FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Agriculture D Division South Asia Projects Department Document of The World Bank FOR OFFICIAL USE ONLY INDIA KARNATAKA SERICULTURE PROJECT STAFF APPRAISAL REPORT May 14, 1980 Report No. 290la-IN This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS US$1.00 = Rs / WEIGHTS AND MEASURES Metric System PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADS = Assistant Director of Sericulture ARDC Agricultural Refinance and Development Corporation CB Commercial Banks CSB = Central Silk Board CSRTI = Central Sericultural Research and Training Institute DCCB District Cooperative Central Bank DOS Department of Sericulture GOI Government of India GOK = Government of Karnataka IDBI Industrial Development Bank of India ISDP Intensive Silk Development Project KSIC Karnataka Silk Industries Corporation KSSDI Karnataka State Sericultural Development Institute LDB Land Development Bank PRC People's Republic of China PWD Public Works Department RBI = Reserve Bank of India SA = Sericulture Assistant SD Sericulture Demonstrator TSC Technical Service Center FISCAL YEAR GOI and GOK - April 1 - March 31 ARDC, IDBI and Cooperative Banks - July 1 - June 30 Commercial Banks - January 1 - December 31 1/ Until September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then it has been fixed against a "basket" of currencies. As these currencies are floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in this report are based on the projected exchange rate during the project period.

3 FOR OFFICIAL USE ONLY GLOSSARY Basin - Part of a silk reeling machine in which cocoons float in warm water. Bivoltine - Silkworm varieties from temperate climate countries which breed only twice a year and whose eggs exhibit dormancy. Charka - Simple, hand driven silk reeling machine with one basin and four to six ends. Chawki - South Indian name for very young silkworms. Cocoon - Silk capsule formed by silkworm larva in which it spends pupa stage. Cottage Basin - Mechanized silk reeling machine used in villages. Each unit has six to ten basins each with six ends. Degumming - Removal of sericin from silk waste. Denier - Grams silk per 9,000 meters yarn or filament, used as measure of silk yarn or cocoon filament thickness. Ends - Part of silk reeling machine where several cocoon filaments are combined into silk yarn. Filature - Large-scale silk reeling factory. Grainage - Establishment for silkworm egg production. Hatchery - Communally operated village establishment where eggs hatch into silkworms. Laying - Egg production from one female moth. Multivoltine - Tropical silkworm varieties which breed throughout the year and whose eggs have no dormancy. Raw Silk - Silk yarn, after reeling. Renditta - Measure of silk recovery from cocoon; ratio of kg cocoons needed to reel 1 kg raw silk. Sericin - Gummy substance which binds filament together on cocoons and also binds silk waste fibers together. Silk Recovery - Reciprocal of renditta. Silk Waste - By-product of silk reeling and raw material for spun silk. Spun Silk - Silk yarn prepared from silk waste by degumming, combing and spinning process, similar to that used for wool. Univoltine - Similar to bivoltine silkworm varieties, but breed only once during the year. Note: Paragraph 1.06 of this report contains a brief description of the silk production process. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 INDIA KARNATAKA SERICULTURE PROJECT Table of Contents Page No. I. THE SECTOR... 1 General... 1 Sericulture in India... 1 The Silk Production Process Mulberry Cultivation... 2 Silkworms and Silkworm Rearing Cocoon Marketing and Processing Government Programs... 6 Mulberry Silk Research and Technology II. SILK PRODUCTION IN KARNATAKA... 7 Agriculture in Karnataka... 7 Silk Production Area... 8 Topography, Climate and Soils Production... 9 Holding Size and Tenure Reeling Department of Sericulture (DOS) Credit III. THE PROJECT.. 13 Project Genesis.. 13 Project Summary.. 13 Silk Production.. 15 Silk Processing.. 17 Karnataka Silk Industries Corporation Facilities 17 Research and Technical Assistance..18 Land for Project Facilities..20 Environmental Aspects..20 Project Phasing.. 20 This report is based on the findings of a preappraisal mission consisting of Mr. Ducksoo Lee and Ms. J. Stockard (IDA) and Messrs. T. Omura, T. Kuwano and Y. Arakawa (Consultants) which visited India in February 1979; and of the appraisal mission consisting of Messrs. G. Stern, J.C. Goldbrenner and Ms. J. Stockard (IDA) and Messrs. T. Omura, T. Miyazaki, and R.G. Deshpande (consultants) which visited India during September/October 1979.

