Document of

The World Bank

FOR OFFICIAL USE ONLY FILE COPY

Report No. 2688

PROJECT PERFORMANCE AUDIT REPORT

INDIA: ANDHRA PRADESH, TAMIL NADU, AND MAHARASHTRA

AGRICULTURAL CREDIT PROJECTS(Credits 226, 250 and 293-IN)

October 5, 1979

Operations Evaluation Department

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

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CURRENCY CONVERSIONS

Andhra TamilPradesh Nadu Maharashtra

At appraisal US$1 = Rs7.50 Rs7.50 Rs7.28At Completion US$1 = Rs8.60 Rs8.60 Rs9.00

ABBREVIATIONS

AED - Agricultural Engineering Department (Tamil Nadu)

AIC - Andhra Pradesh State Agro-Industries Corporation

ARDC - Agricultural Refinance and Development Corporation

CBs - Commercial Banks

ERR - Economic Rate of Return

FAO - Food and Agriculture Organization of the UN

FRR - Financial Rate of ReturnGOAP - Government of Andhra Pradesh

GOI - Government of IndiaGOM - Government of MaharashtraGOTN - Government of Tamil Nadu

LDA - Land Development Agency (Maharashtra)

LDB - The Land Development Bank System, made up of one State(apex) land development bank in each state (SLDB), plus

scores or hundreds of SLDB branches ("central" structure)or independent primary land development banks (PLDBs;

"federal" structure) spread all throughout each state's

territory. They specialize in long term credit.

MLDC - Maharashtra Land Development CorporationPCCS - Primary Cooperative Credit Societies (short term credit)

PLDBs - Primary Land Development Banks

RBI - Reserve Bank of India (India's Central Bank)REC - Rural Electification CorporationSCB - State Cooperative Banks (short and medium-term credit)SEB - State Electricity BoardSGD - State Groundwater Department, in Andhra Pradesh;

State Groundwater Directorate in Tamil Nadu; and

Groundwater Surveys and Development Agency

in MaharashtraSLDB - State (Apex) Land Development Bank (Cooperative Central

Agricultural Development Bank in Andhra Pradesh)

FOR OFFICIAL USE ONLY

Project Performance Audit Report

INDIA: ANDHRA PRADESH, TAMIL NADU AND MAHARASHTRAAGRICULTURAL CREDIT PROJECTS

(Credits 226, 250 and 293-IN)

TABLE OF CONTENTS

Page No.

Preface iBasic Data Sheets iiiDisbursement Tables vi

Highlights ix

I. PROJECTS SUMMARYA. Introduction 1B. Andhra Pradesh 1C. Tamil Nadu 3D. Maharashtra 4

E. General Aspects 7

II. MAIN ISSUES IN THE PCRsA. Arrears and Collections 7

1. The Case of Maharashtra 72. The Case of Tamil Nadu 93. The Case of Andhra Pradesh 9

B. Integration of the Two CooperativeCredit Systems 11

C. Groundwater Development and Control 12

1. The Need for Control 12

a) Protection of Individual Investments 12

b) Protection against WidespreadOverdevelopment 13

2. The Measures for Control 14

D. Well Failure and Possible Remedies 17

III. ADDITIONAL ISSUESA. Delays in Project Implementation 17

B. Disbursements against "Irregular" and"Off-limits" Lending 21

C. Groundwater Exploitation Control andEquity Considerations 23

D. A Cautionary Note on the SGDs' Effectiveness 26

E. A Cautionary Note on Statistical and

Accounting Data 26F. Reuse of IDA Funds 27

Annex 1 Comments received from the Government of India 28

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

Project Performance Audit Report

INDIA: ANDHRA PRADESH, TAMIL NADU and MAHARASHTRA

AGRICULTURAL CREDIT PROJECTS

(Credits 226, 250 and 293-IN)

PREFACE

This is a performance audit of three state agricultural creditprojects in India. They are the third, fifth and seventh out of a groupof ten such projects, financed by IDA between mid 1970 to late 1973 before

switching to the all-India, general agricultural line of credit approachin 1975 1/. Credits 226, 250 and 293-IN, for a total of US$89.4 million,were signed in January 1971, June 1971 and March 1972, and closed fullydisbursed, in June 1977, December 1977 and June 1976, respectively.

Two other state agricultural credit projects (Haryana andPunjab) are also closed, as well as ARDC I. They are the subject of two

other project performance audit reports: one combining the two stateprojects and focusing mainly on tractor and tractorization issues, and the

other covering ARDC I and treating several financial issues, as well as

the convenience of switching from the state-by-state to the all-Indialending approach. The first state project (Gujarat), which was closed inMarch 1975, was the subject of an audit report distributed to the Board onOctober 4, 1976 (Report No. 1303).

The audit report includes a summary of the developments underthe projects as reported in the project completion reports (PCRs), themain issues raised in the PCRs and some additional issues raised by theaudit mission. The PCRs, dated January 1978, June 1978 and January 1979,were prepared originally by ARDC and put in final form by the Bank's SouthAsia Regional Office following country visits in August and November 1977.

The lengths of the PCRs, however, prevent their inclusion in the PPAR2/.

A three-member mission from the Operations Evaluation Department

visited India in February/March 1979. The mission held discussions withofficials of the Government of India, ARDC, the governments of the statesconcerned, the state land development banks (SLDBs), the main commercial

banks involved in the projects (CBs) and other relevant state governmentalagencies - particularly the state groundwater development agencies and theagencies in charge of tractor procurement. The mission also visited some

rural branches of the Maharashtra SLDB and of the CBs, some primary land

1/ ARDC I, Credit 540, April 1975, for US$75 million. An eleventh stateproject (West Bengal, Credit 690, for US$12 million) and a second ARDCCredit (Credit 715, for US$200 million) followed in June 1977. A thirdARDC credit was just approved (Credit 947, August 1979, for US$250million).

2/ They are available from the South Asia Regional Office, AgricultureD Division.

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development banks (PLDBs) in Andhra Pradesh and Tamil Nadu, and severalfarmers who had borrowed under the projects. Comments of the officials

interviewed are fully reflected in the report and are gratefully acknow-

ledged. The information obtained during that mission was utilized totest the validity of the analyses and conclusions of the PCRs.

The audit report is based on these discussions, on interviews

with Bank staff and on a review of the PCRs, the President's Reports No.P-881, 941 and 10271/ as well as the Appraisal Reports (No. PA-59a, 81a,and 116a).V; the Development Credit Agreements, Project Agreements andState Agreementa./ and materials available in the Bank's files.

A copy of the draft report was sent to the Borrower. Comments

received from the Government of India are in Annex 1. Suggested changes

have been introduced or different views footnoted.

The PCRs, which are detailed and accurate, focus on and thor-oughly cover most aspects of project implementation, analyze the projects'main achievements and shortcomings, and raise some relevant issues. Two

issues, however, are only marginally mentioned or not treated at all:delays in project implementation and retroactive financing. These are

analyzed in the third chapter of the PPAR, prepared by OED. Also, the

equity aspects of groundwater development are further elaborated, andminor comments are included on three other issues.

1/ Dated December 1, 1970; May 17, 1971, and February 16, 1972, respectively.

2/ Dated December 1, 1970; May 14, 1971, and February 14, 1972, respectively.

3/ The set of these for each individual state are dated January 8, 1971;June 11, 1971 and March 29, 1972, respectively.

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ANDHRA PRADESR AGRICULTURAL CREDIT PROJECT(Credit 226-IN)

Amounts in US$ million as of August 31, 1977

Original Disbursed Cancelled Repaid Outstanding-11

Credit 226-IN 24.4 24.4 - 24.4

Project Data

Original Plan Revisions Actual

First Reference in Bank files 1968Board Approval 12/11/70Credit Agreement 1/08/71Credit Effectiveness 4/08/71 5/10/71

Physical Completion Z ofOriginal Project Completedby Date Shown

- Irrigation Investments U/73 (100) 6/75 (200%)- Land Levelling 11/73 (100) 6/75 ( 50%)- Tractor Purchases 11/73 (100) 7/77 (93%)

Loan Closing 6/74 6/75, 6/77 7/77Total Costs (Rupees_Million) 338 376Economic Rate of Return 30% 37%

Mission Data

Month No. of No. of Man- Date of/Year Days Persons weeks Report

Identification 1968Preparation 6/69Appraisal 4/70 31 5 20 12/01/70

Supervision I 3/71 3 1 1 4/26/71Supervision II 9/71 4 2 1 10/21/71Supervision III 3/72 7 2 2 5/05/72Supervision IV 3/73 7 1 1 5/15/73Supervision V 11/74 5 2 2 11/27/74Supervision VI 7/75 7 4 4 9/29/75Supervision VII 9/76 6 3 3 11/09/76Supervision VIII (PCR) 11/77 7 2 .2 12/06/78

Sub-total Supervision 16

1/ Before foreign exchange adjustment.

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TAMIL NADU AGRICULTURAL CREDIT PROJECT 250-IN

Basic Data Sheet

Original Disbursed Cancelled Repaid Outstanding

Credit 250-IN (US$ M) 35.0 35.0 - - 35.0

Project Data

Original Actual

First Reference in Bank files 1968

Board Approval 06/01/71

Credit Agreement 06/11/71

Credit Effectiveness 09/30/71 11/02/71

Credit Closing Date 12/31/74 12/31/77

Total Costs (US$ M) 62.0 about 62.0

Economic Rate of Return 28% about 35%

Mission Data

Month/ No. of No. of Man- Date of

Year Days Persons Weeks Report

Identification 68

Preparation 06/69 4 1

Appraisal 09/70 30 4 24 01/71

Supervision I 03/72 8 2 3

Supervision II 11/72 8 8 13 02/06/73

Supervision III 11/73 11 3 7 02/25/74

Supervision IV 02/75 8 3 5 04/08/75

Supervision V 10/11/75 7 2 3 12/19/75

Supervision VI

(Completion) 08/77 9 3 5 11/79

36

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MAHARASHTRA AGRICULTURAL CREDIT PROJECT 293-IN

Basic Data Sheet

Original Disbursed Cancelled Repaid Outstanding

Credit 293-IN (US$M) 30.0 30.0 - - 30.0

Project Data

Original Revisions Actual

Conception in Bank 1968Board Approval 3/29/72Credit Agreement 3/29/72Credit Effectiveness 9/30/72 1/31/73 1/31/73Physical Completion 3/76Credit Closing Date 12/31/75 6/30/76 6/30/76Total Costs (US$ M) 53.4 /a about 57Economic Rate of Return 33-over 50% 17-over 50%

Mission Data

Month/ No. of No. of Man- Date ofYear Days Persons Weeks Report

Identification 68Preparation 6/69 4Appraisal 3-4/71 5 2/14/72

Preliminary Supervision 10/72 2 2 4 10/30/72Supervision I 12/73 13 3 6 3/07/74Supervision II 12/74 15 2 4 2/05/75Supervision III 12/75 10 3 4 1/22/76Supervision IV 8/77 13 4 6 1/78

(PCR)24

/a Including depreciation of earth-moving machinery.

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DISBURSEMENTS TABLES

ANDHRA PRADESH: Accumulated Disbursements (Credit 226-IN).(US$ million)

Appraisal RevisedIDA Fiscal Year Estimates Estimates Actual as Percentageand Quarter End (1970) (9/74) Actual of Appraisal Estimate

1971/72September 30, 1971 1.6 0December 31, 1971 3.6 0March 31, 1972 5.6 1.1 19June 30, 1972 7.6 1.4 18

1972/73September 30, 1972 9.8 2.7 27December 31, 1972 12.0 8.9 74March 31, 1973 14.2 10.4 73June 30, 1973 16.4 11.0 67

1973/74September 30, 1973 18.7 11.2 59December 31, 1973 21.1 14.0 66March 31, 1974 23.5 14.1 60June 30, 1974 a/ 24.4 16.2 66

1974/75

September 30, 1974 16.6December 31, 1974 17.6 17.8March 31, 1975 18.1 18.7June 30, 1975 b/ 24.4 19.5

1975/76September 30, 1975 19.5December 31, 1975 19.5March 31, 1976 20.1June 30, 1976 20.3

1976/77September 30, 1976 20.5December 31, 1976 21.1March 31, 1977 22.4June 30, 1977 23.8

1977/78August 31, 1977 C/ 24.4

a/ Original Closing Dateb/ Revised Closing Date

c/ Actual Closing Date: June 30, 1977.

