, 1970 June 30, 1971 Ordinary Debentures , ,319.6 ]Rural Debentures Special Debentures Total , ,448.4 Significant in the above table are the relatively small amounts raised through rural debentures (LDB's quota in is Rs 5.9 million). It is estimated 1:hat as of June 30, 1971, farmers' direct contribution to the LDB system l:hrough rural debentures and share-holdings was about Rs 177 million. The above table also shows that ARC's contribution to LDB financing (through t:he special debentures) has not been significant to date, and it has thereiore had relatively little influence on LDB policies and procedures. C. Primary Land Development Banks Clrganization and Management 12. Unlike most other land development bank systems in India, the P'rimary Banks in Maharashtra are organized on a district basis and not on the smaller administrative unit of a taluk (tehsil). There are thus only 27 Primary Banks in the State and, although they operate through branches in the taluks (as of June 30, 1970 there were a total of 252 branches), the large operating unit has helped develop a stronger financial base at the Primary level. 13. Membership in the Primaries is of two types. First, the borrowing (or A Class) membership is open to individuals and cooperatives (who must be landowners) and second, the associate (or B Class) membership which exists to provide support for the movement without borrowing rights. As of June 30, 1970 total membership was 568,000 of which 500,000 comprised A class members. 14. The direction and management of eacb Irimary follows the LDB pattern ulth overall control vested in the general meeting, and direction exercised by a board of elected members. The manager of each Primary is appointed by the Board and their quality is variable. As part of the general need to improve the quality of management, it would be desirable that the LDB system in Maharashtra follow the practice adopted in other states of requiring the managers of Primaries to be on the regular staff of the apex bank and therefore acceptable to it.

85 ANNEX 4 Page The Primaries main independent functions are the approval of loans (of up to Rs 10,000 without further authority), the appointment of staff and the declaration of dividends. Their main activities are the appraisal of loan applications, disbursement of approved loans and control of utilization. 16. Three categories of staff are involved in the Primaries' work. First there is the Bank's own supervisory staff who are mainly concerned with the processing of loan applications and the administration of disbursements. Second is the staff of the State Government's technical departments (e.g. agriculture and public works) who carry out the technical evaluation of individual schemes. Third is the Government's Cooperative Department staff who exercise the statutory audit and other regulatory functions and are to some extent concerned with land titles. Because of the close involvement of Government staff, the District Collector is concerned with coordinating the various activities of the Primary Bank. Sources of Funds 17. The Primaries' main sources of funds are members' share capital, undistributed profits and loans from LDB. Each Primary Bank has its own share capital and borrowers are required to hold share capital to the extent of 10% of the value of their loans. Similarly, Primaries must invest in LDB shares to the extent of 5% of their borrowings therefrom. The share capital contribution required from members and the 5% retained by the Primary Banks constitute the highest levels existing among the land mortgage/development banks in India, the more usual practice being a total 5 or 6% share capital requirement of which all but 1% is usually re-invested in the apex bank. As a result of the equity arrangements in Maharashtra, the Primary Banks have relatively large resources of their own and this in turn has made them more independent of LDB. It has also enabled the Primaries to maintain a a higher level of repayments to the apex bank than that of ultimate borrowers to them (para 26). D. Overall Lending Procedures and Operations Loan Purposes 18. The Primary Banks lend for a wide range of agricultural purposes on a medium- and long-term basis. These purposes include: (a) The construction, improvement and major repair of minor irrigation works. (b) Land drainage, reclamation and improvement. (c) Construction of farm buildings (excluding housing). (d) Purchase of farm machinery including tractors and implements.

86 ANNEX 4 Page 6 (e) Purchase of land occupancy rights and redemption of mortgages. (f) Such other purposes as the Board may determine to be for land improvement or agricultural production. 19. Because of the shortage of funds, LDB has laid down a maximum loan limit of Rs 20,000 for a well and Rs 45,000 for farm mechanization. In the case of well investments, however, the maximum amount can be increased without limit providing the appraising technical officer certifies that this would be justified. I.ending Procedures 20. Applications for a loan have to be made to the Primary Bank of which the applicant is a member and are registered in chronological order. Apart from the technical feasibility of the proposed investment, the loan aippraisal consists essentially of an assessment of the prospective borrower's repayment capacity, a valuation of his land and an examination of his land title (the latter is established by a public inquiry conducted by an officer of the State Cooperative Department). 21. Land is required as security on all loans and, hitherto, LDB has established the land value on the traditional basis of taking a multiple of the annual land revenue payable. In the case of investments in minor irrigation and farm mechanization, the multiple is five hundred and, in addition, the cost of the proposed investment is added; for other investment purposes the multiple is 300. Because the system is complicated and is based on an outdated land revenue assessment, ARC is, as a matter of general policy, requiring land mortgage/development banks to value land at its post-development worth which can be done by taking the sale price of comparable land in the area. It is recommended that this procedure be adopted in Maharashtra. At present the loan limit is 50% of the value of land offered as security, but this criterion could be an unreasonable constraint in the case of farmers with small holdings. Therefore, consideration should be given to increasing the limit to 75% of the developed value of land. 22. On completion of the appraisal procedures, the application is submitted to the managing committee of the Primary Bank which may approve 1oDans up to Rs 10,000 without further reference; above this amount but below Rs 20,000 loans have to be authorized by LDB 's regional committee and for Rs 20,000 and above by LDB's head office. When a loan has been appraised, d isbursements are made to the third parties concerned in the case of the purchlase of land, tractors or machinery or of expenditures for land development or well drilling by contractors; loans for other purposes are disbursed in installments after confirmation of proper utilization has been obtained. ALL payments are made by checks drawn on the bankers of the Primaries, and borrowers' investments are inspected after disbursement. LDB subsequently

87 ANNEX 4 Page 7 advances loans to the Primaries against the security of mortgages collected by them, LDB's loan terms matching those of the Primaries' lending to their members. Lending Terms and Interest Rates 23. As for similar banks elsewhere in India, a borrower's share contribution to his Primary in effect represents his down payment against a loan. With the equity contribution at 10%, farmers in Maharashtra are thus in this respect making a greater contribution to the mobilization of local resources than elsewhere in India. Loan terms are a maximum of 15 years for soil conservation and land development schemes, 13 years for lift irrigation schemes and 12 years for dugwells. The relatively low discharge from many dugwells has been advanced as an argument in favor of long maturities on loans for this type of investment. However, adherence to sound technical criteria would eliminate the need for long repayment terms and would reduce the risk of LDB financing sub-economic wells. 24. In January 1967, the State Government discontinued the payment of interest subsidies on various types of loans amounting to about 3% per annum, though the subsidy is still paid to LDB on loans made before that date. The present lending rate from the Primaries to individual farmers is 9% per annum on all investments. LDB refinances the Primaries at 7-1/4% per annum providing them with a substantial margin of 1-3/4% and leaving LDB with a margin of just over 1%. The latter is inadequate to meet the cost of an increasing staff and also provide reasonable profits. Furthermore, the lending rate of 9% does not, in the present India conditions, permit a worthwhile mobilization of rural savings. Lending Operations 25. LDB's loan portfolio has risen sharply over the last three years, from Rs 672 million as at June 30, 1967 to Rs 850 million the following year and Rs. 1,042 million as at June 30, 1970, giving it the largest portfolio of any land mortgage/development bank in India. About 85% of LDB's lending has been for minor irrigation investments or connected purposes; lending for farm mechanization has been small and represents only 2% of the total. The Primary Banks are currently making about 90,000 loans annually. E. Overall Operational Results Repayment Arrears 26. The Maharashtra LDB system has for many years had a poor record of loan repayments. The following table shows the arrears by amount and also as a percentage of total collections due (principal and interest) from ultimate borrowers to the Primary Banks and from the Primary Banks to LDB over the last 10 years.