6 - ii - Page No. IV. COST ESTIMATES, FINANCING, PROCUREMENT AND DISBURSEMENTS Cost Estimates Financing Procurement Disbursement V. ORGANIZATION AND MANAGEMENT Department of Sericulture Department of Agriculture Karnataka Silk Industries Corporation (KSIC) Research Credit for KSIC through the Inoustrial Development Bank of India (IDBI) Credit for Silk Farmers and Silk Reelers through ARDC ARDC and IDBI Interest Rates GOI Ministry of Industries Training Project Coordination Reporting Requirements and Evaluation Accounts and Audits VI. PRODUCTION, MARKET AND PRICES Yields and Production World Production, Consumption and Trade Exports and the Domestic Market in India World Raw Silk Price Projection Indian Domestic Prices VII. FINANCIAL PROJECTIONS Karnataka Silk Industries Corporation Departmental Filature Cottage Basins for Private Reelers Farm Models Cost Recovery VIII. BENEFITS AND ECONOMIC EVALUATION Benefits Economic Evaluation Project Beneficiaries Project Risks IX. RECOMMENDATIONS... 41

7 Table of Contents (Cont'd) Schedule A - Lending Terms and Conditions Annex 1 - Text Tables Table 3.1 Implementation Schedule Major Items Table 6.1 World Cocoon and Raw Silk Production Table 6.2 World Raw Silk Consumption Table 6.3 World Raw Silk Exports and Imports Table 6.4 Indian Mulberry Silk Production and Exports Table 6.5 Japanese Imported Raw Silk and Silk Waste Prices Table 6.6 Financial Price Projection for Raw Silk Annex 2 - Project Cost Tables Table 1 Project Cost Summary with Phasing Table 2.1 Grainages: Estimated Costs and Phasing Table 2.2 Hatcheries: Estimated Costs and Phasing Table 2.3 Model Hatcheries: Estimated Costs and Phasing Table 2.4 A. Technical Service Centers: Estimated Costs and Phasing B. Mobile Demonstration Units: Estimated Costs and Phasing Table 2.5 Training Schools: Estimated Costs and Phasing Table 2.6 Cocoon Markets: Estimated Costs and Phasing Table 2.7 Departmental Filature: Estimated Costs and Phasing Table 2.8 DOS Incremental Administrative Cost Table 3.1 KSIC Filature: Estimated Costs and Phasing Table 3.2 KSIC Spun Silk Mill: Estimated Costs and Phasing Table 4 Research: Estimated Costs and Phasing Table 5 Technical Assistance and Study Tours: Estimated Costs and Phasing Annex 3 - Schedule of Estimated Disbursements Annex 4 - Financial Analysis Table 1 KSIC Cash Flow Projections and Financial Rate of Return Table 2 KSIC Consolidated Income Statement Projections Table 3 KSIC Balance Sheet Table 4.1 KSIC New Filature Estimated Operating Profit Table 4.2 KSIC Spun Silk Mill Estimated Operating Profit Table 4.3 KSIC Weaving Plant Estimated Operating Profit Table 4.4 KSIC Existing Filatures Estimated Operating Profit Table 4.5 KSIC Twisting Mill Estimated Operating Profit Table 5.1 KSIC Workshop: Estimated Operating Costs Table 5.2 KSIC Headquarters: Estimated Operating Costs Table 6 Departmental Filature: Estimated Net Operating Profit and Financial Rate of Return Table 7 Cottage Basins: Projected Reeler Income and Financial Returns