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TAMIL NADU: Accumulated Disbursements (Credit 250-IN)

IDA Fiscal Year Appraisal Actual as Percentageand Quarter End Estimate Actual of Appraisal Estimate

1972

March 31, 1972 0.5 - 0June 30, 1972 1.7 0.4 24

1973

September 30, 1972 3.7 2.7 73December 1972 6.7 3.7 55March 31, 1973 10.7 4.4 41June 30, 1973 14.3 5.9 41

1974

September 30, 1973 17.5 8.9 51December 31, 1973 20.7 10.2 49March 31, 1974 24.3 22.0 91June 30, 1974 29.1 23.1 79

1975

September 30, 1974 33.3 23.6 71December 31, 1974 a/ 35.0 23.6 67March 31, 1975 25.0June 30, 1975 25.0

1976

September 30, 1975 25.0December 31, 1975 25.5March 31, 1976 25.7June 30, 1976 27.7

1977

September 30, 1976 28.1December 31, 1976 29.6March 31, 1977 30.2June 30, 1977 32.3

1978

September 30, 1977 34.2December 31, 1977 b/ 34.4March 31, 1978 35.0

a/ Original Closing Dateb/ Actual Closing Date

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MAHARASHTRA: Accumulated Disbursements (Credit 293-IN)

(US $ M)

IDA Fiscal Year Actual as a

and Quarter End Appraisal Percentage of

Actual Estimate Estimate

1973

March 31, 1973 4.6 0.2

June 30, 1973 4.6 3.6 126

1974

September 30, 1973 8.7 4.6 177

December 31, 1973 8.7 7.5 116

March 31, 1973 11.3 9.2 123June 30, 1974 12.8 12.7 101

1975

September 30, 1974 15.2 15.1 101

December 31, 1974 19.6 18.1 108March 31, 1975 20.4 21.1 97

June 30, 1975 20.5 24.1 85

1976

September 30, 1975 21.0 27.1 77December 31, 1975 a! 22.4 30.0 75

March 31, 1976 27.4

June 30, 1976 b/ 28.8

1977

September 30, 1976 30.0

a/ Original Closing Date

b/ Actual Closing Date

Project Performance Audit Report

INDIA: ANDRRA PRADESH, TAMIL NADU AND MAHARASHTRAAGRICULTURAL CREDIT PROJECTS

(Credits 226, 250 and 293-IN)

HIGHLIGHTS

The three state-oriented credit projects financed on-lendingactivities by the state land development banks and some commercial banks.Funds were channeled through the Agricultural Refinance and DevelopmentCorporation (ARDC). They also made provisions for equipment, consultants

and supporting services. Sub-loans were primarily for supporting on-farm

investments in minor irrigation, with smaller shares assigned to landdevelopment, tractors and implements.

By and large, the refinancing and on-lending procedures worked

as anticipated, although commercial banks' participation was smaller thanexpected. Serious delays (3 years over the appraisal estimate) occurredin Andhra Pradesh and Tamil Nadu. The project areas were expanded so as to

cover the full state territory in both cases. Actual lending veeredtowards minor irrigation, fueled by strong demand, lower unit costs anddifficulties in executing the other components; the number of unitsfinanced substantially exceeded appraisal targets. Lending for landdevelopment was considerably reduced as a result of lack of progress inmajor command area development programs, difficulties in consolidation of

farm holdings and other problems. About the same number of tractors asanticipated were procured, but tractor deliveries were delayed until1976/77 as a result of procurement disagreement between the Government of

India and IDA affecting a series of similar projects!/. Overall, manymore sub-loans were made under the projects (251,000) than anticipated(147,000, a 71% increase). About one-sixth of the projects' lending went

to small farmers, defined as cultivators whose potential post development

income was Rs2,400 or less.

Most of the projects' objectives were broadly achieved. Produc-

tion increased, though less than anticipated (due to a smaller increase incropped area in some parts, and to yields lower than appraisal estimates,in others). Farm employment expanded significantly. Investments imple-

mented under the projects were financially and economically viable. Ratesof return are similar to or above appraisal estimates; increases in paddyprices contributed to this result. Under the projects, incremental income

criteria for sub-loan appraisal were introduced. ARDC expanded andimproved its refinancing operations, opening the way to the current

all-India line-of-credit approach in IDA lending for agricultural creditin India. The LDB system expanded and developed in Andhra Pradesh but didnot improve in Maharashtra. While it developed initially in TamilNadu, it later declined. The state groundwater agencies established underor supported by the projects did develop into large and competent ground-water research, development and control organizations. Regulation of

groundwater development by administrative/lending procedures was onlypartly successful.

1/ For a detailed discussion of this issue see PPAR on Punjab and HaryanaAgricultural Credit Projects (Credits 203 and 249), Report No. 2684, ofOctober 5, 1979.

The following points may be of special interest:

- Poor credit discipline and some political interference are the

primary reasons for low recoveries (paras. 36 to 44).

- Enforcing credit discipline may conflict with investment financing

in disadvantaged areas (paras. 45 and 46).

- Efforts to prevent well interference and groundwater overdevelop-ment through lending restrictions were only partly effective and

led to unequal water distribution; deferring the establishment of

effective controls has made a definitive solution more difficult

(paras. 55 to 63, and 80 to 84).

- The existence of other sources of funds, which were cheaper and

more convenient than the project funds, contributed to the slow

pace of disbursements in Andhra Pradesh and Tamil Nadu (paras. 69

to 71).

- IDA agreed to disburse credit funds against sub-loans made under

the Andhra Pradesh and Tamil Nadu projects which did not conform

with the lending conditions stipulated in the credit agreements,

or which had been effected beyond the previous, restricted projectareas (paras. 74 to 79).

- Covenants on reuse of IDA funds recovered from participating lend-

ing agencies were not appropriate, for recovered funds are avail-

able for a period shorter than the shortest possible loan terms.They have not been complied with (paras. 88 and 89).

Project Performance Audit Report

INDIA: ANDHRA PRADESH, TAMIL NADU AND MAHARASHTRAAGRICULTURAL CREDIT PROJECTS

(Credits 226, 250 and 293-IN)

I. PROJECTS SUMMARY 1.

A. Introduction

1. The projects were the third, fifth and seventh in a series often similarly designed state-oriented credit projects aimed at increasingagricultural production in India. Total costs were estimated at Rs 1195M (US$160 M) of which Rs 828 M (69%) was for minor irrigation investments,Rs 148 M (12%) for land development, Rs 123 M (10%) for tractors andimplements (no tractors were financed in Maharashtra), and Rs 96 M (8%)for equipment, consultants and supporting services. The IDA credits forUS$89.4 M were to finance 56% of project costs, the balance being met bythe Agricultural Refinance and Development Corporation (ARDC) and thestate governments, participating banks and the borrowers themselves.

2. The project's main objectives were to:

(a) increase production and employment through financially andeconomically viable investments in minor irrigation and landdevelopment;

(b) facilitate expansion of the cropped area by providing supportfor the state's farm mechanization goals (except in Maharashtra);

(c) improve technical services in support of these investments;

(d) introduce effective measures to control groundwater development;

and

(e) improve institutional credit channels.

B. Andhra Pradesh

3. The credit became effective in May 1971 and was fully disbursedby August 1977 (July 1975 except for the tractor category). Total costs

are estimated at Rs 376 M, of which 67% was for minor irrigation, 25%for tractors, and 8% for land levelling and supporting services.

4. About 80,000 minor irrigation units, twice the appraisal esti-mate, were financed. This increase was made possible by reallocationsfrom other components and because of lower unit costs than had been

estimated at appraisal. The land development program, delayed by lack of

progress in major command area development projects, was eventually cut byover 50%. The project area was extended to cover the whole state, thus

enabling these components to be fully disbursed by 1975.

1/ Adapted from the PCRs.

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5. Tractor deliveries were delayed until 1976/77 as a result of aprocurement disagreement between GOI and IDA affecting a series of similarprojects1 /. Some 1,400 units were eventually delivered out of theestimated 1,500, at prices far higher than estimated at appraisal.

6. A total of some 95,000 sub-loans (appraisal estimate 52,000)were made under the different project components. The higher than antici-pated number of irrigation units easily compensated for the shortfall inland development cases. Both these categories of investment proved to beas viable financially (FRR 16% to over 50%, ERR 30% to over 50%) aspredicted at appraisal (FRR 20% to over 50%), although the area benefittedin each farm from either kind of investment was smaller than anticipated.Data on tractors are not conclusive, but point to a satisfactory economicrate of return. The total value of incremental production generated bytractor sub-borrowers in 1976 prices is estimated to be Rs 360 M ascompared to appraisal estimates of Rs 460 M. Sixteen per cent of projectlending went to small farmers, defined as cultivators whose potential postdevelopment income was Rs2,400 or less (no such target was set at ap-praisal for this project, or the other two projects reviewed here).Further, project investments generated some 8 million man-days of incre-mental on-farm employment, mainly for landless laborers.

7. The land development banking system (LDB) had at first somedifficulty in adapting to the new policies and procedures required underthe project, and its lending suffered during the drought and politicalunrest of 1971/72. Since then it has streamlined its operations in linewith project consultants' recommendations, expanded steadily with ARDCsupport, and consistently maintained one of the best recovery records inthe country. Issues it will have to tackle in the near future include:(a) how to address the special problems of drought-prone areas and areaswith poor bank coverage; and (b) the long-term viability of a number ofsmall constituent primary banks.

8. Commercial banks' (CBs) participation in the project was smallerthan expected, reflecting a lack of expertise in agricultural lendingduring the early part of the project which has by now mostly been remedied.In addition, there were a number of procedural obstacles placed on theirexpansion. Now that CBs are becoming more prominent in term lending foragriculture, the need for closer monitoring and guidance by ARDC of thisaspect of their services is becoming apparent.

9. The State Groundwater Department (SGD) set up with projectassistance also performed well, charting out new areas for possibleexploitation and monitoring the use of existing resources.

1/ Disagreement was mainly on procedures and requirements for tractorprocurement (interchangeability of individual tractor parts, financingimported vs. domestically manufactured tractors, existence of accept-able pre- and post-sale services, institutions involved, etc.). SeePPAR or Punjab and Haryana Agricultural Credit Projects (forthcoming)for a detailed discussion of tractor procurement issues.

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10. The design of the project, only slightly modified from a well-

established pattern to suit local conditions, was basically sound. Weak-

nesses concern overestimates of command area, unrealistic downpayment

requirements, and inconclusive handling of tractor pricing issues. IDA

supervision was infrequent but not inadequate in view of the apparent lack

of state-level implementation problems. IDA lending to Andhra Pradesh has

continued to grow via the three ARDC general lines of credit.

C. Tamil Nadu

11. The credit became effective in November 1971 and was fullydisbursed by the end of March 1978. The delay in project completionwas mainly due to the disagreement between Government of India (GOI) and

IDA on tractor procurement procedures mentioned above (see para. 5).

Total cost was about Rs 524 M of which 70% was for minor irrigation, 2%

for land development, 20% for tractors and 8% for equipment and consul-

tants. The IDA credit financed about 53% of project costs; ARDC and

participating banks, 29%; and farmers, about 18%.

12. Most of the project objectives were broadly achieved. There

was not, however, much progress toward effective control of gr(,andwater

development, and the situation of the LDB has deteriorated, being char-

acterized by high overdues and a high proportion of non-viable primary

banks.

13. About 52,000 investments in minor irrigation were financed

(considerably more than appraisal estimates) of which about 20% were in

the sedimentary areas and 80% in the crystalline (hardrock) areas. Of

these, about 16% were pumpsets, 14% filter points and tubewells, 41%

dugwells and 30% improvements of existing wells. The average area develop-

ed under each minor irrigation investment was lower than estimated at

appraisal.