88 ANNEX 4 Page 8 Arrears to Primaries Arrears to LDB Year Rs M % of total due Rs M % of total due n.a. n.a The above table shows the following: (a) Although there had been a general improvement in recent years, the position deteriorated again from 1969/70 and in 1970/71 overdues assumed serious propertions. In part this situation is attributable to severe drought conditions which prevailed in Maharashtra during 1970/71 (see Appendix 4-1) but other arrears bave continued to rise. (b) Primary Banks hitherto have been able to achieve a much higher level of repayments to LDB than their own recoveries from ultimate borrowers. This has been possible because of the magnitude of the Primaries' own resources which they have in part utilized to meet obligations to LDB. However, the crop losses in had a strong effect at this level also, resulting in overdues of 34%. 28. Within the 53% average arrears position of the Primary Banks at Jute 30, 1971, 14 of the 26 Banks had overdues of more than 50%, and all but one of the 21 Banks which fall within areas of proposed Project lending had overdues of more than 25%. A number of reasons have been given for this situation, and although it is not possible to attribute varying degrees of responsibility, the following have all contributed to some extent:

89 ANNEX 4 Page 9 (a) Inadequate lending practices in the past based on low technical criteria and weak appraisals. This has applied particularly to dugwells with the result that many wells have failed to discharge adequate water to provide the expected incremental income. It has to be emphasized that for such wells to be bankable they must be based on criteria which will ensure a sufficient discharge to meet irrigation requirements through both kharif and rabi seasons annually. The proposal widely discussed in Maharashtra that such wells should have a low discharge adequate only as an insurance against inadequate rainfall in kharif and providing sufficient water for rabi in perhaps 7 years out of 10 is not an acceptable proposition for a credit project. If adopted it would also result in over-investment in wells. (b) Until 1967 LDB imposed loan limits on well investments which resulted in many investments remaining unfinished. (c) Droughts particularly in 1970/71, and heavy rainfall in late 1970 which damaged several crops. (d) The Primary Banks' failure to pursue an active collections policy. To some extent this may have been encouraged by their relatively large resources which reduced the pressure to collect. Also, the expanding lending program probably diverted staff from collections. Some political pressures may have discouraged repayments, particularly at election times. (e) Lack of support from the district administrations in initiating foreclosure proceedings against long-outstanding offenders. Although local conditions often make it difficult to sell all land acquired in this way, it is essential that Primary Banks make an example of at least the worst offenders. 29. Because of their overdues, five of the 21 Primary Banks which would be involved in Project lending had overdues as of June 30, 1971 in excess of their paid up capital and reserves (which taken together usually amount to about 6% of total borrowings). This did not necessarily mean, however, that these Primaries were insolvent because all loans are secured by mortgages and are therefore technically recoverable. Nonetheless, Primary Banks have experienced some difficulty in obtaining realistic market prices on land where they have had to foreclose and with an increasing volume of foreclosed loans this problem could become more acute. Therefore not only are present overdue levels unacceptable high to justify a major lending program under an IDA Project but some new capital injection is essential. This is necessary both to strengthen the Bank's financial position and also to ensure a sufficient capital base to permit the required future borrowing in the event of some existing equity having to be written off against irrecoverable loans. Although the State Government is only a minority shareholder in LDB, LDB's operations are intermixed with it and the State Government is also a

90 ANNEX 4 Page 10 guarantor of most of its debenture issues. It is therefore appropriate that the State Government should assist LDB at the present time. Rehabilitation of the LDB System 30. In order to provide the LDB system with a sound structure adequate to administer the Project and channel IDA funds, the State Government and LDB in consultation with ARC are therefore implementing a financial and managerial rehabilitation program, which has been agreed upon after discussions with IDA. The principal features of the program are as follows: (a) Financial Rehabilitation The main purposes is to reduce overdues to not more than 25% of the June 30, 1971 demand after deducting overdues attributable to drought. To this end the State Government has agreed to contribute capital to all 21 Project Primary Banks to the extent necessary to meet this criterion as at June 30, In addition however, the 25% maximum overdue position must also be met against the current year's demand and the State Government will similarly contribute capital to the extent necessary so that at least 15 of these Primaries qualify (including specifically the Jalgaon, Nanded and Parbhani Banks through which much of the Project lending will be concentrated). Based on the June 1971 overdues, the State Government's contribution is estimated at Rs 34 million (US$4.7 million) and in addition it will provide guarantees of Rs 21 million (US$2.9 million) to cover half the amount of drought overdues (Appendix 4-1). The capital contributions will be redeemed and the guarantees reduced as recoveries are made. (b) Collection Program With the cooperation of the State Government including the provision of additional recoveries staff and improved foreclosure procedures, the LDB system has started a collection campaign to recover past overdues in accordance with scheduled timetables (Appendix 4-2) and ensure satisfactory repayment levels in future. ARC will review the recovery performance of each Primary and, subject to IDA agreement, will withhold Project refinance from any Primary which fails to make satisfactory progress on recovering amounts overdue on June 30, 1971 or which incurs a default rate of more than 25% of payments becoming due in any subsequent year. (c) Managerial Rehabilitation Where necessary, boards of directors will be reconstituted and management replaced in Primaries according to a plan to be sent to the Association by April 30, LDB will

91 ANNEX 4 Page 1 1 eventually employ all managers and, as appropriate, other staff of Primaries. Training courses are being established for managers and staff of the LDB system to introduce new appraisal and lending techniques. Those for sernior executives of LDB and key officers of the Primaries would be completed by the date of credit effectiveness. 31. The above measures, which were agreed at negotiations are expected to result in a satisfactory rehabilitation of the LDB system by September 30, 1972, the proposed date of credit effectiveness. By that date all 21 of the Project Primaries would in effect have had their overdues reduced to acceptable levels and the proposed capital injections would have enabled them to reduce the amount of their overdues to the apex bank to not more than 19%. Improved collection methods described above should have resulted in all the 21 Primaries meeting the 25% criterion on current year's demand without further capital contributions from the State Government. At the same time the financial position of the Project Primaries will have been strengthened and each will have an adequate capital base to permit the further borrowing required under the Project. These measures for the 21 Banks will also be sufficient to ensure an adequate strengthening of the whole LDB system though the State Government has also agreed to take early and similar measures for the five banks which would not be involved in Project lending. Profits 32. LDB's accounts show that until 1970/71 interest payments from the Primary Banks (as against repayments of principal) have been maintained at a high level and until that year LDB has not therefore suffered a significant loss of income. Its profits have however been low when compared with similar banks elsewhere in India, mainly because of its low interest margin at about 1.1% per annum (in 1970/71). The following table shows LDB's expenditures, income and profits, also expressed as a percentage of average funds employed, during the three years to June 30, 1971: 1970/ / /70 Average Funds Rs 1,061 million Rs million Rs 1,580 million Employed % of aver- % of aver- % of aver- Rs M age funds Rs M age funds Rs M age funds Expenditures: Interest Other Total Expenditures Profit Total Income