8 i v - Table of Contents (Cont'd) Table 8.1 Table 8.2 Table 8.3 Table 8.4 Table Ha Irrigated Farm Model: Projected Income and Financial Returns 1 Ha Irrigated Farm Model: Projected Income and Financial Returns 0.5 Ha New Irrigated Farm Model: Projected Income and Financial Returns 1 Ha Rainfed Farm Model: Projected Income and Financial Returns Departmental Facilities: Staff Salaries and Phasing Annex 5 - Economic Analysis Table 1 Economic Rate of Return to the Project Table 2 Price Summary for Financial and Economic Analysis Annex 6 - Industrial Development Bank of India Annex 7 - Related Documents and Data Available in the Project Files List of Charts Chart No. WB Proposed Organization Chart, Karnataka Department of Sericulture Chart No. WB Proposed Organization Chart, Karnataka Silk Industries Corporation Chart No. WB Project Organization Chart Chart No. WB Department of Sericulture Implementation Schedule of Main Project Activities Chart No. WB Project Initiation, KSIC, Technical Assistance and Overseas Training Implementation Schedule of Main Project Activities Chart No. WB Research Implementation Schedule of Main Project Activities List of Maps IBRD 14378R - Karnataka Sericulture Project

9 INDIA KARNATAKA SERICULTURE PROJECT I. THE SECTOR General 1.01 Agriculture is the dominant sector of the Indian economy. It contributes 45% of the GNP, provides about 70% of the country's employment and is the basis for almost 60% of its export earnings. Most of the 160 million ha cultivable land in India is devoted to foodgrains, pulses and oilseeds, but industrial crops such as cotton, jute, tobacco and sericulture, plantation crops such as tea, coffee, rubber, coconuts and cashewnuts, and a large range of spices and horticulture crops are important in some states and make a sizeable contribution to the Indian economy During the last decade, Government of India's (GOI) development plans have emphasized agriculture, particularly foodgrain production, by increasing use of irrigation, fertilizers, plant protection and good seeds, backed by improved extension and research services. Although production has responded impressively, leading to the build up of large reserve grain stocks, considerable further efforts are needed to insure the long-term food supply. Consequently, GOI is again giving high priority to foodgrain production in its Draft Sixth Five-Year Plan. However, the plan also emphasizes alleviation of rural unemployment and poverty and therefore includes investment for labor intensive subsectors such as sericulture. Sericulture in India 1.03 India ranks fifth among silk producing countries after Japan, the People's Republic of China, Korea and the USSR and sericulture holds an important place in the Indian economy. About 3.8 million people are engaged in plant cultivation, silkworm egg production and rearing or in the predominantly small-scale reeling and weaving industry. In 1978 production reached 3,700 tons raw silk used to manufacture fabrics with an estimated value of between US$200 and US$250 million. Since silk is rooted in Indian social tradition, the domestic market is strong and most of the production is used locally. However exports, mostly fabrics, have expanded, particularly over the last five years and earned about US$45 million in Four silk varieties 1/ are produced in India--mulberry, 2/ tasar, 3/ eri, 4/ and muga. 5/ Of these, mulberry silk, representing the bulk of internationally traded silk, comprises about 85% of total Indian silk production. Introduced into India in ancient times, mulberry silk production received some emphasis during World War II for parachute production, but started to expand markedly only two decades ago and has received a boost during the last five 1/ Derived from different silk worm varieties feeding on leaves of: 2/ mulberry bushes or trees, 3/ a variety of trees chiefly oak, Terminalia and Sal, 4/ castor or cassava, and 5/ several tree species indigenous to Assam.