14. The land development program (including drainage) was reduced

considerably due to difficulties in consolidation of farm holdings anddelay in the construction of irrigation dams involving interstate water

agreements. Some 4,500 ha were improved as compared with appraisal

estimate of 28,000 ha.

15. There was a delay in the supply of tractors due to the dis-

agreement between IDA and GOI on procurement and, thereafter, a slow

processing of tender documents by the Government of Tamil Nadu (GOTN). By

the time the first tractors arrived (March 1976) many potential buyers had

already obtained tractors from non-project sources and the supply shortage

which the project was to have relieved had improved significantly.

Nevertheless, some 1,627 tractors were provided under the project as

compared with an appraisal estimate of 1,500.

16. The State Groundwater Directorate (SGD) played a central role in

the execution of the project. It developed into a large and competentgroundwater investigation organization. The requirements and impetus

provided by the project both demanded and facilitated not only a sub-

stantial increase in staff, but also the budget allocations and equipment

needed to support the initiation of a series of important hydrological

studies and water resource inventories. The SGD was assisted by three

consultants provided under the project.

17. Regulation of groundwater development in areas in which over-exploitation was a danger was attempted through requiring credit insti-tutions to employ spacing and density criteria. However, since institu-tional lending accounted for only a small proportion of the investments inminor irrigation (about 13% in the period 1971/72 to 1975/76), the impactof those control measures was very limited. Moreover, employment of thespacing criteria appears to permit inequitable allocation of limitedgroundwater resources (this issue is discussed at length in paras. 49 to63, and 80 to 84 below). On the positive side, the project's emphasis onadequate hydrological studies for the appraisal of minor irrigationinvestments stimulated extensive groundwater investigation and preparedthe ground for further progress in this area.

18. During the project investment period there was a deteriorationin the performance of the LDB. Overdues increased from about 14% at thebeginning of the project to about 40% in 1976/77, primarily because ofdroughts and their adverse impact on benefits and cash flows. The volumeof lending also declined, to a large extent, because in many areas invest-ment in minor irrigation had reached the limit permitted by the spacingcriteria. As a result, and because of their high overdues, many of thePLDBs have become non-viable.

19. Despite ARDC's repeated urging, GOTN did not permit the CBsto participate in the minor irrigation component of the project.

20. Investments financed under the project were financially andeconomically viable. Estimates of average financial rates of return (FRR)of minor irrigation investments vary from 19% to 24% (appraisal estimateswere 28% and 29%), those of land development are estimated at over 50%(appraisal estimate was 46%) and that of tractors at 19% (appraisalestimate was 30%). Estimates of economic rates of return (ERR) range from26% to 41% for minor irrigation (appraisal estimates were 21% and 29%),over 50% for land development and 42% for tractors (appraisal estimateswere 37% and 26% respectively). The overall ERR is estimated at 35% ascompared with appraisal estimate of 28%.

21. About 56,000 sub-loans (appraisal estimate: 50,000) were madeunder the different project components. Since the average area benefittedin each farm was much below appraisal targets, overall incremental croppedarea is estimated at about 42,000 ha as compared with an appraisal esti-mate of 60,200 ha. Incremental production at full development, estimatedat Rs 250 M at 1976 farmgate prices, is lower than appraisal estimate (Rs480 M at 1976 farmgate prices) mainly because of the smaller increase incropped area. About 20% of the lending for minor irrigation was to smallfarmers. In addition, the poorest segments of the population, namely thelandless who provide most of the casual labor in rural areas, benefittedconsiderably through an increase in the demand for labor generated by theproject, which is estimated at about 6 million man-days per annum.

D. Maharashtra

22. The credit became effective in January 1973 and was fullydisbursed by July 1976, about six months after the original closing date.Total cost was about Rs 509 M of which about 90% was for minor irrigationand 10% for land development (including earth moving machinery).

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23. The project's main objectives, i.e. increased production and on

farm employment, were achieved. The project also resulted in substantialimprovements in the technical services in support of minor irrigationinvestments. However, the measures taken to control groundwater develop-ment were not entirely effective, mainly because the Government of Maha-rashtra (GOM) has not yet introduced legal measures to control privateinvestments in groundwater development where the groundwater resource islimited. The objective of improving the State Land Development Bank(SLDB), the main institutional credit channel, was not achieved mainlybecause of severe droughts during the project period and political inter-vention in SLDB collection activities, which resulted in high overdues.Although the last two objectives were not achieved, lessons were learnedduring project implementation that have been taken into considerationduring later projects. One important, although unplanned, achievement wasthat, as a result of SLDB not coming up to expectations, the CBs werestrengthened and played a much more prominent role than previously infinancing agricultural development in Maharashtra.

24. About 73,000 minor irrigation units were financed. Of theseabout 45% were new wells with pumpsets, 37% new wells, 10% well improve-ments, and 8% pumpsets only. Because most minor irrigation investmentsare made in 2 to 3 installments, about 42% of the units financed wereincomplete by the end of the project development period and were expectedto be completed by mid-1977 with funds provided under the first ARDCgeneral line of credit (ARDC I) funded by Credit 540-IN. In terms ofcomplete units, an equivalent of 60,000 investments were financed, consi-derably more than the appraisal estimate. Investments envisaged in deeptubewells did not materialize, due mostly to lack of farmer response,while those in lift irrigation were implemented by GOM under droughtrelief measures.

25. Although generally in accordance with appraisal guidelines, thestandard of land development works initially was low but improved as theproject progressed. Land development was a new venture in Maharashtra,and there were difficulties with the organization of credit which tooka long time to overcome. However, the experience gained from this waslater used in designing other IDA financed projects. Land developmentequipment purchased under the project arrived too late to be utilized inproject land development works. However, given GOM plans for futureexpanded land development, the machinery is expected to be fully utilized.

26. The Groundwater Survey and Development Agency (SGD) was sub-stantially strengthened and played an important role in the project. Some1,467 groups of watersheds covering the entire state have been delineatedand their water resources assessed. Procedures for appraisal of ground-water resources have been modified and substantially improved. However,regulation of groundwater development in areas in which overexploitationis a danger through requiring credit institutions to employ spacing anddensity criteria was only partially successful, as a great part of minorirrigation investments is financed from private sources. Moreover, thespacing criteria appear to enforce an inequitable allocation of thelimited groundwater resources. (see paras. 49-63 and 80-84).

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27. Most project lending (95%) was channelled through the SLDB,which was to be rehabilitated under the project. The rehabilitationeffort proved unsuccessful despite the fact that GOM introduced severalreforms in the LDB system's management and financial structure. Overduesremained at a very high level (63% of demand at June 30, 1977), primarilybecause of three successive years of drought (1970/71 to 1972/ 73) whichreduced farmer repayment capacity and forced a massive, although unsatis-factory, rescheduling of loans. Rescheduling took the form, in mostcases, of increasing annual repayments in the remaining years of theoriginal loan period (subject to a maximum increase in annual repayment of25%), rather than by extending the loan period, thus compounding theproblem. The SLDB, heavily engaged in reorganization and reschedulingactivities, did not commit sufficient resources to recoveries, and fre-quent rescheduling and lack of effective action against defaulters general-ly reduced credit discipline. Default reached epidemic proportions, and,by their sheer numbers, defaulters carry considerable political weight.The overdues situation was aggravated further in that GOM from time totime advised SLDB to avoid taking coercive actions against defaulters.GOM and ARDC are concerned about the poor recoveries and have since agreedon a rehabilitation program. Further, GOM has issued instructions to takecoercive action irrespective of the age of overdues and amount involved.

28. Another problem affecting SLDB is the high proportion of sub-branches which are non-viable mainly due to insufficient lending volume.This is also a serious problem in the short-term credit system. Integra-tion of the short and long-term systems could improve profitability and,at the same time, enable farmers to obtain their short and long-termcredit requirement from one source (see paras. 47 and 48 for furtherdiscussions).

29. The CBs gained considerable experience in agricultural lending,strengthened their staff, and expanded their rural branches network. Theyincreased their share in ARDC disbursement in Maharashtra from 5% at thebeginning of the project to about 36% in 1976/77 under ARDC I, and in manyareas have provided a much needed alternative source of institutionalagricultural credit.

30. Investments financed under the project were financially andeconomically viable. Estimates of average FRR for the main minor irriga-tion investment (well and pumpset) vary from 36% and 20% in sugarcanegrowing areas to 11% in areas where the main crops were foodgrains. Theyare satisfactory, although less than the appraisal estimate of 40% overallfor the State. The FRR for land development is estimated at over 50%, thesame as the appraisal estimate. Estimates of the ERR range from 18% toover 50% (appraisal estimates 33% to 50%) for minor irrigation and over50% (same as appraisal) for land development.

31. About 100,000 sub-loans (appraisal estimate 45,000) were madeunder the different project components. Incremental cropped area resultingfrom minor irrigation investments is estimated at about 35,000 ha and fromland development investments at about 24,000 ha (appraisal estimates weresimilar). The value of incremental production at full development,estimated at Rs 530 M per annum at 1976 farmgate prices, is lower thanappraisal estimate (roughly Rs 900 M in 1976 prices) mainly because yields

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are lower than estimated at appraisal. Only 10% of the lending was tosmall farmers (as defined above; see para. 6), but the poorest segments ofthe population, mainly the landless, benefited considerably through anincrease in the demand for hired labor estimated at 13 million man-days

E. General Aspects

32. An important achievement has been the introduction of the in-cremental income criteria for evaluation of loans under the projects. Itresulted in a change from the security-oriented approach which was pre-dominant before the projects towards a production-oriented one.

33. ARDC played an important role in all aspects of project imple-mentation. It guided participating banks in adjusting to project pro-cedures and assisted them in overcoming bottlenecks and contraints. Itcarried out its supervision and scheme preparation functions satis-factorily, but needs further strengthening at the regional level to widenits development and evaluation roles. This is being undertaken in theARDC II General Line of Credit Project.

34. Experience gained under the projects exposed some weaknesses ofprevious and current approaches to groundwater control and in the agricul-tural credit system. The lessons learned were used in designing the ARDCIII general line of credit.

II. MAIN ISSUES IN THE PCRs

35. Several issues are dealt with in the PCRs. The main ones arearrears and collections, integration of the two cooperative credit systems,groundwater development and control, and requirement of insurance forwell failure. Since the PCRs are not included as a part of the PPAR, therelevant PCR texts are reproduced in this chapter.

A. Arrears and Collections

1. The Case of Maharashtrail/

36. The management of SLDB attributes the high overdues to thefollowing main reasons: (i) drought conditions; (ii) poor reschedulingmethod; (iii) unsatisfactory pre-project standards for investments; (iv)incomplete investments and delays in electrical connections; and (v)priority given to short-term credit in recovery from crop proceeds. In asurvey covering a sample of SLDB sub-branches, the main reasons foroverdues given by sub-branch managers were as follows: crop failure 46%;misuse of loan 23%; unfavorable market conditions 19%; other reasons 12%.Overdues on IDA supported lending (66% of demand as of June 30, 1977)exceeded the state average (63%) and indicate that the improvements in thestandard of lending under the project did not result in better recoveries.The tying of recovery to the marketing of cash crops like sugarcane andcotton has also been disappointing mainly due to the low priority given toSLDB in the recovery from sale proceeds.

1/ Taken from PCR on Maharashtra, paras. 3.10, 3.11, 3.14 to 3.17; and5.03.

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37. Drought is clearly one of the main reasons for poor recoveries.Despite the protection provided through irrigation facilities, therehave been complaints about reduction in loan repayment capability result-ing from drought. Well discharge is affected by variations in rainfall;during drought periods the discharge is reduced and so is the area whichcan be irrigated and/or the amount of water per unit area 1/. Moreover,most of the investors also had a considerable area of non-irrigated land(65% according to survey results) even after the investment. Rainfedcrops remained, therefore, a major source of income and the overallfinancial position of the household remained sensitive to drought thoughto a lesser extent than before the investment. However, even in non-drought districts overdues per branch as of June 30, 1977 averaged 57%(range 35-76%), a percentage only slightly lower than the average forbranches in drought prone areas which was about 61% (range 45%-81%).