92 ANNEX 4 Page 12 LDB's profits, which have declined as a percentage of capital employed over each of these years, have been sufficient to maintain a 4% dividend (but in 1970/71 with only a small margin after making the statutory transfers to reserves). In 1970/71 profits at 0.35% of average funds employed compared with 0.42% for the Tamil Nadu LDB and 0.87% for the Andhra Pradesh LMB. It is important that LDB increase its profits, and to do this it will be necessary to increase its interest margin. Appendixes 4-2 and 4-4 give summarized statements of LDB's net income and balance sheets, and indicative projections of its future financial position are given at Appendixes 4-3 and At present, the LDB system obtains a margin of 2.5% (borrowing from ARC at 6.5% and lending to farmers at 9%) on lending similar to that proposed under the Project. As part of a general review of the agricultural interest rate structure, consideration is now being given in India as to whether this margin is likely to be adequate in future to meet the expenses of LDB's and provide them with sufficient profits and reserves. For the time being therefore, it is not intended that the 9% lending rate to ultimate borrowers be increased. Within the 2-1/2% margin however, the apex bank at present retains only 3/4% and this should be increased to at least 1% to meet higher costs and assist in enhancing the present inadequate profit levels. 34. The accounts of LDB and the Primary Banks are audited by independent accountants of the State Cooperation Department in accordance with the practice which is common throughout India. Apart from the delay in preparing a Eull analysis of the arrears position, LDB's records and accounts appear c.omplete and well maintained. February 11, 1972

93 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT MAHARASHTRA STATE COOPERATIVE LAND DEVELOPMENT BANK LTD Analvsis of Overdues and Capital Contribution for Primary Banks as of June 30, 1971 (Rs '000) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) O v e r d u e s State Government Participation A Prolect Total Foreclosed Drought Under Three Three Years % Overdue Capital Guarantee on Residual Residual Overdues Primary Bank Demand Loans Induced Years and Over Total to Demand Contribution Drought Overdues Overdues as Percent Demand (8)-(4)-.25(2) (8)-(4)-(9) (11)/(2) Nasik 15, ,702 2,493 7, , , Ahmednagar 18,598 1,783 2,341 3, , ,383 1,170 4, Satara 13,095 1, , , , Sangli 20,382 1, , , , , Kolhapur 14, ,740 1,082 4, , , Sholapur 15, ,564 1, , ,282 2, Poona 11, , , Bhandara 3, Nagpur 5, , , Amravati 8, , , ,900 1, Parbhani 7, ,702 1,374 1,399 4, , , Jalgaon 16,377 1,400 1,312 3,569 4,221 10, , , Nanded 12,069 4,993 1,467 2,556 1,305 10, , , Wardha 4, , , , Dhulia 18,357 4,044 1,627 2,857 2,940 11, , , Akola 11,059 3,335 1,071 2,642 1,157 8, , , Buldana 7,897 1,505 2, , ,475 1, Yeotmal 8,700 1,209 2,116 1,317 1,082 5, ,433 1,058 2, Aurangabad 22,532 3,018 7,157 3, , ,504 3,578.5, Bhir 8, , , ,261 1, Udgir 7, ,894 1, , , , Subtotal , , , B Other Primary Banks Osmanabad 10,810 4,513 5, , Ratnagiri Rolaba 2, Thana Chandrapur 3, , , Subtotal 18,902 na 5,267 na n Total 270,012 na na 53 34,243 21, February 10, 1972

94 INDIA M6AIRARSlTRA AGRICULTURAL CREDIT PROJECT M&JAhA_hTRA STATE COOPEPATIVE LND DEVELOPlfENT BANK LTD Schedule of Recovery of Overdoes for Pri-ary Banks Involved in the PrO-ect Primary Rack Recovery Pro-ra for Foreclosed Loans Recovery Progra- for Drought Overdues Recovery Program fec Other Overd-es Total Overdoes on After After Afte 6/30/ / / / /75 6/30/75 Total 1971/ / / /75 6/30/75 Total 1971/ / / /75 6/30/75 Tstal Nasik 7, ,300 1,300 1,400 2,013 6,213 Ahueduagar 8, , , ,000 1, ,200 4,200 Satara 4, , ,235 Sangli 7, , B32 1,50D 1,500 1, ,817 Kolhp-r 4, ,250 1, ,822 Sholapur 7, ,000 1,000 1,000 1, , P.o.. 3, ,553 Bhaudar l Nagpur 2, , so Asuravati ,000 1,000 1, , P-rbhani 4, , ,373 2,773 Jalg.on 10, , , ,500 1,500 1,000 3,290 7,790 Nanded 10, ,200 1, ,493 4, , ,861 3,861 Wardha 2, , Dhulin 11, ,100 1, , , ,000 1,000 1,000 2,297 5,797 Akoln 8, ,000 1, , , ,299 3,799 Buldhana 5, , , Yeotusal 5, , , S ,399 Aura-gabad 14, ,018 1,600 1,600 1, , ,429 4,129 *oi6 Bhir 6, ,000 1,000 1,000 1, , Udgir , ,716 Total _ _ , ,925 12,975 11, ,492 February 10, 1972

95 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT MAHARASHTRA STATE COOPERATIVE LAND DEVELOPMENT BANK LTD CONDENSED STATEMENTS OF NET INCOME INCOME 1966/ / / / /71 X of % of % of % of % of Total Total Total Total Total Rs M Income Rs M Income Rs M Income Rs M Income Rs M Income Interest and Dividends Received Miscellaneous Total Income EXPENSES Interest Paid on Debentures and Loans Discount Brokerage and Commission Establishment Costs Other Expenditures ; 4.1 Total Expenses NET INCOME / Of which Rs 58.5 million represented interest on loans and advances and Rs 5.5 million interest on sinking fund and other investments. x 2/ Of which Rs 62.2 million represented interest on loans and advances and Rs 11.8 million interest on sinking fund and other investments. 3/ Including a provision of Rs 3.1 million for overdue interest. February 10, 1972

96 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT MAHARASHTRA STATE COOPERATIVE LAND DEVELOPMENT BANK LTD PROJECTED STATEMENTS OF NET INCOME 1971/ / / /75 b of % of % of % of Total Total Total Total Rs M Income Rs M Income Rs M Income Rs M Income INCOME Interest Received on: Project Loansl/ 2/ Other Loans and Investments Total Interest Received Miscellaneous Income Total Income EXPENSES Interest Paid on: Loans on Amount of Projec D X Other Debentures and Loans Total Interest Paid Establishment Costs Other Expenditures Total Expenses NET INCOME / Assumes 7 3/4% interest per annum. 2/ Assumes an average of 7 1/4% interest per annum on loans made to June 30, 1971, 7 1/2% on loans made in 1971/72 and 7 3/4% on loans made thereafter: interest on investments rising from 5% in 1970/71 to 6% in 1974/75. 3/ Assumes 6 1/2% interest per annum. 4/ Assumes an average of 6.1% in 1970/71 rising to 6.3% in 1974/75. February 10, 1972