10 - 2 - years, due to introduction of improved mulberry and silkworm varieties. Karnataka accounts for 74% of Indian mulberry silk. Therefore, large scale expansion there, which would be supported by the project, would have a major impact on Indian production Sericulture is highly labor intensive. One hectare of mulberry plantation creates man-years of direct employment annually in mulberry cultivation, silkworm rearing, reeling, twisting, weaving and implements fabrication. Development of sericulture therefore accords well with GOI priorities for alleviating unemployment and rural poverty. Furthermore, the time is propitious for expanding Indian sericulture since production is dropping in the countries of leading producers, notably Japan and Korea, due to high labor requirements and costs. India has other advantages over competitor producers, notably an ample supply of suitable land, not available in Japan, for instance, and year-round production (up to seven silkworm rearings) compared to seasonal production (two to three rearings) in temperate countries. Consequently, GOI has included sericulture development programs in its Draft Sixth Plan (1978/ /83) to double production and exports. The project would contribute significantly to achieving these objectives. The Silk Production Process 1.06 Sericulture, which in this report refers to mulberry silk production, consists of three activities: mulberry leaf production as silkworm feed (paras ), silkworm rearing (paras ) and silk reeling (paras ). Sericulturists cultivate mulberry plants and annually rear several crops of silkworms, producing cocoons which are sold to reelers. For each rearing, the sericulturist purchases eggs from a grainage, where, under controlled conditions, disease-free eggs are produced from selected silkworm varieties. After hatching, fresh leaves are harvested several times daily and brought to the rearing house to provide a continuous feed for the silkworms for days. Subsequently, in about a 48-hour period, the silkworm extrudes a continuous filament which it winds around itself, spinning a protective shell, the cocoon. Inside the cocoon, over a ten day period, the silkworm undergoes metamorphosis into a pupa and then into a moth. Under natural conditions or for breeding and egg production purposes, the moth emerges from the cocoon and lays eggs, beginning the cycle anew. The sericulturist, however, must sell cocoons before moth emergence so that the continous silk filament can be removed from the cocoon by reeling. The reeling process exists at several levels of technology depending to a large extent on cocoon quality, but all reelers must stifle the pupae to prevent moth emergence by steam or hot air drying of the cocoons. Raw silk is generally the term used to describe the filament after it has been reeled out of the cocoon and combined with several filaments to produce a thread of specified thickness, silk yarn. The yarn is then "thrown" or twisted to impart tensile strength suitable for weaving purposes. These processes are described in more detail below. Mulberry Cultivation 1.07 Mulberry is a hardy and drought resistant tree. In Karnataka it is cultivated as a shrub in closely spaced lines and is allowed to grow two or three meters high. The tree tolerates most soil conditions other than impeded

11 - 3 - drainage and because of a range of varieties grows well from sea level to over 1,500 m altitude. Establishment is by cuttings and the first crop of leaves is harvested five to six months after planting. Under rainfed conditions, harvesting is seasonal and tails off during the dry time between November and June, whereas under irrigation five harvests at roughly 10 weekly intervals are customary. The crop responds well to inputs and good cultivation practices as evidenced by a 3,000 kg/ha average yield under rainfed (about 700 mm/annum) conditions, compared to commonly obtained yields of 30,000 kg/ha with a full package of practices under irrigation. Such package includes an improved variety (M5), regular weeding, heavy manuring (100 kg N,50 kg P and 50 kg K per hectare annually for rainfed crops and up to 300 kg N, 120 kg P and 120 kg K per hectare annually for irrigated mulberry). Correct harvesting and pruning methods play an important role in determining plantation yield and life. Mulberry sticks for fuel or planting material and parts of leaves not eaten by silkworms and used for cattle fodder, are valuable by-products Pests and diseases cause few problems. While leaf spot diseases and powdery mildew are fairly common, they have caused little economic damage to date. Control measures are known, but their use is rarely called for. A well tended mulberry garden comes into full production in the second year after planting and remains productive for years. Silkworms and Silkworm Rearing 1.09 Silkworm varieties have adapted themselves to the climate of their