38. Overdues were thus almost as high in non-drought as in droughtareas. The recovery rate of loans extended under the project was also lowdespite the improved lending technique. It appears, therefore, that theprimary reason for low recoveries has been the poor credit discipline inMaharashtra resulting from many years (over 15) of poor repayments and thelack of effective action against defaulters.

39. A better understanding of the reasons for overdues can begained by analyzing the individual farmer's motivations. For most farmersthe investment in minor irrigation is a once in a lifetime venture.Therefore, the negative effect of default on potential future borrowingfrom SLDB is not of great concern to them. Short-term credit is, on theother hand, required every year and the farmer has a built-in interest torepay it in order to ensure a regular supply. Farmers can be expected,therefore, to give priority to repayment of short-term credit-2. Farm-ers who borrow from private lenders (at a rate of interest estimated tobe about 24%) can be expected to give priority to the repayment of suchloans because of the high rate of interest. Therefore, borrowers can beexpected to give the lowest priority to repayment of SLDB loans.

40. A restoration of credit discipline is a pre-condition to thesuccess of any future rehabilitation of the SLDB and would require toughand unpopular steps which could only be taken effectively with the fullsupport and cooperation of GOM. The number of SLDB defaulters is about400,000 and the total number of defaulters on loans from cooperativecredit institutions (including short-term) exceeds one million. By sheernumbers, the defaulters carry a considerable political weight and actionsagainst them, which are feasible when they represent a small minority,have become politically difficult. There are indications that politicalinterference has affected loan recovery. From time to time GOM signaledto SLDB that it should relax its collection effort (the most recentoccurrence was in February 1977) and effectively prevented SLDB from

1/ Presently there are no statistical data to quantify the resultingreduction in net income.

2/ Some staff members have questioned this conclusion, because of thepoor repayment record of the short-term credit agencies. See foot-note to para. 47.

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introducing a special debt collection drive through provision of financial

incentives to its staff. GOM officials have occasionally condemned largeand wealthy farmers for willful default and threatened to take strictmeasures against them. These threats, unfortunately, were not translated

into effective actions and have failed to improve loan recoveries.

2. The Case of Tamil Nadul/

41. The land development bank system (LDB) in Tamil Nadu, which wasin the past one of the best in India, has been declining in efficiency andprofitability. The main reasons are the poor recoveries and the reductionin the volume of lending for minor irrigation. The primary land develop-ment banks (PLDBs) showed satisfactory collection efforts for many yearsas they enforced timely utilization of loans, kept in close contact withthe farmers and took disciplinary action against delinquent staff. How-ever, since 1974, matters took a turn for the worse mainly as a result ofthe drought; political pressures undermined repayment discipline. Re-scheduling has become a routine affair, but while in 1974/75 it was prob-ably justified due to severe drought, there are indications that in thefollowing years rescheduling may have been influenced, in part, by poli-tical considerationa-/. The deterioration took place despite the fact thatforeclosure actions in case of misutilization and other defaults wereprompt and relatively effective. In 1976, there were about 4,000 accountsunder foreclosure proceeding and in 200 cases the land was auctioned off.By June 1976, the amount under foreclosure totalled Rs 19 M (down from Rs31 M in June 1975) compared to a reserve for bad debt of Rs 109 M (anotherindication of SLDB's financial soundness). Given that Tamil Nadu had agood recovery record prior to 1974/75, it should be possible to reestab-lish credit discipline and it is possible that the situation could againbe brought under control. However, strong commitment on the part of theState government including support of prompt actions against defaulterswill be required in order to achieve that.

42. The reduction in the volume of lending and, therefore, profita-bility of PLDBs is a more serious problem. GOTN plans to reduce thenumber of PLDBs but this will increase the area of operation per PLDB andmake their contact with the individual farmer more difficult, althoughthese difficulties are being partly compensated by increasing the numberof field staff. GOTN hopes to expand diversified lending through thePLDBs. However, the possibilities for diversified investments are limited.Moreover, PLDBs would face strong competition from the CBs, which plan toincrease agricultural lending, and, as they have been prevented by GOTNfrom lending for minor irrigation, their increased lending will be mainlyfor diversified investments. Competition from the State Cooperative Bankcan be also expected.

1/ Taken from PCR on Tamil Nadu, para. 4.04 and Annex 3, paras. 18 and 22.

2/ GOTN has stated that relief was given in respect of certain loans bothrelating to cooperatives as well as governmental dues on account ofdrought and not otherwise.

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3. The Case of Andhra Pradeshl

43. LDB has achieved and maintained one of the highest collectionrates in India, both from final borrowers to PLDBs and from these toSLDB. Moreover, this overall performance has held steady between 1975/76and 1976/77, against an all-India pattern of worsening recovery disci-plines. On an individual basis, an impressive 165 out of 205 PLDBs fellinto the unrestricted lending category (meaning that they had 25% or lessunrecovered) in 1977. As many as 82% of these 165 PLDBs were citedas having reached 100% recovery. Even if in some cases year-end windowdressing may exaggerate the success of a collection campaign, these arevery solid results. Overall, overdues from final borrowers are less than16% of demand.

44. A combination of several factors underlies this LDB good re-covery discipline: (a) Professional tradition. Collection has beenstressed by every management since the LDB's foundation and in the MadrasState cooperative banking system before that. Loan recovery is the singlemajor target against which PLDB staff and PLDB board performance ismeasured and rewarded, either tangibly or in terms of status. In thecollection season (March to July) this drive is intensified to the pointwhere other work virtually ceases in many PLDBs, even if this meansneglecting potential new customers. (b) Cash incentives. Borrowers whorepay late, as elsewhere in India, pay penalty interest; borrowers whorepay before the well-publicized target date are allowed a discount of 2%,which appears to attract a large number of takers. PLDBs which reach 100%recovery are awarded significant cash bonuses, which compensate for theextra effort to clear the last outstanding accounts. This and a series ofother competitive awards help to preserve a good recovery record once ithas been achieved. (c) Political climate and LDB management. At thelocal level, elected PLDB boards reinforce credit discipline by acting aspressure groups to "sponsor" many borrowers and take some responsibilityfor their repayment performance. This is in net contrast to states wheredefaulters are a politically significant minority and local PLDB boardstend to act as a shield against the SLDB's collection efforts. At thestate government level, there appears to be a strong tradition of non-interference with the internal operation of the banking system, streng-thened by solid resistance from the professional management to changesthat appear to run counter to perceived sound banking practice.

45. Not all officially declared drought-prone areas in the statehave consistently high overdues, and by no means all high overdue PLDBsare in those areas. However, it can be argued that recent discipline oflinking new advances by PLDBs to their recovery performance is holdingback development in some areas where fresh investment is most needed.These issues were addressed in depth in the preparation of the thirdARDC general line of credit. With particular reference to Andhra Pradesh,the following points should also be made: (a) Consistent with its em-phasis on credit discipline, the SIDB refuses to authorize rescheduling of

1/ Taken from PCR on Andhra Pradesh Annex 3, paras. 10, 11, 13 and 14.

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loans on a block basis in years of drought as is the practice in some

neighboring states. It has argued convincingly that such "blanket"

measures will lead to expectations of further concessions and ultimatelythe erosion of discipline state-wide. However, without the buffer of

rescheduling, the impact of drought and other calamities is more rapidly

reflected in the choking off of new institutional finance. (b) Under

existing Debenture Norms Committee rules, the state government is allowed

to inject additional capital into those PLDBs which would otherwise not

qualify for new lending, this equity being considered equivolent torecoveries up to a certain maximum. This is a temporary measure to give

breathing space to PLDBs who can temporarily continue lending under

existing programs provided they attempt to bring their collections backinto line. To date, the GOAP has not availed itself of this provision,

but is now considering doing so.

46. This is an area where developmental objectives and sound banking

practices are not easy to reconcile. Given existing regional disparities

in Andhra Pradesh as well as the varying profitability of its PLDBs, thisissue should be kept under close review. In addition to facilities now

allowed by the Debenture Norms Committee (such as concessions to banks

lending more than 50% of their total to small farmers), the state govern-ment and the banking system should jointly consider what incentives

should be provided to spread institutional financing in disadvantaged

areas, e.g. by stimulating competition for the restricted PLDBs.

B. Integration of the Two Cooperative Credit Systems!

47. Integration of the long and short-term credit systems2wasproposed by the Committee on Integration of Cooperative Credit Institu-

tions which studied the problem under the terms of ARDC 1!/. No ad-

vance towards that end has been made yet. Allowing PLDBs to extend

short-term credit to their long-term borrowers is a further alternative,

although the impact of this on the institutions lending short-term would

have to be examined carefully. Besides improvements in service to farm-

ers and PLDB viability, either alternative would enable borrowers to

obtain short-and long-term credit from one bank and, from the lending

banks' point of view, facilitate the recovery of loans.

1/ Taken from PCR on Tamil Nadu, para 4.08 and Annex 3, para. 23; PCR on

Andhra Pradesh, para. 3.14, and PCR on Maharashtra, Annex 2, para.

48. For a more detailed discussion of integration, see PPAR on ARDC

I, currently under preparation.

2/ Presently the LDB system provides only long-term credit. Short-term

credit is provided through a three tier system which includes the

primary agricultural cooperative credit societies at the village

level, the district cooperative banks at the middle tier and state

cooperative bank at the apex level.

3/ Staff members who participated in the appraisal missions mentioned to

OED that they had considered the need for a greater integration of

both branches of the credit system. But they did not go further on

any proposal for integration because at that time the repayment

record of the short-term credit institutions was much worse than the

LDB's.

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48. There is a division of opinion within GOTN and GOM regardingthe advantages and disadvantages of integration, and decisions are notexpected in the near future. In Maharashtra, the SLDB has a considerablenumber of non-viable sub-branches. An RBI Study conducted in 1975 esti-mated that only 54% of SLDB sub-branches were viable, about 30% werepotentially viable and 16% were non-viable. As the short-term creditsystem had, and still has, a large proportion of non-viable primarycooperative credit societies (PCCS), the viability of both credit systemscould be improved through a partial or full integration. The GOAP isplanning an experiment involving the partial merger of four selected PLDBswith their more numerous PCCS counterparts. This experiment, whichamounts to a sub-contracting arrangement, aims at using the PCCS' villagelevel facilities together with PLDBs' specialized areas of expertise. Adecision on starting such merger is yet to be adopted. GOI undertookunder ARDC III to review the progress made by the cooperative creditsystem in meeting the farmers' credit needs through one source or closelycoordinated sources by December 1980.

C. Groundwater Development and ControlyI

1. The Need for Control

49. The need to control groundwater development has been advanced ontwo primary grounds: (a) to protect the cash flow from an individualinvestment against later interfering development; and (b) to preventwidespread and long-term drawdown trends which might have unacceptableeconomic effects (particularly increased pumping costs).

a) Protection of individual investments.

50. Theoretically, because farms in general are small relative tothe physical area of influence of typical wells, the yield of almost anyprivately owned well in India could be reduced by the development of a newwell on an adjacent plot. Prima facie, this is a legitimate area ofconcern for both the investor (farmer) and his banker. However, theempirical evidence available so far does not support the above concern.

51. Despite the fact that control through institutional creditcovered only a small percentage of minor irrigation investments, to datethere are not many documented cases of curtailed loan repayment due tosinking of a new well nearby. The main reasons for this may include thefollowing: (a) the geological conditions in the plateau in the threestates under analysis (and over most of India) are such that the physicalareas influenced by typical wells are not much larger than the fields ofthose farmers who can afford wells with pumpsets; (b) because of droughtconditions in the three states during much of the projects implementationperiod, it is not possible to distinguish between reductions in dischargedue to drought and reductions due to a sinking of a nearby well; (c) theminimum spacing between wells was based on conservative calculations; and(d) it appears reasonable to assume that most farmers will not sink awell too near an existing one since this will put their investment atrisk; if correct, this hypothesis would have important policy implica-tions and should therefore be examined through studies and/or surveys.