97 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT MAHARASHTRA STATE COOPERATIVE LAND DEVELOPMENT BANK LTD CONDENSED BALANCE SHEETS June 30, 1966 June 30, 1967 June 30, 1968 June 30, 1969 June 30, 1970 June 30, 1971 Rs M Rs M Change from Rs M Change from Rs M Change from Rs M Change from Rs M Change from previous previous previous previous previous date date date date date Rs M _ Rs M Rs M Rs M Rs M ASSETS Cash on Hand and with banks (20.3) Investments Loans to Primary Banks , , Other Assets (0.4) TOTAL ASSETS , LIABILITIES AND EQUITY CAPITAL Debentures , , Loans and Overdrafts (14.7) (37.5) (8.5) Other Liabilities (21.4) TOTAL LIABILITIES , , , Capital Equity: Paid-up Share Capital Reserves and Net Income TOTAL CAPITAL TOTAL LIABILITIES AND EQUITY CAPITAL , February 10, 1972

98 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT MAHARASHTRA STATE COOPERATIVE LAND DEVELOPMENT BANK LTD PROJECTED BALANCE SHEETS June 30, 1972 June 30, 1973 June 30, 1974 June 30, 1975 Change from 1/ Change from Change from Change from Rs M Previous Date Rs M Previous Date Rs M Previous Date Rs M Previous Date ASSETS Cash on hand and with banks (2.4) (15.5) Investments 2/ Loan to Primaries: Project Other 1, , , , Other Assets TOTAL ASSETS 2, , , LIABILITIES AND EQUITY CAPITAL Debentures: Project Other 1, , , , Loans and Overdrafts (20.0) Other Liabilities TOTAL LIABILITIES 1, , , , Equity: Paid-up Share Capital Reserves: X At beginning of year x Add Net Income Total Available Dividends Paid>/ At End of Year Total Equity TOTAL LIABILITIES AND EQUITY , , , / See Appendix / Assumes about 80% of Project lending. 3/ Assumes 5% paid in 1971/72, 6% i.n 1972/73 and 7% in 1973/74 and 1974/75. February 10, 1972

99 ANNEX 5 Page 1 INDIA MAHARASHTRA AGRICULTURAL CREDIT PROJECT Commercial Banks Operating in Maharashtra (as of April 1971) Number of Nationalized Banks Branches Allahabad Bank 13 Bank of Baroda 95 Bank of India 91 Bank of Maharashtra 179 Canara Bank 48 Central Bank of India 105 Dena Bank 90 Indian Bank 14 Indian Overseas Bank 17 Punjab National Bank 47 Syndicate Bank 27 Union Bank of India 94 United Bank of India 4 United Commercial Bank 38 State Bank of India 221 State Bank of Hydrabad 56 State Bank of Bikaner 6 Jaipur 7 State Bank of Indore 2 State Bank of Mysore 1 State Bank of Sauashtra 1 State Bank of Travancore 1 Total 1,151

100 ANNEX 5 Page 2 Number Banks Under Private Ownership Branches of Sangli Bank Ltd. 43 United Western Bank Ltd. 47 Belgaum Bank Ltd. 14 Ratankar Bank Ltd. 9 Ganesh Bank of Kuruwadi 2 Bank of Karad Ltd. 10 Andhra Bank Ltd. 2 ViJaya Bank Ltd. 4 Miraj State Bank Ltd. 9 National and Grindlays Bank Ltd. 12 American Express International Banking Corp. 1 Bank of American Trust & Savings Association 1 Banque National de Paris 2 Bank of Rajasthan Ltd. 2 Bank of Tokyo 1 British Bank of Middle East 1 Canara Banking Corporation 4 Chartered Bank 5 Eastern Bank Ltd. 1 First National City Bank 3 General Bank of Netherlands 2 Habib Bank Ltd. 1 Hindustan Mercantile Bank Ltd. 1 Hindustan Commercial Bank Ltd. 2 Hongkong and Shanghai Banking Corporation 1 Mercantile Bank Ltd. 6 Mitsui Bank Ltd. 1 New Bank of India Ltd. 1 Oriental Bank of Commerce Ltd. 1 Total 189 Note: All of the preceding banks are scheduled, i.e., are included under the Second Schedule to the Reserve Bank of India Act, They are entitled to certain borrowing facilities from the Reserve Bank of India. Febiruary 11, 1972

101 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT DETAILS OF ESTIMATED PROJECT COST Unit First Year Second Year Third Year Total Project Cost Units Total Cost Units Total Cost Units Total Cost Units CZst 7 (Rs M) (Rs M) (Rs M). TigM) 1. Minor Irrigation Dugwells Lift 16.8 _ _ 8h.0 Tubewells 60, Total Land Development, Total Lending Program Project Equipment 1/ Drilling Rigs Earth-Moving Machinery Hydrological.quipment Total _ - _ Consultancy Services 1/ TOTAL PROJECT COST - - _ _ / For details see Appendix 6-2 February 10, 1972

102 I N D I A MAHARASHTRAGRICULTURAL CREDIT PROJECT DETAILS OF PROJECT EQUIPMENT AND CONSULTANCY SFR.VCES COSTS Unit CIF Spare Unit Price Unit Local Unit Total Total Imported Number Price Parts With Spares Dist. Cost Cost Cost Component (Rs) Rs) (RT (Rs (Rs '000) (Rs '000) A. Project Eoripment 1. Drilling Rigs Hammer Drills 4 650,000 98, , , , ,000 Total ,600 3, Earbh Moving Machinery Elevator Scrapers ,000 55, ,000 85, ,000 24,400 20,300 Crawlers with Bunding Toolbars ,000 42, ,000 65, ,000 7,800 6,500 Land Planes 20 66,000 10,000 76,ooo 15,000 91,000 1,800 1,500 Total ,000 28,300 Total Project Equipment =37,600 3l300 B. Consultancy Services for Grourndwater Directorate 1/ No. Annual Total Foreign Exchange Number Years Cost Cost Components (Rs)' (Rs'000) (Rs '000) Chief Advisor , Assistant Advisors ,000 1,400 1,000 Gaging Equipment Total Consultancy Services - - 3,200 2,300 1/ Personnel costs include salaries, on-costs, travel and consultancy overheads. December 6, 1971