environment. Tropical silkworms, including traditional Indian varieties, are multivoltine and produce several generations during the year. Their eggs have no dormancy. By contrast, temperate area silkworms from Europe or Japan, are uni or bivoltine having only one or two generations per year. Their eggs remain dormant for some months to allow over wintering. There are artificial means of terminating dormancy so that silkworms of these varieties can also be reared throughout the year. Multivoltine varieties have low productivity compared to bivoltines and the successful adaptation of the latter to tropical conditions has laid foundations for a major production boost for Indian sericulture The life cycle of mulberry silkworms in India lasts about days and comprises egg hatching, days feeding on mulberry leaves, during which worms undergo four moults 1/, about 2 days cocoon formation, days pupating, followed by moth emergence, mating and egg laying. Each moth lays about 400 eggs. During the feeding period larvae from 100 layings consume about kg mulberry leaves--over 80% during the last week--resulting in mature silkworms with about 10,000 times their birthweight. Mature silkworms stop feeding and are transferred to cocooning frames, where they spin cocoons Cocoons consist of floss (a series of silk strands) with which silkworms attach themselves to the cocooning frame, pupa and a smooth shell consisting of silk filament. Floss and filament are formed by extrusion of a liquid By silkworms that solidifies on contact with air. Length, thickness and weight of filament vary with rearing method and silkworm variety. For instance, 1/ A period during which the silkworm stops feeding and sheds its outer skin.

12 -4- in traditional multivoltine varieties filament length averages 400 m, while in modern bivoltine hybrids average lengths of 1,500 m are common. The uniqueness of mulberry silk is that each cocoon has only one filament which is industrially processed by reeling (para 1.15) rather than spinning employed for making yarn from other natural fibers Silkworm rearing requires skill, constant attention and is beset by many risks. Ideally rearing should take place in specially designed rearing houses which enable growers to control temperature and humidity and apply hygiene measures. In practice, rearing takes place mostly in farmers' houses. Equipment used includes rearing trays, stands for the trays and cocooning frames, all made locally by village artisans. Application of hygiene measures are crucially important to prevent a complex of serious diseases that can destroy a whole rearing in a matter of hours and can be carried over to subsequent rearings. The most important diseases are pebrine, flacherie, grasserie and muscardine. Pebrine, caused by a protozoan parasite, can be prevented by ensuring disease-free silkworm egg production in grainages. The other three diseases, caused by viral, bacterial and fungal pathogens can be prevented by disinfection of rearing houses and equipment between silkworm rearings, maintenance of optimum temperatures and humidities, correct feeding practices, constant vigilance to detect diseases and immediate application of appropriate controls Other important measures that determine silk yield include daily cleaning of trays, 1/ supply of sufficient fresh and good quality mulberry leaves, and provisiol of adequate, ventilated space at proper temperatures for the silkworms. i-or instance, the space required for one hundred layings increases from about 0.4 m 2 after hatching to 35 m 2 at maturity. Overcrowding of worms to economize on trays is a common fault that causes excessive competition for food resulting in low silk yields. Adequate supply of disease-free eggs and services giving intensive farmer training and frequent advisory visits to each grower are prerequisites for a successful smallholder based silk industry. Cocoon Marketing and Processing 1.14 Shortly after cocoon formation, farmers sell cocoons to reelers. Formerly reelers purchased cocoons from farmers either directly or through agents, but in recent years most sales take place at state regulated cocoon markets, particularly in Karnataka where 85% of the crop passes through such markets (para 2.16). There cocoons are auctioned by staff of the GOK Department of Sericulture (DOS) who also supervise weighing and payment to farmers. The large proportion of growers using these markets testifies to their effectiveness in ensuring fair trade practices Before reeling takes place the pupa inside the cocoon is stifled to prevent moth emergence and consequent damage to the filament. At present, stifling in India is done by steam, but in modern processing hot air is used which results in improved cocoon storage quality and higher silk recovery. Reeling consists of boiling cocoons to soften sericin, which binds loops of 1/ Silkworm droppings are used as manure.