1/ Taken from the PCRs: (i) Andhra Pradesh, para. 2.06, and Annex 4,para. 16; (ii) Tamil Nadu, paras. 3.05 to 3.15; and (iii) Maharashtra,paras. 2.04 and 2.05, and Annex 3, paras. 43 to 45.

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52. Because of the enormous technical and socio-political difficul-

ties, it is presently impractical to impose a comprehensive control on

groundwater development although efforts to develop such a system shouldcontinue. Consequently for the short-run (3-5 years) the use of pragmatic

control measures, such as restrictions on institutional credit, restric-

tions on electric connections and similar measures (e.g. limiting public

drilling operations to wells cleared by SGD) will have to continue.

Additional measures of control and protection of institutionally financed

investment could be achieved by basing the number of ARDC approved invest-ments on more detailed studies and investigations conducted by SGD and

ARDC. Such investigations will have to forecast future levels of ground-

water development for each scheme area, including development from non-

institutional sourceql/.

b) Protection against widespread overdevelopment

53. Long-term excessive drawdown over large areas could increase

pumping costs to economically unacceptable levels. Over most of India,

i.e. the hardrock areas as well as the alluvial areas in high rainfall

(over 1,000 mm) conditions, this type of drawdown is practically impos-sible and in the arid states with substantial alluvial deposits (Gujarat,

Haryana and Punjab) groundwater is already fully developed. In the latter

states overall planning and control of all water resources, surface as

well as underground, are required rather than narrowly based legislationlimited to groundwater.

54. While some danger of over-exploitation of the groundwater does

exist: (a) this is a highly complex question, not only technically, but

also economically, socially and legally, and none of these dimensions are

yet fully understood; (b) the question was deemed to be of importance to

the lending banks primarily because of the possibility that overdevelop-

ment in certain limited areas would lead to reductions in the yield of

some wells which, in turn, might reduce the repayment capacity of some

well owners; and (c) the imposition of these and the other technical

conditions of the credit caused the SGDs to focus their attention on this

potential problem area and thus to develop a series of criteria for wellsite selection and control which are appropriate and have minimized the

problem of interference between wells. In the particular case of Maha-

rashtra, it now appears that the size of area in which there is a danger

of over-exploitation is far smaller than that of the elemental watersheds

which were designated in the Credit Agreement as the basic unit of hydro-

logic analysis, and that the mechanisms of recharge and discharge are also

such as to render inappropriate the formulations imposed under the credit.

1/ Under ARDC III, GOI and ARDC have agreed to introduce a new appraisalsystem for groundwater development financing in areas with excessive

groundwater development. This system would be based on more detailed

investigations by SGDs. The choice among three levels of resource

evaluation and groundwater investigation will depend on the current

groundwater development of the proposed project area. (See also

footnote 2/ on page 25).

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55. The one serious criticism that might be leveled at the appraisalexercise is that it did not perceive the potentially serious retrogressiveeffects of the imposed spacing criteria as a mechanism for allocating useof an extremely limited and valuable natural resource. It is clear nowthat only a very small fraction (10-15%) of the farmers in any hydrologicunit in the Tamil Nadu and Maharashtra plateaus can have a well requiringannual withdrawals of 16,000-24,000 cubic meters per year. As the firstborrowers in any area are typically the more well-to-do and aggressivefarmers, the conditions imposed by the credit, in the hope of preventingoverdevelopment of the groundwater, probably had, as their principaleffect, the perpetuation and exacerbation of existing inequities of incomedistribution.

56. Perceiving this problem is however far easier than solvingit, because to share the quantity of say 80,000 m3 of annual rechargeamong the 40 farmers occupying a typical square km in Maharashtra wouldgive them only 2,000 m3 each. Withdrawals at this low level would notsupport the investment in any kind of well. The logical conclusion isthat for development to be equitable as well as economically viable, someform of forced water sharing, from jointly, communally or government ownedfacilities, is unavoidable.

2. The Measures for Control

57. In the absence of groundwater legislation, a pragmatic effortwas made to prevent overdevelopment through stipulation of minimum wellspacings and maximum densities. These restrictions, which at appraisalwere considered to be only temporary, were also to apply to wells financedthrough institutional credit not under the project. The spacing anddensity criteria specified at appraisal and modified during the projectsin the light of additional groundwater information obtained by SGDs, weregenerally observed. They were expected to be effective since a largeproportion of minor irrigation investments was assumed to be financedthrough institutional credit. It appears, however, that non-institutionalcredit accounted for a greater than envisaged proportion of the invest-ment in minor irrigation 1/. Thus the effectiveness of groundwater

1/ In a survey of villages, conducted by the GOM Bureau of Economics andStatistics on behalf of SLDB, which covered a sample of 90 villages innine districts, it was found that 25% of the wells constructed in theperiod 1972/73-1975/76 were financed under IDA projects. The SLDBstatistics indicate that about 75% of the wells financed by it in thesame period were under IDA supported programs. Assuming that thispercentage applies also to the districts surveyed, it would appearthat in those districts, SLDB financed only about one third of thewells. The CBs are known to have financed a relatively small numberof wells and, assuming that the above percentages hold true forthe state, it can be concluded that a large proportion of the wells inMaharashtra were financed from private sources. The data available areinsufficient to permit drawing strong conclusions and should besupplemented by additional, carefully planned investigations. Thereare no reliable data on private money lenders; however, it is clearthat, in most cases, farmers preferred institutional credit sourcesbecause of their lower interest charges.

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control through limitations affecting only institutional credit isquestionable. This conclusion is strengthened by statistics from TamilNadu which indicate that, as minor irrigation investments approach thelimit allowed by the spacing and density criteria, farmers increasinglyfinance the investment from non-institutional sources, either to avoidconforming to these criteria or because the criteria make them ineligiblefor institutional loans.

58. Recently, some state governments (as GOTN) have extended controls

to electric connections, and only wells which comply with the spacingcriteria may be electrified. This measure should discourage uncontrolledinvestments to some extent, but will not be fully effective since farmers

are still free to install diesel engines and many can be expected to do sodespite the higher operating costs of such equipment.

59. As in the case of the other agricultural credit projects,provisional controls (pending legislation) were introduced in AndhraPradesh through spacing and density restrictions. However, unlike theother projects it was left to the SGD to determine the spacing and densitynorms, subject to ARDC and IDA approval. Control through institutionalcredit could not have been entirely effective as it did not cover pri-vately financed investments. There are no reliable estimates of the scopeof such investments, but it is roughly estimated at 25% of total newwells. According to SGD calculations, groundwater resources in the hardrock area of Andhra Pradesh are sufficient to irrigate about 50% of thecultivated area. In this respect, the situation in Andhra Pradesh appears

to be better than in the hard rock areas of Tamil Nadu and Maharashtra, inwhich groundwater resources are sufficient for roughly 10-15% of thecultivated area. Equitable allocation of water in Andhra Pradesh should,

therefore, be easier than in those states.

60. The experience under these projects, and particularly in Tamil

Nadu, indicates that by deferring the establishment of effective controls

until most of the groundwater resource has been developed makes a defini-tive solution more difficult. Enforcement of any spacing criteria (if theyare effective) means that when a farmer sinks a well, his close neighborsare de facto stripped of the right to dig a well on their land. Despitethis consequence of employing the spacing criteria, no guidelines forallocation of groundwater resources among farmers have been prepared andthe first to apply had the first entitlement to investment in a well.Understandably farmers who have not yet invested in wells object to such aprior right allocative regulation, while those who have invested can beexpected to object to any reallocation of the resource. A more equitable

allocation of groundwater development rights, introduced at earlier stagesof development, would have reduced conflicting interests and facilitated

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the establishment of effective controls-1/. Unfortunately, in much ofIndia, that time has passed and the question of the control of groundwater

exploitation is becoming an increasingly complex and difficult problem.

61. No state government has yet taken active steps to enact ground-water legislation. Most of them consider it essential to prove andquantify the damage caused in the absence of legislation. Any delay inlegislation will, however, make its implementation more difficult.

62. The draft groundwater legislation, under consideration byGOTN for the last 7 years, is based on a model bill published by GOI inDecember 1970. The model bill includes principles which are basic to theorderly development of a groundwater resource. The difficulties lie inthe practicability of implementation. The main problem is how to control

development in areas in which the groundwater resource is sufficient forirrigating only a small fraction of the cultivated land. Legal controlsbased on spacing criteria will be especially unpopular since they will besupportive of a basically inequitable allocation of groundwater resources.Unfortunately, however, legislation based on spacing and density criteriawith its acceptance of prior right is the only kind of control that GOI orany of the state governments has seriously suggested to date. Withdrawalcontrol, which would involve allocation of irrigation water quotas, wouldbe more appropriate, but the mechanisms for enforcing it remain to becarefully studied.

63. A major constraint on the introduction of groundwater legisla-tion is the difficulty, and danger, of attempting to proceed from thegeneral to the particular in terms of groundwater availability and behaviorin any given area. While SGDs have developed considerable overall strengthand competence, they have neither the manpower nor the data required topermit precise estimates of the potential for, or constraints on, develop-ment in a specific village. In addition, statistical shortcomings make itdifficult to be precise about how much water is already being extractedand thus how much remains available.

1/ Staff members who participated in the appraisal missions mentioned toOED that the equity issues were very much in their minds, but theyconcluded that "a more equitable allocation of groundwater rights" wasnot an alternative reality at the time for the reasons argued in thesubsequent paragraphs. They point out that the projects' design was

the correct one to get something going within the realm of the pos-sible. The main objective was to maximize production development(and these three credits along with those to other states have madeconsiderable contributions to India's improved grain position) avoid-ing over-exploitation of the groundwater resource (which has beenachieved to some extent). It was assumed that equity considera-tions would be taken care of by administrative means, pricing in-creases, encouragement of water sharing and other direct provisions,but these ones had only limited effect.

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D. Well Failure and Possible Remediesl

64. Estimates of the proportion of well failure vary from 1% (percen-

tage of claims for well failure subsidy) to about 13% (based on survey).SGDs claim that as a result of groundwater investigations there has been a

reduction in the proportion of well failures, but there are no data to

verify this. Approved cases of failed wells were entitled to a subsidywhich provided for: (i) remission of total interest accrued up to the

date of application for subsidy; and (ii) remission of 20% of the out-standing loanl/. As shown above, the subsidy program may have covered onlya small proportion of the well failures and only a part of the investment

cost. The main risk was still carried by the farmer and may have deterred

especially small farmers from investment in minor irrigation.

65. The time appears to be ripe for the introduction of insurance

schemes which would cover the loan repayment commitments and thus reduceinvestors' risk. Insurance to cover cases in which the well dug was found

to be dry or nearly dry is feasible since SGDs should be able to providethe data necessary for calculating the insurance premiums. The premium

could be paid by the financing bank and added to the loan amount.

III. ADDITIONAL ISSUES3/

66. The PCRs contain a thorough discussion of most project issues.Two issues, however, are only marginally mentioned or ignored: delays inproject implementation, and retroactive financing. These are elaborated

below. Also, the equity aspects of groundwater development are furtherelaborated. Minor comments are included on three other issues.

A. Delays in Project Implementation

67. Two of the projects: Andhra Pradesh and Tamil Nadu, were delayedfrom the very beginning; their rates of disbursement fell significantlyshort of the appraisal estimates throughout the projects' lives. If

disbursements on "irregular" and "off-limits" lending (see next section)

are not taken into account, the credit funds were disbursed at a rate of

1/ Taken from PCR on Maharashtra, paras. 2.03 and 7.03.

2/ In Tamil Nadu, the Failed Wells Fund rules provide that up to 90% ofthe zost of the failed wells (subject to a maximum of Rs. 10,000) can

be granted by way of assistance.

3/ A number of other institutional, financial and procedural issues

stem from these projects. All of them have been treated together

with those arising from other State and all-India projects in thePPAR on ARDC I.

- 18 -

US$3.1 million per year in Andhra Pradesh (39% of the appraisal estimate)and of US$3.8 million per year in Tamil Nadu (less than one-third of theestimate). Eventually, the two projects' closing dates had to be post-poned by more than three years each. (see Graph 1)1/.