103 INDIA MAHARASRTRAGRICULTURAL CREDIT PROJECT ESTIMATED SCHEDULE OF DISBURSEMENTS (CUMULATIVE) Quarter 1972/73 Ending Lending Program Other Investments Minor Land Equip- Consultancy Total Irrlgation Development Total ment Services Total Disbursements (Rs M) Rs M) T(Rs M) (Rs M) (Rs M) (Rs M) (Rs M) (US$ M) 1973/ / /76 September 30, 19722/ December 31, March 31, June 30, September 30, December 31, March 31, June 30, h 12.7 September 30, December 31, March 31, June 30, 19752/ September 30, December 31, / h / Estimated date of credit effectiveness. 2/ Estimated date of Project completion. 3/ Closing Date. February 10, 1972

104

105 ANNEX 7 INDIA MAHARASHTRAGRICULTURAL CREDIT PROJECT Present and Proposed Interest Rates for Project Institutions The following table gives the present (in brackets) and proposed interest rates and margins (expressed as % per annum) for Project institutions. ARC Margin Increase Borrowing Rate Lending Rate Margin (Decrease) Project ( -) 5.4/1 t -) 6.5 ( -) 1.1 Other (5.0)/2 5.0/2 (6.5) 6.5 (1.5) 1.5 LDB /3 Project ( -) 6.5 ( -) 7.5 ( -) Other ARC (6.5) 6.5 (7.25) 7.5 (0.75) Other Schemes (6.1)/2 6.25/2 (7.25) 7.5 (1.15) Primary Banks /4 Project ( -) 7.5 ( -) 9.0 ( -) Other ARC (7.25) 7.5 (9.0) 9.0 (1.75) 1.5 (0.25) Other Schenes (7.25) 7.5 (9.0) 9.0 (1.75) 1.5 (0.25) /1 Weighted average of 5.25% and 5.75%. /2 Average figures. /3 Participating commercial banks would also receive funds from ARC at an interest rate of 6.5% and would lend to ultimate borrowers at 9% giving them a margin of 2.5% per annum. /4 In addition Primary Banks and commercial banks would retain the proceeds of a 0.5% evaluation fee charged on all investment lending. February 11, 1972

106

107 ANNEX 8 Page 1 INITA MAMARASIWR1A ARTICr,LTUA. CREDIT PROJECT 1 arm Incomes and Financial Rates of Return on Investments 1. lhis Annex is an explanation of the methodology and assumptions adonted in the illustrative farm models (Appendix 8-1), financial rates of rettirn (n(nerdix R-2), and estimated increases in cropped area and production (A.nenpnix 9-) n)ata on costs and revenues are based on present prices. The net incremental nroduction value is based on a comparative static analysis of each indiviaual farm model. 3. Pamily labor has been excluded from production costs. Only hired labor during the neak periods has been included. 4. In the case of minor irrigation investments, farmers are required to make a denosit representing the cost of the electrical connection (TRq 79;nn) to the State Electricity Board to obtain priority for the connection. The deposits would be included in the loans extended to farmers and accordinrly have been included in total Project costs. However, the cost of electric power, at Rs.18fkwh, is considered to be approximately adequate to cover all costs of generation and distribution and, therefore, the connection charge has not been included as an investment cost in the farm models. 5. Winancial rates of return are based on the estimated life of the assetst 7n years in the case of dugwells, tubewells and lift irrigation, and In years in the case of land development. For minor irrigation investments it is assumed that electric pumpsets would be replaced in the 8th and lth vears. fi. Full production increases estimated in Appendix 8-3 would result not onlv from direct effects of the proposed investments but also from the accomranving improved cultivation patterns. They are assumed to occur after a development period of 4 years. 7. Rased on these assumptions, the financial rates of return over the life of the assets would range from 4n to 73%. P. qensitivitv tests have been conducted to demonstrate the effect of a decrease in oroduction value (through lower prices or yields). The resultint rates of return (7) are as given below:

108 ANNEX 8 Page 2 Present production and investment costs -20X gross production value and present investment costs Model T Model I Model III Model IV Model V November 8, 1971

109 I N D I A MAHARASHTRAGRICULTURAL CREDIT PROJECT FARM MODELS: FINANCIAL Model I: Investment: Dugwell Improvement (Rs 4,o00); Farm Size: 4 ha Area Yield Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development -ha ton/ha ^ - - Rs Kharif Pulses Jowar (Irrigated) ,329 1,590 2, , Jowar (Non-Irrigated) (208) Groundnuts Cotton ,211 2, , Chillies Sugarcane / (Harvested in Rabi season) Rabi Groundnut Wheat ,142 1, Vegetables , , Sugarcane ,269 1, Total ,942 4,617 Cropping Intensity 128% 153% Hired Labor (124) (532) (408) I/ Annual Crop December 6, 1971 Total 3,066 5,149 7,342 11,758 4,276 6,609 2,333 ~t00 j ~~~~~~~~~~~~

110 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT FARM MODELS: FINANCIAL Model II: Investment: Dugwell (Rs 1U,500); Farm Sizo: 5 ha Area Yield Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development * ton/ha Rs Kharif Pulses Jowar , , , Cotton , , Groundnut Chillies Sugarcaye / Banana _/ Rabi Groundnut Wheat , Vegetables , ,860-1,282 1,282 Sugarcane _ 1, Banana ,400-4,000-2,600-2,600 Total ,370 Cropping Intensity 1 0, 136 h Hired Labor (656) (656) Total 716 7,026 2,335 16,607 1,619 9,581 7,962 t1. 1/ Annual Crop. December 6, 1971

111 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT FARM MODELS: FINANCIAL Model III: Investment: Tubewell (Rs 57,500); 5 Farms, Size 4 ha Kharif Area Yield. Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development ha ton/ha R s Pulses (140) Jowar , , , Baira (58) Groundnut (204) Cotton , , Chillies , , Sugarcane 1, Banana 1/ Rabi Groundnut Wheat , Vegetables , Sugarcane ,484-2,538-1,054 1,054 Banana ,400-4,000-2,600 2,600 Total ,410 - Cropping Intensity 100% 145% Hired Labor (740) (740) a td Total 561 7,150 1,846 16,003 1,285 8,853 7,568 a ]/ Annual Crop December 6, 1971

112 I N D I A MAHARASHTRA AGRICIJLTURAL CREDIT PROJECT FARM MODELS: FINANCIAL Model IV: Investment: Lift Irrigation (Rs 480,000); h6 Farms, Size 5 ha - Area _ Yield Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development ha - - ton/ha Kharif Pulses Jowar , , ,778 1,150 Groundnut (326) Cotton , ,467 1,000 Chillies Sugarcane / Banana 1, Rabi Groundnut Wheat , Vegetables ,860-1,286 1,286 Sugarcane ,113-1, Banana ,100-6,000-3,900 3,900 Total , Cropping Intensity 102% 14 2/ - Hired Labor (936) (936), > 1/ Annual Crop Total 755 8,365 2,442 18,992 1,687 10,627 8,940 December 6, 1971

113 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT FARM MODELS: FINANCIAL Model V: Investment: Land Development (Rs 4,500); Farm Size 2.5 ha Area Yield - Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Developmant Before Development ha ton-ha RB Kharif Pulses Jowar , Cotton , ,296 1,076 Rice Chillies Rabi Wheat Jowar Rice Vegetables Total ,091 Cropping Intensity 108% 140% Hired Labor - 32 (32) (32) Total 385 2,123 1,197 6, ,279 3,467 a December 6, 1971

