Public Disclosure Authorized Public Disclosure Authorized
RESTRICTED Report No.
FLE
.coPY
This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views.
INTERNATIONAL DEVELOPMENT ASSOCIATION
Public Disclosure Authorized
REPORT AND RECOMMENDATION OF THE
PRESIDENT TO THE
EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT
Public Disclosure Authorized
P - 50 3
TO INDIA FOR THE
THIRD INDUSTRIAL IMPORTS PROJECT
August 10,
1966
INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMINDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS 0H A PROPOSED DEVELOPENT CREDIT TO DIDIA FOR A THIRD INDUSTRIAL I1PORTS PROJECT 1. I submit the following report and recommendation on a proposed credit to India in an amount in various currencies equivalent to U.S. $150 million. PART I - HISTORICAL 2. The proposed credit would assist selected industries manufacturing capital goods and agricultural chemicals by providing foreign exchange to pay for a portion of the imports of components, materials, spare parts and balancing equipment which they require to maintain and expand production. In June 1964 and in August 1965 I recommended, and you approved, similar credits to India. It is now clear that those credits have been successful in achieving their primary objective, which was to support and expand production of certain types of capital equipment. It is also evident that a substantial further increase in production can be obtained from existing industrial facilities if additional imports are made available, and that some more general approach is necessary than was possible with the limited resources available from previous industrial imports credits. 3. In recent months the Government of India has announced a number of rnieasures designed to make more efficient use of India's vast productive potential. These measures include a substantial reorientation of agricultural policy, a stepped-up campaign to restrain the growth of population and, in June of this year, devaluation of the rupee along with the first steps toward removal of administrative controls over essential imports.
4.
In support of these new directions of policy I have recommended to the Indian consortium that a total of $900 million be provided to India during the current fiscal year (April 1, 1966 to March 31, 1967). On the basis of what consortium members have already reported to me, I am confident that the full $900 million will be made available to India in appropriate form; indeed, much of this has already been announced and, subject to parliamentary and administrative approvals, the balance will be announced during the next month or two. As I already indicated to you at our meeting on June 28, it is my intention over the next several months to recommend credits totaling $215 million as the Association's contribution to this consortium effort. The present proposal represents the first such recommendation.
5.
The Association has made 19 credits to India, totaling about $676 million and including 4 which are fully disbursed. The Bank has made 35 loans,including 21 which are fully disbursed. The status of Bank loans and IDA credits to India,
-2-
as of July 31, 1966, is sl.%.marized below: Amounts ($ million) IDA
Bank
675.5
1,001.9
Total (less cancellations) Of which has been repaid
269.3
-
Total now outstanding
732.6
675.5
Amount sold Of which has been repaid
105.0 89.3
15.7
Total now held by Bank and IDA
716.9
Of which still undisbursed
189.3
675.5
1/
215.8
2/
1/
including $30 million for the Fourth IISCO Loan, wjhich is not yet effective.
2/
Including $68 million for the Ninth Railway Project, which Credit became effective August 3, 1966, and $23 million for the Beas Equipment Credit, not yet effective.
The following loans made before July 1, 1960, are not yet 6. disbursed: fully
Amount ($ million) Loan Date 11/19 1954 5/29 1957
6/25 1958 7/15 1959
Number 106 16h 199 232
Borrower
Purpose
Tata Power Tata Power Madras Port ICICI
Trombay I Trombay II Equipment Industry II
Loan 16.2
Undisbursed on 7/31 1966
0.04
9.8
0.09
1h.0
0.53 0.01
10.0
-37.