68. Three factors, which are mentioned in the PCRs, contributed tothese delays: (i) Disagreement between IDA and GOI on tractor procurement(this issue is analyzed in detail in the PPAR on Punjab and Haryana,currently under preparation). As a result, tractors were deliveredstarting in March 1976 and up to January 1977 (Andhra Pradesh) and December1977 (Tamil Nadu). But this factor explains only part of the delay. Onthe one hand, tractors represented only 12% of total project costs inAndhra Pradesh, and 14% in Tamil Nadu. In terms of credit disbursements,they represented less than US$5 million in Andhra Pradesh, and only US$6.3million in Tamil Nadu. On the other hand, the disbursement graphs (seeGraph 1) show no startling jump in disbursements or in the disbursementrate in late 1976 and through 1977, when disbursements for tractors tookplace. (ii) Delays in starting the minor irrigation component in AndhraPradesh; some limitations on groundwater availability in Tamil Nadu anddifficulties in obtaining the necessary clearance for new wells from therespective SGDs in either state are also stated in the PCRs or werementioned to the audit mission. (iii) The restricted area the projectsinitially covered2/. These factors also contributed to the slow implemen-tation pace, but do not explain such a large discrepancy between actualimplementation times and appraisal forecasts either.

69. There is a fourth factor, which is not mentioned in the PCRs,which also contributed to the slow pace of disbursements: LDBs had othersources of funds, which were cheaper and more convenient than the projectfunds. From the time they started operations until 1972-73, LDB's mainsource of funds was the issues of ordinary debentures controlled by RBI.The IDA funds were to be channelled through a different credit instrument:special development debentures, controlled and bought by ARDC. ARDC'sfunds could be obtained at 6.5%, against 6 to 6.3% for ordinary debentures(earlier costs were even lower). When the IDA credit projects werestarted, the margins allowed for LDBs were 2.5% for special debentures and2.7% for ordinary debentures; they increased as rates of interest wereraised. Over recent years (including the projects' last years as well as1978), ordinary debentures would provide LDBs a spread of about 4.25% onminor irrigation loans and 4.5% on diversified lendings, as compared witha uniform spread of 3% under the special debentures.

1/ The Maharashtra project was implemented almost on schedule - infact, ahead of schedule through the first two years, and behind itthereafter, ending up with a rather minor nine-month delay. A possibleexplanation for this anomalous behavior is ventured in para. 72.

2/ Further, during 1974-75 there was an energy crisis in Tamil Nadu andthe energization program could not be expedited.

- 19 -

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- 20 -

70. Further, the repayment term under IDA supported projects was toapproximately match those allowed to the ultimate borrowers. This impliedannual repayments by SLDBs to ARDC, while repayments of ordinary deben-tures to RBI are made in a lump sum after 10 or 15 years. To generatesuch a lump sum most of the loan collections has to be allocated to asinking fund of GOI securities, LDB debentures and other securities. Atthe beginning of project implementation, the sinking fund arrangementswere financially marginal for LDBs. Over the years, however, as thereturns on investments increased, the income from sinking funds has made asignificant contribution to LDB incomes. Currently the amount of invest-ments range from one third to more than half the amounts of loans out-standing for most LDBs, and resulting profits are substantial 1/.Moreover contributions to the sinking funds can be treated with moreflexibility than annual payments./. In addition, special debenturesintroduced new restrictions to regular SLDB and PLDB operations: tech-nical, economic and financial regulations for appraising the sub-projectsand subsequent supervision of actual fund utilization. LDBs were thereforehesitant to borrow from ARDC under special debentures because ARDC'sinnovative rules and control were found to be somewhat constraining.

71. ARDC, with implicit IDA suport, has been trying to reduce theimportance of ordinary debentures as a source of funds for LDBs as well asequalize the rules and procedures for issuing both kinds of debentures.Initially, some restrictive measures were recommended - for example, notallowing the refinancing of minor irrigation works through ordinarydebentures in those areas where ARDC-financed schemes were operational.Eventually, the debenture eligibility formula was extended to ordinarydebentures in 1977, and rates of interest were brought closer to eachother in March 19791/. These developments have had different effects.On the positive side, a more technical approach to long-term lending hasbeen established through introducing regulations on subproject analysisand supervision. From this, a more substantial impact resulted on produc-tion, employment and income. Also, disbursements under the follow-on

1/ Funds "deposited" in the sinking fund are earning from 6 up to9 and 9.5% today, to eventually redeem debentures floated at 4%to 6% interest rates. Since almost no cost is incurred in handlinginvestments and risk is nil, that full spread is profit.

2/ The Committee on Integration (see para. 47) has reported that somePLDBs were building their sinking funds at a rate less than pro-portionate to theit ordinary lending.

3/ Rates of interest on ordinary debentures are currently higher (by0.25%) than those on special debentures regarding minor irrigation,land development and diversified investments for small farmers, andlower (by 0.75%) regarding diversified investments for other farmers.

- 21 -

projects (ARDC I and II) have moved more easily and faster. On thenegative side, these developments may have resulted in IDA funds sub-stituting for local capital that ordinary debentures might have raised,thus reducing the overall additional impact IDA funds were supposed togenerate in Indian agricultural investments 1/.

72. Why was it that the higher cost of project funds (as comparedwith the cost of the alternative ordinary debentures) contributed todelaying project implementation in two of the state projects under analy-sis, and not in the third one, Maharashtra? The mission found no obviousexplanation for this anomaly. Some guesses can be ventured, however:First, the Andhra Pradesh and Tamil Nadu LDBs were strongly business-oriented systems (the Andhra Pradesh LDB still is). They were profit-minded and readily noticed the difference in operational costs and profitmargins and reacted accordingly. The Maharashtra LDB, however, was actingmuch more like a para-governmental agency; this feature became moreapparent when the LDB structure was reorganized and the former PLDBs weremade SLDB branches. Second, the Maharashtra project came more than oneyear after Tamil Nadu and more than a year and a half after Andhra Pradesh.The eventual outcome of the struggle between IDA/ARDC on the one hand andthe profit-minded state LDBs on the other was much more evident by then,reducing the temptation to continue resisting the use of IDA funds pro-vided through special debentures. And third, the Maharashtra LDB wasin an extremely poor financial situation; the project had to be madeconditional on LDB's financial rehabilitation by GOM. LDB was then underpressure to lend, and for this particular purpose, IDA funds were ad-ditional financial resources made available to LDB.

B. Disbursements against "Irregular" and "Off-limits" Lending2/

73. To ensure that project funds would be usefully invested, IDArequired that new and more sophisticated techniques were to be introducedamong the PLDBs for analyzing the feasibility and profitability of thesub-borrowers' proposals. Since effective PLDBs were required for improv-ed analysis of such proposals and for supervising their actual implemen-tation thereafter, project lending was geographically restricted to thosedistricts in which IDA and the state governements agreed that effectivePLDBs existed. Also, IDA-financed lending for minor irrigation and forland development was restricted in Andhra Pradesh and in Tamil Nadu tothose areas which most obviously lent themselves to such activities.

1/ There are conflicting data on the extent of additionality under theprojects. The debenture eligibility formula as well as the addition-ality (actually, the lack of it) are analyzed in detail in the PPAR,on ARDC I, op.cit.

2/ The terms "irregular" and "off-limits" are not very appropriate torefer to those loans, for they may suggest procedural irregularities.This is not the case; they just did not properly conform to the pro-jects' lending conditions. Since the terms have been extensivelyutilized in Bank memoranda and in the PCRs, they have been retained inthis text.

- 22 -

74. After two years of implementation, GOI and IDA agreed to dis-burse credit funds against loans made under the Andhra Pradesh and TamilNadu projects 1 which did not conform with the lending conditionsstipulated in the credit agreements ./. These loans ("irregular"loans), which had already been refinanced out of local funds by RBI andARDC, were retroactively transferred to the project accounts from non-IDAARDC schemes and normal PLDB lending-/. The ordinary debentures whichhad been previously issued to refinance them were cancelled; specialdebentures were issued instead under IDA refinancing. Later on, IDAagreed to the State Governments' request to open the full state territoryto lending under the projects, and then, to retroactively refinance alllending which had been effected off the previous project limits since thecredit agreement had become effective ("off-limits" loans). The samedebenture cancellation/debenture issuance routine was carried out again.The switchover of "irregular" and "off-limits" loans to the IDA accountswas suggested as a solution to the slow pace of the disbursement of IDAcredits; such solution satisfied both GOI, which was then under extremeneed of foreign exchange, and IDA, which wished that sizeable disburse-ments take place. Had the operation not been carried out, disbursementswould have continued to lag behind because of the reluctance of the LDBsto apply the new lending conditions and perhaps not to forego the moreattractive terms and conditions of local finance.

75. The discussion between GOI and IDA on the financing of "ir-regular" loans focussed on the Gujarat case because of the large amountof loans involved (some US$18 million out of an overall amount of aboutUS$27 million loans for the four credits) and of some deliberate indiscip-line of the Gujarat LDB in the application of the terms of lendingstipulated in the credit agreement A/. IDA recognized that the "ir-regular" lending in question was in keeping with the project purposes andthat the deviation from the new lending norms adopted under the agree-ments were minor and temporary. It was also appreciated that the GujaratLDB was the first which had to apply the more stringent lending conditionsof the IDA projects and had faced special difficulties in this respect.Consequently, IDA agreed to waive certain terms and conditions of lending

1/ And also under the Gujarat and the Haryana projects. (Credits 191and 249-IN).

2/ Deviation concerned mainly rates of interest (lower), term of repay-ment (longer) and down-payment (smaller).

3/ Hence the term "retroactive finance" utilized in the PCR on Tamil Nadu.

4/ In the other states, the amounts involved were small relative toGujarat, and the lending contrary to the terms of the credit agree-ments took place only between the dates of the agreements and effec-tiveness, most likely as a result of some misunderstanding of thedate of application of the lending covenants.

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laid down in the various credit agreements (January 1973) 1/. Infor-mation in the project files on the discussions on "off-limits" lending isscanty. Eventually, IDA also issued the letters duly authorizing drawingcredit funds against loans made outside the project areas (Februiry1974).

76. As a result of these agreements, the previously lagging dis-bursements under both credits suddenly jumped, approaching momentarilyappraisal estimates. Then, disbursement rates came down again to their

previous level (see Graph 1).

77. The PCR on Gujarat analyzed quite briefly the issue of "ir-regular" lending. The PPAR, carried out under OED's abbreviated proce-dures, found the PCR discussion adequate, but did not analyze the issue.At that time, the decision to bypass this and certain other issues wasdeliberate: the intention being to take advantage of the experienceoffered by a comparative analysis of this and several other projects inthe Indian agricultural credit group, which were expected to be completedshortly (PPAR on Gujarat, op.cit, para. 3.01 in the Memorandum).

78. The audit mission confirmed that Rs 168 million (equivalent toUS$21 million; to 35% of total on-lending under the project, and to 56% of

total lending for minor irrigation under the project) had been actuallydisbursed in Tamil Nadu on the basis of retroactively financing: (i)"irregular" loans made within the agricultural area of the project, in anamount of about Rs 31 million, and (ii) loans made outside the projectarea during the period November 2, 1971 to December 31, 1973, amounting toabout Rs 137 million. The PCR on Andhra Pradesh is silent on this issue;Rs 53.6 million in irregular lending were found to have been switched overto the IDA project under the "irregular" concept. No information could beobtained from the files of the Regional Office or Controller's, of IDA, orfrom ARDC or Andhra Pradesh's SLDB on the amount of "off-limits" lendingwhich was refinanced. Information available in one of SLDB's annualreports seems to indicate a total amount of Rs 20 million.

79. The mission noted a discrepancy in the Tamil Nadu accountsbetween the amount of special IDA debentures issued under the project (Rs277.6 million as of June 30, 1976) and the related amount of loans thatshould have been financed by the debentures (Rs 207 million as of June30, 1976). After exhaustive discussions with officials of ARDC and theTamil Nadu SLDB, the mission found it impossible to have the two figuresreconciled by either ARDC or SLDB, because recording of the transfer ofthe loans to the IDA project loans was never made. In fact, the loans

1/ Amounts and dates are as follows:(a) SLDB Gujarat: Rs 241.5 M of loans for minor irrigation

advanced during the period June 3, 1970 - July 31, 1972.(b) SLDB Haryana: Rs 30.8 M of loans for tubewells, advanced

during the period June 11, 1971 to July 31, 1972.(c) SLDB Andhra Pradesh: Rs 53.6 M of loans for minor irrigation

and land levelling advanced during the period January 6, 1971to July 31, 1972.