114

115 IN D I A ANNEX 8 Appendix 8-2 MAHARASITRAGRICULTURAL CREDIT PROJECT FINANCIAL RATES OF RETURN BY TYPE OF INVESTMENT (Rs) Year I Model I: Investment: Improved Dugwell (Rs 4,000) : Farm Size: 4 ha Net Value of Incremental Production _/ 1,167 1,750 2,333 2,333 2,333 2,333 2,333 2,333 2,333 Capital Investment 4, / Net Incremental Flow (2,833) 1,750 2,333 2,333 2,333 1,083 2,333 1,083 2,333 Financial Rate of Return: 737 with 2017 price or yield decline (on incremental 2 ha): 307, 1) Year 1-507,; Year 2-75%; Year 3 onward full value 2) 50%b of pump and motor Model II: Investment Duawell (Rs 15,500) Farm Size: 5 ha Net Value of Incremental Production 1/ 1,592 3,185 4,777 6,370 7,962 7,962 7,962 7,962 7,962 Capital Investment ,500 2,500 Net Incremental Flow (13,908) 3,185 4,777 6,370 7,962 5,462 7,962 5,462 7,962 Financial Rate of Return: 40% With 20%. price or yield decline: 24% 1) Year 1, 20%; year 2, 4070; year 3, 60%, year 4, 807, year 5 onward full value. Model III: Investment Tubewell (Rs 4,500 t/ Farm Size: 4 ha Net Value of Incremental Production 2/ 1,513' 3,026 4,540 6,054 7,568 7,568 7,568 7,568 7,568 Capital Investment , Net Incremental Flow (9,987) 3,026 4,540 6,054 7,568 6,568 7,568 6,568 7,568 Financial Rate of Return: 51% With 20% price or yield decline: 31% 1) Partial Investment of Total Scheme 2) Year 1, 20%; year 2, 40%7; year 3, 60%; year 4, 80%Z; year 5 onward full value. Model IV: Investment: Lift Irrigation (Rs 10,500)1/ Farm Size: 5 ha Net Value of Incremental Production 2/ 1,788 3,576 5,364 7,152 8,940 8,940 8,940 8,940 8,940 Capital Investment , Net Incremental Flow (8,712) 3,576 5,364 7,152 8,940 6,315 8,940 6,315 8,940 Financial R-te ot Return: 65% With 20% price or yield decline: 38% 1) Partial Inivestment of Total Scheme 2) Year 1, 20%b; year 2, 40%; year 3, 607%; year 4, 80%; year 5 onward full value. Model V: Investment: Land Development (Rs 4,500) Farm Size 2.5 ha Net Value of Incremental Production 1/ 693 1,387 2,080 2,774 3,467 3,467 3,467 3,467 3,467 Capital Investment 4, Net Incremental Flow (3,807) 1,387 2,080 2,774 3,467 3,467 3,467 3,467 3,467 Financial Rate of Return: 60%/ With 207, rice or yield decline: ) Year 1, 207%; year 2, 40%; year 3, 607%; year 4, 80%; year 5 onward full value. December 6, 1971

116

117 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT ESTIMATED INCREASES IN CROPPED AREA AND PRODUCTION Cropped Area Production Increase Increase Before After (Decrease) Before After (Decreased) ha ton - Foodgrains Jowar 101,!50 98,900 (2,550) 117, , ,540 Bajra 3,300 6,000 2,700 1,650 10,800 9,150 Wheat 22,000 45,900 23,900 24,480 64,260 39,780 Rice 2,200 8,800 6,600 1,760 19,800 18,040 Pulses 31,550 22,200 (9,350) 12,620 13, Commercial Crops Total Foodgrains 160, ,800 21, , , ,210 Cotton 61,650 56,o00 (5,650) 28,395 78,400 50,005 Groundnut 14,050 25,250 11,200 12,595 35,575 22,980 Sugarcane 3,600 8,200 4, , , ,500 Banana 4,300 4, , ,000 Vegetables 3,600 18,250 14,650 33, , ,245 Chillies 1,800 12,600 10,800 2,880 20,160 17,280 t B Total Commercial Crops 84, ,600 39, ,350 1,236, ,010 Total All Crops 245,200 61,200 OD December 6, 1971 NOTE: The increases in cropped area and production are estimated at full development (in the fifth year after investment).

118

119 ANNEX 9 INDIA MARARASHTRA AGRICULTTtAL CREDIT PROJECT Economic Rate of Return 1. The economic rates of return from participating enterprises have been calculated as shown in the attached tables. The following principal assumntions have heen made- (a) MorM market nrices as projected by the Trade Policies and Exnort Prolections Division of IBRD's Economics Department have been used to estimate benefits. (b) Current prices net of taxes and duties have been used for investments and price contingencies have been excluded. (c) Water rates on major irrigation schemes have been adjusted to reflect the cost of scheme investment. (d) Family labor has been excluded from production costs. Onlv hired labor during the peak periods has been included. (e) The electricity connection charge has not been included as an investment cost (see Annex 8). 1. Rased on these assumptions, the economic rates of return over the life of the assets would range from 33% to 55%. The effects of possible decreases in production value (through lower prices or vields) have been tested. If gross production value were to decline by 2n% the economic rates of return would range from 15% to 30%. lnvvember R, 1q71

120

121 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT FARM MODELS: ECONOMIC Model I: Investment: Improved Dugwell (Rs 3,850); Farm Size 4 ha Area Yield. Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development ha -ton/ha Rs Kharif Pulses Jowar (Irrigated) ,329 1,590 2, , Jowar (Non-Irrigated) (208) Groundnut Cotton , Chillies Sugarcane Rabi Groundnut Wheat Vegetables , , Sugarcane Total ,942 4,617 Cropping Intensity % Hired Labor (124) (532) (408) Total 3,066 5,149 6,251 10,010 3,185 4,861 1,676 % 1/ Annual Crop. December 6, 1971

122 I N D I A Model II: Investment: Dugwell (Rs 15,350); Farm Size 5 ha MAHARASHTRAGRICULTURAL CREDIT PROJECT FARM MoDELS: ECONOMIC Area Yield *. Costs Gross Production Value Net Production Value Full Full Full Full Full Increrneni Befo-e Development Before Development Before Development Before Development Before Development ---- ha ton/ha Rg Rharif Pulses Jowar , , , Cotton , Groundnut Chillies _ Sugarcane _/ Banana 1/ Rabi Groundnut Wheat Vegetables ,860-1,282,2821 Sugarcane Banana ,400-4,000-2,600 2,600 Total ,370 Cropping Int,ensity 100% 136% Hired Labor (656) (656) N 1/ Annual Crop Total 716 7,026 2,117 14,859 1,401 7,833 6,432 W December 6, 1971