The following loans and credits were approved since July 1, 1960:
Loan or credit Date
7/29 10/28 6/21 8/9 8/17
Borrower
Purpose
Niumber
1960 1960 1961 1961 1961
262 269 3 292 294
India ICICI India India Calcutta
Railways V Industry III Roads Private Coal Mining Equipment II
Amount ($ million) Undisbursed Bank IDA on 7/31 1966
70.0 20.0
1.02 60.o
35.0 21.0
4.55 0.78 8.44
Port
9/6 10/13 11/22 11/22 11/22
1961 1961 1961 1961 1961
8 298 13 14 15
India India India India India
Tubewell Irrigation Railways VI Shetrunji Irrigation Salandi Irrigation Punjab Flood Protection
12/22 2/14 2/28 6/29 7/18
1961 1962 1962 1962 1962
307 19 312 21 23
IISCO India ICICI India India
Coal Mining Durgapur Power Industry IV Sone Irrigation Purna Irrigation
8/8 9/14 9/14 3/22 5/24
1962 1962 1962 1963
24 27 28 36
India India India India
1963
37
India
Koyna Power II Bombay Port Telecommunications I Railways VII Kothagudem Power I
6/5 6/9 7/6 10/26 5/28
1963 1964 1964 1964 1965
340 52 58 67 414
ICICI India India India ICICI
Industry V Industrial Imports I Telecommunications II Railwrays VIII Industry VI
6/11 6/11 8/11 6/29 6/29
1965 1965 1965 1966 1966
416 417 78 88 89
India India India India India
7/7
1966
456
IISCO
6.0
-
4.5
1.11 6.42 0.55
50.0
-
8.0 10.0 19.5 15.0 13.0
13.35 5.22 2.h4 3.27 3.32
17.5 18.0
8.26 11.82
42.0
5.37
18.5 20.0
67.5 20.0
30.0
-
6.34 8.65
90.0 33.0 62.0
-
9.69 -
50.0
48.53
Power Transmission Kothagudem Power II Industrial Tmports II Railways IX Beas Equipment
70.0 14.0
69.25 6.16 58.86 68.oo 23.00
Balancing Scheme
30.0
100.0 68.0 23.0
30.00
-48. In my report on the Ninth Railway Project (IDAR66-13), which was circulated on June 20, 1966, I summarized the current status of projects which have experienced delays in disbursement. There have been no significant changes since then, except with respect to the Power Transmission Project (Loan No.416-IN); the first disbursements of Bank funds for this Project were made only recently, but a mission which has just returned from India reports that the rate of disbursement can be expected to quicken in the course of the next few months, partly as a result of improved procedures for clearance of subprojects and procurement documents. With respect to the Salandi Irrigation Project (Credit No. 14-IN), my memorandum of August 4, 1966 (IDA/R66-18) summarizes proposed new arrangements for its completion. PART II
- DESCRIPTION OF THE PROPOSED CREDIT
9. Borrower:
India, acting by its President.
Amount:
Various currencies equivalent to US $150 million.
Purpose:
To improve the rate of utilization of existing productive capacity and capital equipment in India by increasing the availability of foreign exchange for the import of materials, components, spare parts and miscellaneous items of manufacturing equipment.
Amortization:
The term of the credit would be 50 years with a grace period of 10 years. One-half of 1 percent of the principal amount would be repayable semi-annually for 10 years beginning January 15, 1977, and 1-1/2 percent of such principal amount would be repayable semi-annually beginning January 15, 1987 and ending July 15, 2016.
Service Charge:
3/4 of 1 percent annually.
PART III - THE PROJECT 10. An appraisal report (AS-115a)is attached. It describes recent measures which the Government of India has taken to relax administrative controls on essential imports and the importance of this program for future economic development in India. The report also provides information on a wide range of industries which are expected to participate directly in the proposed project. 11.
The project forms part of a program to maintain and expand
industrial production and provides primarily for the import of materials, components and spare parts required by manufacturers of various types of capital equipment and agricultural chemicals.