(d) SLDB Tamil Nadu: Rs 33.2 M of loans for minor irrigationadvanced during the period June 11, 1971 to July 31, 1972.

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transferred had never been individually identified, as in the caseof those made directly under IDA credits. Since 1973 SLDB's auditorhas repeatedly asked to "reallocate the mortgages under the normalloans and earmark them to the required extent as cover for the specialdevelopment debentures (IDA) after carrying out necessary adjustments inaccounts"; no corrective action has been taken by SLDB, however. Thismay be due to the fact that the identification of the loans concerned mayinvolve a laborious and time-consumming work. Further, the missionfound no indication that the auditor's recommendations had been noted byeither ARDC or IDA. The audit mission was assured by ARDC and SLDB,as well as by Bank officials, that the loans refinanced conformed with theproject criteria and that deviations regarding lending terms were minor.GOI reiterated that the switchover of loans had been considered appropri-ate since lending conformed to project criteria. However, as mentionedabove, the information required to substantiate these claims is notavailable.

C. Groundwater Exploitation Control and Equity Considerations

80.1/ There is no explicit statement on ownership and use rights ofgroundwater in India. The right of ownership of groundwater seems torest with the owner of the overlying land 2/. The right of using thegroundwater is acquired through actually capturing it - i.e., drilling andoperating a well, and Indian farmers currently have an unrestricted rightto use groundwater obtained from a well sunk on their farms. Since ground-water cannot be enclosed, it must be accepted that all landowners above anaquifer share (proportionally to their land holdings) in their rights toown and use the groundwater. However, these private rights of ownershipand use are indefinite for any individual user, because other co-ownersmay take possession of the water at any moment. This situation can leadto depletion of the aquifer over time if eventually groundwater pumpingexceeds recharge. Since this is the case in most of the South Indianplateau, the fact that groundwater may be eventually depleted acts asstimulus for farmers to sink their wells as early as possible. The riskof depletion becomes a motivation for depletion, rather than for conser-vation, of the resource.

1/ This paragraph, and the two following the next one draw some materialfrom Veerman, T.S. - "Water Policy and Water Institutions in NorthernIndia: The Case of Groundwater Rights", Natural Resources Journal,Vol. 18, July 1978, pages 569 to 587.

2/ This is not absolutely clear. Although groundwater has never beendeclared to be publicly owned, the case can be construed that theCentral and State Governments are the ultimate owners of groundwaterbecause ownership rights on groundwater are derived from ownershiprights in land, and the governments are the ultimate owners of theland.

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81. IDA properly identified this problem and readily realized thatpublic intervention was needed to prevent local well interference aswell as long term overexploitation (see paras. 49 to 54). One particularsystem was selected to perform such control: IDA required that maximumwell density and minimum well spacing be observed (paras. 57 to 59)1/.These density and spacing criteria were properly conceived from a strictlytechnical point of view. If they were properly enforced - currently, theyare enforced only for those wells financed by institutional credit sources- they would produce the anticipated long-term effect on groundwateravailability and utilization, and on well profitability.

82. But IDA failed to realize at the time that these criteriaimplied introducing in those states a legal approach to groundwater rightswhich differed from the present Indian practice, and which leads toincreasing wealth and income concentration. The solution adopted was torestrain the right of late-comers to get access to the groundwater re-source. But this amounted to acknowledging full private ownership rightsto whoever first sank a well over the full quantity of groundwater hecould pump, and depriving without compensation all his neighbors (withinthe area determined by the spacing limit) of their right to use (to own,too?) the groundwater. Thereafter, the "early birds" could draw withimpunity the groundwater underlying their and their unfortunate neighbors'land ; their use rights had become definite. Two classes of farmers arethus created: the owners of some land with right of use over all ground-water, and the owners of the rest of the land, with mere rights of owner-ship over groundwater but no rights of use over it. Even worse, the firstto get access to groundwater (i.e., to the credit or other financialresources to finance sinking and motorizing a well) have usually been thebetter-off farmers.2/

83. A more equitable solution to the problem - and the problem isindeed serious - would have to recognize and protect the correlative andcoequal rights of all overlying landowners to use their proportional shareof the total groundwater supply. Such a solution could include one ormore of the following elements: (a) water sharing among all farmers,proportionate to either their land holding or their water requirements;(b) water rationing among all those who want to sink a well - or have onealready; (c) proper compensation to farmers who lose or must involuntarilysurrender their right to use the groundwater underlying their lands; (d)public or social drilling and operation of wells, with water being propor-tionately distributed or sold to all interested farmers; etc. In eitherof the first two cases, those receiving water would have to share theinvestment and operating costs of the owner/operator of the well. In thethird case, a decision would be required on whether such compensationshould be paid by the neighboring well owner(s) or by the government. Asuitable government agency (like the SGDs, which are drilling wells for

1/ Such restrictions were introduced into the states for the first timeas a result of the projects.

2/ The comment made by GOI on this paragraph and the following onedoes not actually refer to these paragraphs but to para. 52. Afootnote was added there.

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drinking water in Tamil Nadu and Andhra Pradesh) or a cooperative/com-mercial institution should be identified for the latter. Water sharing orrationing could be carried out under either the appropriation system(under which prospective groundwater users must apply for a Governmentlicense to draw a certain amount of water), the adjudication system (underwhich water for quarreling users is apportioned by the judiciary), ortraditional systems (under which someone with local authority - localcouncils, elders, leaders, etc. - iron out discrepancies or impose authori-tative decisions, or some traditional consensual mechanisms are put intowork).

84. Two additional points - both referring to flexibility - mustbe borne in mind while devising a more equitable solution. One is tointroduce enough flexibility into the system to accommodate future demands,mainly coming from many small farmers (who most certainly will not claimtheir right to groundwater until they become more aware of their rightsand possibilities) and from other potential users (such as nearby villagesor far away cities V/). The other one is to consider - where there issuch a possibility - conjunctive development and use of surface andgroundwater; correlative rights to groundwater, once adjudicated throughwhatever system, should be flexible enough to be integrated into a rota-tional or other distribution system for canal water deliveries, or to beshifted to other potential users when the first ones could be more ef-ficiently served with surface water.

D. A Cautionary Note on the SGDs' Effectiveness

85. All three PCRs show a well deserved satisfaction with thesuccessful establishment, development or strengthening of the respectiveSGDs. Indeed, they have become good technical agencies. But some of theSGDs have yet to become fully effective agencies. The PCRs do mentionthat the human and technical resources of this or that particular SGD havehad to be spread too thinly, and that more information on water resourcesis still required. ARDC III continues to place emphasis on furtherSGD development and on water resources evaluation. Two examples oflimited effectiveness were mentioned to the audit mission: (i) SLDB andPLDB officials expressed the opinion that the Tamil Nadu SGD, for lack ofdetailed information, was a bit too conservative in its clearance of newwell requests. Areas which allegedly could bear additional wells -even areas where the water table is currently rising - were said tobe "frozen" for future development for the time being. (ii) ARDC tech-nicians felt that the Andhra Pradesh SGD was some times a bit too lenientin granting clearance for well drilling schemes in some areas; parametersused there by SGD to justify clearance for additional wells were found tobe too optimistic when compared with parameters derived for the same areasby GO specialized agencies.

1/ For example, there is an area in Northern Tamil Nadu where ground-water development for farming purposes has been restricted or for-bidden to secure sources of water for future demands by Madras, theState capital.

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E. A Cautionary Note on Statistical and Accounting Data

86. The audit mission was faced with difficulties -i finding con-sistent and reliable data on loans advanced, and their breakdown according

to the resources under which they were financed (ordinary and rural deben-

tures, ARDC non-IDA credits, IDA statewide credit or ARDC I). The problem

results from the fact that the IDA-supported projects - including the

statewide as well as the ARDC projects - are continuing programs whereseveral investments financed under one project were completed underfollow-on projects. The sub-loan accounts are only markDd as "IDA projects"

- as compared with "normal loans" -, without signaling whether they were

financed under the state project or under one of the ARDC projects.Further, the PLDB or SLDB branch staff are not usually aware of the

details of the project under which SLDB has floated debentures. The sameproblems were found regarding the breakdown of loans outstanding and thedebentures issued and outstanding. For example, in Tamil,Nadu the annual

volume of lending given in the PCR (Annex 3, para. 10) is very differeat

from that found in the LDB annual reports and that furnished to themission (these refer to the cooperative years, the other may refer to the

LDB fiscal year but this fact does not explain the differences). Also,

"irregular" loans switched over to the state project have not been record-

ed among the loans made under the project. In Maharashtra no data areavailable on the number and amounts of loans outstanding under the differ-ent IDA-financed projects (the state project, ARDC I and ARDC II); the

breakdown of debentures issued and outstanding according to sources offinancing is incomplete and some figures furnished to the mission areobviously inaccurate.-V-2/.

87. Regarding the keeping of separate projects accountsr3/ some

progress could be made in the standardization of and consistency in

accounts; the adoption of uniform recording procedures, more especiallyregarding interest; the presentation of financial statements and thecollection of statistical data. The audit mission was shown no evi-

dence that covenants which stiputate the maintenance of separate accounts

for project lending by a participating Bank, and the regular auditing ofsuch accounts, had been strictly adhered to. Commercial banks are annual-

ly audited by their statutory auditors. The auditing of PLDB accounts is

not fully satisfactory in two respects: quality of auditing and delays

1/ Actually, the Maharashtra and Tamil Nadu SLDBs are not performingproperly and are two of the six states which may not be eligible toparticipate in the ARDC III project.

2/ Prompted by these findings of the OED mission, the last supervisionmission of ARDC II (June 1978) checked five different states (includ-

ing Maharashtra) . The mission reported having been able to tracepayments through IDA to GOI to ARDC to LDB in every state; theaccounts checked in Maharashtra were clearly identifiable.

3/ Discussions on accounting and auditing is absent in the PCRs.

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(which vary by states, but are usually long)1/. It must be said, how-ever, that the registrars of cooperative societies cannot cope with super-vising and auditing the considerable number of cooperative societies, andPLDBs cannot afford to pay for private auditors.

F. Reuse of IDA Funds

88. A special covenant concerning the reuse of IDA funds recoveredfrom participating lending agencies was included in the project agreementsfor Andhra Pradesh and Maharashtra 2/. Under this covenant, repaymentsto ARDC by participating agencies had to be deposited in a special accountto be used only for refinancing ARDC-approved agricultural developmentschemes, to be carried out in conformity with sound administrative,agricultural and financial practices. In this way, ARDC could count onsignificant amounts of funds, because the repayment periods under itsrefinancing arrangements are shorter than GOI's terms of lending.

89. Repayments to ARDC by participating banks have not been deposit-ed in a separate account, and this was never reported by IDA supervisionmissions. But it was not appropriate to have such covenants included inthe project agreements: although the funds involved are substantial, theyare available for a period shorter than the shortest term of any loan tobe made under any scheme similar to those financed under the projects -even leaving aside the time required to commit and disburse them. Cove-nants like these do not appear in more recent projects.

1/ The Bank's Regional Office finds that quality of accounting is gen-erally good.

2/ Also in the projects for Punjab and for Karnataka, but not in thosefor Tamil Nadu, ARDC I and ARDC II.