123 I N D I A MAHARASHTRAGRICULTURAL CREDIT PROJECT FARM MODELS: ECONOMIC Model III: Investment: Tubewell (Rs ); 5 Farms, Size 4 ha Kharif Area Yield Costs Gross Production Valueu e Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development ha ton/ha s Pulses (140) Jowar , , , Bajra (58) Groundnut (130) Cotton , Chillies , Sugarcane l/ Banana I/ Rabi Groundnut Wheat Vegetables , Sugarcane ,484-1, Banana ,400-4,000-2,600 2,600 Total ,410 Cropping Intpnsity 100% 145% Hired Labor (740) (740) ' 1/ Annual Crop December 6, 1971 Total 561 7,150 1,682 14,260 1,121 7,110 5,989

124 I N D I A MAHARASHTRAGRICULTURAL CREDIT PROJECT FARM MODELS: ECONOMIC Model IV: Investment: Lift Irrigation (Rs 472,640); 46 Farms, Size 5 ha Kharif Area Yield _ Costs Gross Production Value Net Production Value Full Full Full Full Full Incremental Before Development Before Development Before Development Before Development Before Development -- ha ~ ~~ a - ~ton/a ton/ha Rs Pulses Jowar , , ,778 1,150 Groundnut (214) Cotton , Chillies Sugarcane 1/ _ Banana 1/ Rabi Groundnut Wheat Vegetables ,860-1,286 1,286 Sugarcane ,113-1, Banana ,100-6,000-3,900 3,900 Total , Cropping Intensity 102% 1427/ Hired Labor (936) (936) I > 1/ Annual Crop Total 755 8,365 2,180 17,238 1,425 8,873 7,448 December 6, 1971

125 I N D I A MAHARASHTRA AGRICULTURAL CREDIT PROJECT FARM MODELS: ECONOMIC Model V: Investment: Land Development (Rs 4,369); Farm Size 2.5 ha *.Area _- Yield _ Costs Gross Production Value Net Production Value Full Full Full Full Full I:icrernental Before Development Before Development Before Development Before Development Before Development hatnha tnh Ra Kharif Pulses (3) Jowar , Cotton , Rice Chillies Rabi Wheat Jowar Rice Vegetables _ _ Total ,765 Cropping Intensity 108=/ 1407/ hired Labor (32) (32) December 6, 1971 Total 385 2,797 1,100 5, ,818 2,103 * x

126

127 ANNEX 9 Appendix 9-2 I N D I A MAHARASHTRAGRICULTURAL CREDIT PROJECT ECONOMIC RATES OF RETUPN BY TYPE OF INVESTMENT (Rs) Year Model I: Investment: Improved Dugwell (Rs 3,850) Farm Size: 4 ha Net Value of Incremental Production / 838 1,257 1,676 1,676 1,676 1,676 / 1,676 1,676 1,676 Capital Investment 3, Net Incremental Flow (3,012) 1,257 1,676 1,676 1, , ,676 Economic Rate of Return: W0K With 20% yield or price decline 15% 1) year 1 50%; year 2, 75%; year 3 onward fall value 2) 507% of pump and motor Model II: Investment Dugwell (Rs 15,350): Farm Size: 5 ha Net Value of Incremental Production / 1,286 2,573 3,859 5,146 6,432 6,432 6,432 6,432 6,432 Capital Investment , Net Incremental Flow (14,064) 2,573 3,859 5,146 6,432 4,082 6,432 4,082 6,432 Economic Rate of Return: 33% With 207. yield or price decline 17% 1) year 1, 2074; year 2, 40%; year 3, 607%; year 4, 80%; year 5 onward full value. Model III: Investment Tubewell (Rs 11,440)1/: Farm Size: 4 ha Net Value of Incremental Production 2/ 1,198 2,396 3,593 4,791 5,989 5,989 5,989 5,989 5,989 Capital Investment Net Incremental Flow (10,242) 2,396 3,591 4,791 5,989 5X049 5,989 5,049 5,989 Economic Rate of Return: 41% With 207% yield or price decline 22% 1) Partial investment of total scheme 2) year 1, 20%; year 2, 40%/; year 3, 60%; year 4, 80%; year 5 onward full value. Model IV: Investment Lift Irrigation (Rs )1/: Farm Size: 5 ha Net Value of Incremental Preductian 2/ 1,490 2,979 4,469 5,958 7,448 7,448 7,448 7,448 7,448 Capital Investment X Net Incremental Flow (8,850) 2,979 4,469 5,958 7,448 4,983 7,448 4,983 7,448 Economic Rate of Return: 55% With 20% yield or price decline 302 l) Partial investment of total scheme 2) year 1, 20%; year 2, 40%; year 3, 607%; year 4, 80%; year 5 onward full value. Model V: Investment: Land Development (Rs 4,365): Farm Size 2.5 ha Net Value of Incremental Production 1/ ,262 1,682 2,103 2,103 2,123 2,103 2,103 Capital Investment Net Incremental Flow (3,944) 841 1,262 1,682 2,103 2,103 2,103 2,103 2,103 Economic Rate of Return: 39% With 20% yield or price decline 19% 1) year 1, 20%; year 2, 40%; year 3, 60%; year 4, 80%; year 5 onward full value. February 10, 1972

128

129 ANNEX 10 Page 1 INDIA MAHARASHTR AGRICULTURAL CREDIT PROJECT Comparison of Alternate Transport Means for Sugarcane A. Background 1. The Maharastra State Government has requested financial assistance from IDA to provide some 20 well-established sugar mills with about 1,000 tractors, mainly for sugarcane transport. The proposal is for wheel-type tractor/trailer units which could also be used for farm operations. B. Comments 2. Present means of transportation are bullock carts, tractors and trucks. Limiting factors for the choice of transport means are, firstly, the crushing season which normally should not exceed 180 days from October through April/May and, secondly, the necessity of processing the harvested cane within 24 hours in order to avoid unacceptable loss of sugar content. Bullock carts are only used over short distances (up to 10 km) because of their low carrying capacity and speed. Tractors and trucks are used for longer distances, but information obtained in the field indicates that the transport volume by truck greatly exceeds the volume handled by bullock cart: and tractors. 3. With regard to the advantage of tractors over trucks on deteriorat roads, it appears that, under normal circumstances, the existing road conditions in the sugarcane area, especially during the dry harvesting season, are adequate to allow trucks access to the fields. This assumption is supported by existing transport patterns. 4. The use of tractors for farm operations would be very limited, since the sugar mills would require the use of the tractor/trailer units for transport during the harvesting season which covers, to a great extent, the periods during which tractors could be used for cultivation purposes. C. Comparative Analysis 5. The intention of the following analysis is to compare investments in a tractor fleet and a truck fleet for sugarcane transport. For this purpose, it has been assumed that investments in the sugar industry would