12. Under the new policy announced in June of 1966, the Government is issuing licenses to manufacturers in priority industries - defined to include a very large percentage of all industrial capacity - largely on the basis of manufacturers' own estimates of their production requiremerits. The Government has indicated to firms in the priority industries not only that they will receive import licenses to the full extent of their requirements but also that they may return for additional import entitlements whenever necessary to maintain or expand their outnut. The use of such licenses is somewhat restricted, but only to ensure that banned imports are excluded and to enforce restrictions which aid-givers impose on the use of aid funds. Under this new policy, manufacturers are expected to make substantially more efficient use of imported goods, to expand production (for example, by employing additional work shifts and other measures for improving the rate of utilization of existing manufacturing capacity) and to achieve a significantly better relationship between current production on the one hand and inventories of materials on the other. 13. In keeping with the spirit of the Government's new import policy, the proposed third credit would include a much wider range of industries than its predecessors. Nevertheless, withdrawrals from the proposed credit would be limited to payments for imports required by manufacturers of specified types of capital equipment, basic metals and agricultural chemicals, as agreed upon between India and the Association. The inclusion of imports required by manufacturers of chemical fertilizers and pesticides should be specially noted, since it reflects the new emphiasis of Government on scientific agriculture and intensive farming techniques. 1h. In the administration of Credits No. 52-IN and 78-IN, IDA missions have had occasion to observe many aspects of Indian industry and have exchanged views with Indian officials regarding Government policies affecting the efficient operation of capital equipment industries and plans for their future development. It is intended to continue these discussions. Since my presentation a year ago, general difficulties colnected with the drought, crop failure and military hostilities delayed progress on some fronts (for example, in connection with the removal of price and distribution controls on the sale of new cormercial vehicles, which has only recently come up again for active consideration). Nevertheless, there have been several favorable developments in recent months - particularly in connection with the relaxation or removal of administrative controls. Industrial licenses are no longer required in certain industries and proposals are under discussion which would increase the number of industries so exempted; the distribution and sa'le of cement and fertilizer are no longer subject to rigid Government control; and, as already noted, administrative restrictions on imports are being relaxed. 15. Government continues to emphasize the desirability of consolidating existing manufacturing facilities before investing in further expansion. urgently needed to provide a more realistic However, studies are still assessment of present manufacturing capabilities and of imports required for optimum production. The Government continues to stress export promotion, but the full benefits are still to be reaped. Finally, as I mentioned a year ago, unless the Government succeeds in developing a more effective program for
-6the economic exploitation of local minerals, a rapidly growing import bill for materials such as non-ferrous metals seems unavoidable. 16. The industries which would benefit directly from the proposed credit are growing fast, and many of the companies concerned are highly profitable, even after allowing for heavy taxation. By and large, the firms visited by IDA missions follow business practices and policies that resemble those of similar firms in Europe, Japan and the United States, and some would be considered outstanding even in more industrialized countries - well laid out, with highly efficient labor and practicing good production control techniques. 17. The credit would be used for imports under licenses giving the recipient wide freedom to purchase in the way which best suits his needs. I. view of the large number of items involved, many of wihich have to fit existing equipment in India, it would be inappropriate to insist on any special procurement procedures. PART IV - LEGAL INSTRUINTS AND AUThIORITY The draft Development Credit Agreement betwreen India and the 18. Association and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement, are being distributed to the Executive Directors separately. 19. The provisions of the riaft Development Credit Agreement follow substantially the pattern of the Agreements for Credits No. 52-INi and 78-IN. Attention is drawl to Section 4.Ol(b) of the draft Development Credit Agreement which contains cormitments of the Borrower with respect to the issuance of licenses, the availability of foreign exchange and the allocation of local materials. These commitments are supplemented by a letter entitled "Foreign Exchange and Ihport Licenses" which is also being distributed separately. PART V - THE ECONONY
20. A report on the economic position and prospects of India was circulated to the Executive Directors on June 20, 1966 (R66-80). As that report indicated, India's development program would justify substantially increased IDA financing. Except for the relaxation of controls on imports, described briefly in paragraph 12 above and more extensively in the Appraisal Report, there have been no significant changes in the economic situation since the economic report was written. In the short run much will dep-nd on the monsoonso far this year, rainfall seems to have been much better than last year but is still below normal. PART VI - COMPLIANCE WITH ARTICLES OF AGREEPIENT 21. I am satisfied that the proposed development credit would comply' with the Articles of Agreement of the Association.
-7PART VII - RECOMNDATION 22. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Credit to India (Third Industrial Imports Project) in an amount equivalent to U.S. $150,000,000. RESOLVED: THAT the Association shall grant a development credit to India in an amount in various currencies equivalent to one
hundred and fifty million United States dollars (U.S. $150,000,000), to mature on and prior to July 15, 2016, to bear a service charge, at the rate of three-fourths of one percent (3/4 of 1%) per annmu, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Third Industrial Imports Project) between India and the Association which has been presented to this meeting.
George D. Wloods President by S.
W-ashington, D.C. August 10, 1966
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