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Annex 1Z-139 NEW DELHI 1000 151115 Pagel

ETAT PTY MOST IMMEDIATE

INDEMBASSY WASHINGTON

REDDY FROM SIBAL ECOFAIRS

NO.F.6(29)79EB.2

REFERENCE OED DRAFT AUDIT REPORT ON THREE CLOSED AGRICULTURAL

CREDITS ON ANDHRA 3PRADESH, TAMILNADU AND MAHARASHTRA FOR WHICH COMMENTS OF GOI HAVE

000 BEEN INVITED FOR INCORPORATION IN THE FINAL DOCUMENT. THE FOLLWING

OBSERVATIONS MAY KINDLY BE PASSED ON TO IDA IN THIS CONNECTION:-

QUOTE(AAA) PARA 27 OF THE AUDIT MEMORANDUM DISCUSSED THE UNSATIS-

FACTORY STATE OF RECOVERIES OF MAHARASHTRA LDB. IN THIS CONNECTION,

gr IT MAY BE APPROPRIATE TO REFLECT

IN THE AUDIT MEMORANDUM THAT BOTH GOM AND ARDC ARE CONCERNED0

c ABOUT THE POOR STATE OF RECOVERIES IN MAHARASHTRA AND HAVE SINCE

AGREED FOR A REHABILITATION PROGRAMME. FURTHER THE STATE GOVERNMENT

HAS ALSO ISSUED IN STRUCTION THAT COERCIVE ACTION COULD

BE TAKEN IRRESPECTIVE OF THE AGE OF OVERDUES AND AMOUNT INVOLFED.

BBB. PARA 28 ON INTEGRATION OF THE COOPERATION CREDIT SYSTEM GOI

o HAS ALREADY AGREED WHILE NEGOTIATING ARDC III TO REVIEW THE PROGRESS0* MADE BY THE COOPERATIVE CREDIT SYSTEM TOWQRDS MEETING THE AGRI-

CULTURAL CREDIT NEEDS OF FARMERS THROUGH ONE SOURCE CR CLOSELY -

COORDINATED SOURCE BY DECEMBER 1980. THIS NEEDS TO BE SUITABLY

REFLECTED IN THE AUDIT REPORT.

Annex 1-30 - Page 2

CCC. IN PARAGRAPH 52 WHERE THE NEED FOR CONTROL ON GROUND WATER

DEVELOPMENT HAS BEEN HIGHLIGHTED, IT NEEDS TO BE MENTIONED THAT

GOI HAVE RECOGNISED THE PROBLEMS REGARDING GROUND WATER REGULATION

EMERGING MAINLY THROUGH INVESTMENTS OUTSIDE

INSTITUTIONAL FINANCE AND APPROPRIATE MODIFICATIONS HAVE BEEN (

AGREED TO UNDER ARDC III CREDIT PROJECT IN RESOURCE EVALUATION to

DDD. IN PARAGRAPH 71 THERE IS A REFERENCE QUOTE EVENTUALLY THE

DEBENTURE ELIGIBILITY FORMULA WAS EXTENDED TO ORDINARY DEBENTURES IN

1977 AND THE RATES OF INTEREST WERE EQUALISED IN MARCH, 1979

UNQUOTE. THIS IS FACTUALLY NOT CORRECT.

THE CORRECT POSITION IS THAT THE RATES OF INTEREST UNDER ORDINARY0

DEBENTURES AND SPECIAL DEBENTURES WERE NEVER EQUALISED. UNTIL cr

RECENTLY THE REATES OF ORDINARY DEBENTURES HAVE BEEN LOWER BY "

1.25 TO 1.75 PER CENT AS COMPARED OT THE RATES UNDER SPECIAL

DEBENTURES. UNDER THE RECENT AMENDMENT EFFECTIVE MARCH, 1979

THE RATES OF INTERESTON ORDINARY DEBENTURES ARE HIGHER BY 0.25 PER CENT

THAT ARDCS RATES IN RESPECT OF MINOR IRRIGATION AND LAND DEVE-

LOPMENT AND DIVERSIFIED INVESTMENT FOR SMALL FARMERS WHILE LOWER

BY 0.75 PER CENT IN THE CASE OF DIVERSIFIED INVESTMENTS FOR OTHER8FARMERS.

en

-31 - Annex 1Page 3

mm

EEE. IN PARA 72 IS HAS BEEN MENTIONED THAT MAHARASHTRA LDB QUOTE 0

WAS THEN UNDER PRESSURE TO LEND AN OBVIOUSLY TO LEND IRRESPECTIVE

OF SOURCE OF FUNDS AT WHATEVER SPREAD UNQUOTE. THIS OBSERVATION

DOES NOT APPEAR TO BE APPROPRIATE AND IT NEEDS TO BE CLARIFIED THATQ2

THE ATTRACTION OF IDA FUNDS IS MORE RELATED TO THE PROJECT

ORIENTED APPROACH UNDER WHICH THEY ARE AVAILABLE AS THERE ARE

ADVANTAGES TO BE GAINED IN SYSTEMATIC TECHNO ECONOMIC APPRAISAL,

00o SUPERVISION INSTITUTION BUILDING.r-

FFF.IN PARA 74 THE TERMS IRPEGULAR'AND OFF-LIMITS'LENDING

HAVE BEEN USED. CONSIDERING THE FACT THAT THE LOANS REFERRED TO O

o CONFORM TO THE SUBSTANTIAL REQUIREMENTS UNDER THE AGREEMENTS WITH

IDA IN REGARD TO RATES OF INTEREST, DONW

PAYMENT, LOAN MATURITIES AND TECHNICAL CRITERIA AND THE EXTENSION

OF THE PROJECT AREA WAS ALSO BASED ON SOUND TECHNICAL CONSIDERATIONS,

IT MAY BE MORE APPROPRIATE THAT SUCH A SWITCH-OVER LOANDING MAY ..

NOT BE TERMED AS IRREGULAR 'OR 6FF-LIMITS: i

0DGGG. VITH REGARD TO THE OBSERVATIONS CONTAINED IN THIS PARA 79

IT IS NECESSARY TO NOTE THAT THE SWITCH-OVER OF LOANS UNDER TAMILNAD 3o PROJECT WAS CONSIDERED APPROPRIATE BY GOI, ARDC AND IDA SINCE THE00

LOANING CONFORMED TO PROJECT CRITERIA. THE FACT THAT INDIVIDUAL

LOANS WERE NOT MARKED AS PROJECT LOANS IS ESSENTIALLY A PRO+NN

PROCEDURAL AND NOT A SUBSTANTIVE MATTER.

(END OF PAGONE)

- 32 - Annex 1Page 4

HH. IN REGARD TO OBSERVATIONS IN PARA 82 AND 83 A NOTE NEED TO

BE TAKEN OF THE INTROCUTION OF NEW DISCIPLINE FOR GROUND WATER

RESOURCE ASSESMENT UNDER ARDC III WHICH WOULD TAKE INTO ACCOUNT

THE RATE OF GROWTH IN PRIVATE INVESTMENTS NOT COVERED BY INS-

TITUTIONAL FINANCE FOR

EXPLOITATION OF GROUND WATER.

III. REGARDING PARA 86 ARDC HAS CLARIFIED THAT IT IS NOT CORRECT

TO CONCLUDE AS MENTIONED IN THE AUDIT REPORT THAT DATA ARE NOT

AVAILABLE ON OUTSTANDING LOANS UNDER DIFFERENT IDA PROJECTS.

THE PROBLEM IS THAT VARIOUS IDA ASSISTED PROJECTS INCLUDING ARDC I

AND ARDC II ARE CONTINUING PROGRAMMES WHERE INVESTMENTS FINANCED

IN ONE PROJECT WERE COMPLETED IN THE FOLLOWING PROJECTS. THE ACCOUNTS

ARE, THEREFORE, MARKED AS IDA PROJECT/NORMAL LOANS AND NOT 0

NECESSARILY UNDER STATE WISE PROJECT, ARDC I OR ARDC II SEPARATELY. (D

THE PLDB/ BRANCH LEVEL STAFF ARE NOT USUALLY AWARE OF THE DETAILS

OF THE PROJECT UNDER WHICH APEX LEVEL UNIT HAS

FLOATED DEBENTURES. BECAUSE OF THESE REASONS THIS PARAGRAPH NEESS

TO BE SUITABLY NODIFIED.

JJJ. ON THE OBSERVATIONS REGARDING AUDIT IN PARA 7 IT NEEDS

5 TO BE NOTED THAT 0

COMMERCIAL BANKS ARE AUITED BY THEIR STATUTORY AUDITORS ANNUALLY.

WE WOULD AGREE THAT IN THE CASE OF LDBS WHILE REGULAR AUDITING

IS DONE, THERE HAS BEEN DELAY IN FINALISING AUDIT REPORTS WHICH

NDSEED TO BE MIINIMISED.

(a

Annex 1

- 33 - Page 5

KKK. REGARDING PARAGRAPH 88 ARDC HAS CLARIFIED THAT ALTHOUGH REPAY- A)

MENTS TO ARDC BY PARTICIPATING BANKS WHERE NOT DEPOSITED IN A

o SEPARATE ACCOUNT THEY ARE USED ONLY FOR REFINANCING ARDC APPROVED00

SCHEMES CARRIED OUT IN CONFORMITY WITH SOUND ADMINISTRATIVE,

AGRICULTURAL AND FINANCIAL PRACTICES, THE SAID GOVERNMENT HAS,

"4THEREOFRE, BEEN SUBSTANTIALLY COMPLIED WITH ALTHOUGH THERE HAS

BEEN TECHNICAL IRREGULARITY THAT A SEPARATE FUND HAD NOT BEEN MAIN-

TAINED FOR ANDHRA PRADESH AND MAHARASHTRA PROJECTS. THIS PARAGRAPH,

THEREFORE, NEEDS TO BE SUITABLY MODIFIED.

LLL. REGARDING OBSERVATIONS IN PARA 41 THAT IN TAMILNADU AFTER -I

1974-75 RESCHEDULING WAS INFLUENCED BY POLITICAL CONSIDERATION.

STATE GOVERNMENT HAVE POINTED OUT THAT THIS CONCLUSION IS AGAINST 0

FACTS. RELIEF WAS GIVEN IN RESPECT OF

g CERTAIN LOANS BOTH RELATING TO COOPERATIVES AS WELL AS GOVERNMENTAL

DUES ON ACCOUNT OF DROUGHT AND NOT OTHERWISE.

MMM REGARDING THE OBSERVATIONS IN PARA 42 ON THE TAMILNADU PLAN

FOR REDUCING THE NUMBER OF PLDBS THE STATE GOVERNMENT WOULD LIKE

THAT THE AUDIT REPORT SHOJLD CLARIFY SUITABLY THAT THE STATE

5 GOVERNMENT WHILE ORDERING AMALGAMATION OF PLDBS HAVE TRIED TO

00cr MEET THE DIFFICULTIES CAUSED BY INCREASE IN THE AREA OF OPERATION

BY INCREASING THE NUMBER OF FIELD STAFF.

Annex 1Page-G

- 34 -

NNN. IN PARAGRAPH 62, REPORT THERE IS A REFERENCE TO THE EXTENT

OF SUBSIDY PROVIDED FOR FAILED WELLS. THESE OBSERVATIONS, HOWEVER.

ARE NOT VALID FOR TAMILNADQ WHERE THE FAILED WELLS FUND RULES

PROVIDE THAT UPTO 90 PERCENT OF THE COST OF THE FAILED WELLS

0 SUBJECT TO A MAXIMUM OF RS.1O,000 CAN BE GRANTED BY WAY OF0

ASSISTANCE IN THE CASE OF FAILURES OF WELLS. THIS FACT NEEDS TO BE

INCORPORATED.

000. WHILE DISCUSSING CAUSES FOR DELAYS IN IMPLEMENTATION OF THESE

PROJECTS UNDER

PARAGRAPH 69 THE TAMILNADU GOVERNMENT HAS POINTED OUT THAT NO MENTION

HAS BEEN MADE IN THE AUDIT REPORT OF THE FACT THAT DELAY WAS MAINLY

ON ACCOUNT OF SMALL COVERAGE OF PROJECT AREA INITIALLY. FURTHER,

DURING 1974-75 THERE WAS ENERGY

CRISES AND CONSEQUENTLY ENERGISATION PROGRAMME COULD NOT BE

EXPEDITED UNQUOTE )

8 3o FOREIGN

COLS 1391.25 1.75 0.25 0.75 RS.10,000

MEA/NEGI 151350 PL ACK

IBRD 10483R4ARCHl 1979

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