130 ANNEX 10 Page 2 be economically justified. Since sugar processing is an integrated process, benefits for cane transport cannot be determined uniquely and, therefore, a least cost solution has been sought for the transport component. Transport volume and thus benefits would be the same in both cases, although tractors might be used for farm operations to some extent. It has been assumed, however, that these minor additional benefits would be offset by additional truck usage for general cargo after the harvesting season. Therefore only estimated cost streams have been computed and discounted, and the net present values compared. The lowest net present value indicates the preferred alternative. 6. General Assumptions: A sugar cooperative would exp-and its area under sugarcane from about 7,300 ha to about 8,900 ha with-an increase in the corresponding daily crushing capacity from 2,600 tons to 3,250-tons. In addition, the weighing and unloading facilities would be improved to handle the incremental intake of about 120,000 tons of cane in the 180-day crushing season. The road network would be adequate to allow access to sugar fields. 7. Traffic Volume: About 120,000 tons of sugarcane grown in the range between 10 and 40 km around the sugar mill. The average daily volume would be about 670 tons to be hauled over a linear average distance of 25 km. 3.1 Time Limits: Assuming that present means of transport are adequate to handle present production in 180 working days, the additional transport facilities would have to work under the same constraint. In acldition, one transport unit cannot work more than 10 hours per working day. 9. Transport Units: Bullock carts have been excluded from this arnalvsis because of the distances involved and their low carrying capacity. The tractor unit used for comparison would consist of one tractor and four trailers and the truck unit would consist of one truck and two trailers. Two trailers of the tractor unit (one of the truck unit) would be loaded in the field during haulage of the others to the sugar mill. 10. Number of Units Required: Tractor Unit (a) Hauling Distance: 25 km; one-way (b) Tractor Speed: 10 km/hour; loaded 15 km/hour; unloaded

131 ANNEX 10 Page 3 (c) Number of Daily Trips: (i) Travelling time to and from mill: 4.2 hours (ii) Turn-around time at mill: Weighing-parking-uncoupling-coupling: 0.5 hours (iii) Turn-around time at field: Uncoupling-coupling: 0.2 hours (iv) Time required for one round trip: 4.9 hours (v) Trips per day: 2 The tractor unit would travel 100 km per day and haul 18 tons over a distance of 25 km to the sugar mill. For the daily volume of 670 tons, 37 units would be required. Truck Unit (a) Haulipg Distance: (b) Truck Speed: 25 km; one-way 30 km/hour; loaded 40 km/hour, unloaded (c) Number of Dailv Trips: (f) Travelling time to and from mill: 1.5 hours (ii) Turn-around time at mill: Weighing-parking-uncoupling-unloading-coupling: 0.6 hours (iii) Turn-around time at field: Uncoupling-loading-coupling: 1.2 hours (iv) Time required for one round trip: 3.3 hours (v) Trips per day: 3 The truck unit would travel 150 km per day and haul 56 tons over a distance of 25 km to the sugar mill. For the daily volume of 670 tons, 12 units would be required.

132 ANNEX 10 Page Investment and Operating Costs: Tractor TTnit Investment Cost Tractor (1); 35 hp Rs 44,400 Trailers (4); 4.5 ton Rs 24,000 Rs 6 8_ 4 00 Operating Cost Hours operated per season 1,800 h/season Operating Costs per season See Table 1 Life of Assets: Tractor 10,000 hours (6 seasons) Trailer 20,000 hours (12 seasons) Salvage value 20% of original investment Truck Unit Investment Cost Truck (1); 9.5 ton Rs 60,000 Trailers (2); 9 ton Rs 22,000 Rs ~ Operating Cost Hours operated per season 1,800 h/season Kilometers travelled per season 27,000 km Operating Costs per season See Table 1 Life of Assets: Truck 330,000 km (12 seasons) Trailer 330,000 km (12 seasons) Salvage value 20% of original investment 12>. The figures in Appendix 10-1 clearly indicate that a truck/trailer combination is preferable to a tractor/trailer combination under the assumptions made. The main reasons for this result are higher speed, g:reater capacity, and longer lifetime of the trucks. The key variables in this analysis are the distances involved and the mode of operation. Since it: might not always be possible to operate a truck/trailer combination in the sugarcane area, the results have been tested using alternate assumptions concerning the distance and the mode of operation. The results are nresented in the table below:

133 ANNEX 10 Page 5 Comparison of Alternate Means of Transport Under Various Assumptions Alternate Modes Distance from Field Means of Transport to be Chosen of Operation to Sugar Mill Financial Costs Economic Costs Tractor/trailer 25 km Truck/trailer- Truck/trailer VS. Truck/traiter Tractor/trailer 25 km Truck Truck vs. Truck Tractor/trailer 10 km Truck/trailer Truck/trailer Vs. Truck/trailer Tractor/trailer 10 km Tractor/trailer Truck vs. Truck /1 The analysis for this alternative is presented in Appendix The economic analysis is essentially the same and involves primarily corresponding percentage changes in the costs. 13. The results show that over short distances a tractor/trailer fleet would he preferable to a truck (without trailer) operation in financial terms, mainly because of the high taxation on nonagricultural vehicles. This exdlains also why some sugar mills use tractor/trailer combinations to some extent for sugarcane haulage. However, the economic analysis indicates that both a truck/trailer combination and a solo truck operation would he preferable to a tractor/trailer combination, even at 10 km. 14. The foregoing analysis assumes that the mills themselves would own and onerate the means of transport for sugarcane and could, therefore, consider the possibilitv of using a truck fleet for hauling general cargo. In practice, however, a truck fleet would probably stand idle in the off season since nublic carrier licenses are both expensive and difficult to obtain. Therefore the optimum solution under existing conditions might be the rental of trucks on a fixed term basis. November A, 1971

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135 1 N D I A MAHARASIITRA AGRICULTURAL CREDIT PROJECT Net Present Worth of Cost Streams for Transport Alternatives (in Rs) Season lrac-or Unit tnvestments Tractor (1) 44,400 44,400 Trailers (4) 24,000 Salvage Valoe (20X) (8,900) (13,700) Operating Costs (1,800 hi Foel and Lubrication 6,800 6,800 ) 6,800 6,800 (R. 3.70/h) Maintenance and Repairs 7,400 9,800 1/ 7,400 9,800 Insorance (Camp.) ) Drivers Wagrs ) 21,800 21,800 21,800 21,800 ) 21,800 21,800 21,800 21,800 (R. 250/e) 3,000 3,000 3, Clea.er's Wages (Rs 150/rn) 1, Tractor Unit 19,400 21,800 21,800 21,800 21,800 21,800 17,600 21,800 21,800 21,800 21,800 21,800 (13,700) Total Fleet (37 Units) (Rs '000) 2/ _ ( 507) Net Present Value of Cost Stream at Truck Unit Investments Truck 60,000 rrailers (2) 22,000 Salvage Valor (20J) (16,400) Operating Costs (27,000 km) Fuel and Lubrication (Rs 0.21/km) 5,600 5,600 ) Maintenance 2/ 5,000 12,OCO 1/ Tao and Registration 4,500 4,500 ) 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 Insurance 2,500 2,500 Driver' Wages 3,000 3,000 Cleaner's Wages 1,800 1,800 Tru-k UniL 22,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 29,400 (16,400) Total Fleet (Rs '000) 2/ (a) 12 Units 1, ( 197) (b) 24 Units (Without Trailers) 1, ( 300) (a) Net P-resont Valor of Cost Stream at 10!/ z (12 Units) 3,483 (b) Net Present VolIe of a, Cost Stream at 10' x0 (24 Unit,) 6,472 a 1/ Ose set of tires a yer due to higher road u,sae- D/ Including ir6 est19 nts and salvage valve. December

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