13 -5- filament together on the cocoon, unwinding filaments from cocoons, combining several to form a thread of desired thickness and then winding the yarn (or raw silk, as yarn is known at this stage) onto reels Three types of reeling units are common in India: - the charka - a hand powered device with one basin 1/ and four to six ends. 2/ Several of these are combined in a typical charka enterprise; - cottage basin - a mechanical reeling machine with six to ten basins of six ends. As with the charka, a typical cottage basin enterprise has several machines; - filatures - mostly state owned consisting of equipment similar in design to the cottage basin, but combined into large units Cocoon quality and reeling efficiency determine silk yield (per kg cocoon) and silk quality. India's performance on both counts is low. For instance, in Japan 5-6 kg cocoons yield 1 kg silk while in India kg are needed. Quality of charka silk is lowest, but finds ready sale to handloom weavers, but even silk from filatures does not meet international market quality standards. Reasons for poor results are inherently low yield and quality of local silkworm varieties and obsolete reeling equipment. Lack of modern equipment is a contraint to the spread of bivoltine silkworm varieties in Karnataka. With existing reeling machines the higher quality of bivoltine cocoons is not translated into improved yarn quality. Consequently such cocoons fetch only a small premium in the market at present that would increase if efficient processing were possible. Purchase of modern reeling equipment, would therefore be necessary to support the spread of bivoltine silkworm varieties, and would be financed by the project (para 3.14) Silk waste is the most important by-product of reeling and comprises damaged cocoons, cocoon floss, other short lengths of filament and the inner portion of cocoons which cannot be reeled. Waste is processed in "spun silk mills" by a process similar to spinning wool. The end products are spun silk and the coarser noil, both much in demand for carpet weaving. The dead pupae constitute a second by-product of lesser value which is used for animal feed Raw silk is sold to silk merchants who in turn sell it to weavers. Weaving is mostly done by handloom or small scale powerloom enterprises and about 150,000 handlooms are engaged in production of silk fabrics in India - predominantly sari materials. Silk waste is purchased by merchants partly for resale to the three publicly owned mills in India and partly for export. 1/ In all types of reeling equipment cocoons float in one or more "basins" of warm water. Except in automatic equipment, one operator handles a basin. 2/ Part of a reeling machine at which cocoon filaments are combined into yarn.

14 -6- Government Programs 1.20 Silk production is a state responsibility handled by state industries ministries. Most of the important silk production states have a sericulture department. Central Government involvement was formalized in 1949 with the establishment of the Central Silk Board (CSB), headquartered in Bombay, operating under the GOI Ministry of Industries. The Board advises GOI on policy and development programs, and is responsible for silk imports, export quality control, and assists some states with production programs, particularly high quality egg supply. In addition, the Board is responsible for silk research, and to some extent training of advisory staff, and operates four central stations, seven regional stations and about twenty research extension centers in fourteen different states The establishment of the Board led to increasing attention by GOI to sericulture in successive development plans. Plan financial provision increased from Rs 4.5 million (US$550,000) in the First Plan (1951/ /56) to Rs 255 million (US$30 million) in the Fifth Plan (1974/ /78) and proposals in the Draft Sixth Plan (1978/ /83) are for provision of Rs 1.6 billion (US$190 million) to develop sericulture. The programs have been comprehensive and have dealt with all aspects of the industry including development of marketing and reeling. The sound framework established by these programs has laid the foundations for expansion of sericulture to be supported by the project. Mulberry Silk Research and Technology 1.22 Modern integrated sericulture research dates from 1961/62, when CSB became responsible for the subject. The complex of CSB stations has been indicated in para 1.20, but the main effort went into development of the Central Sericultural Research and Training Institute (CSRTI) at Mysore, Karnataka, which now has a team of about 40 scientists and 45 technicians working on mulberry and silkworm improvement, a modest reeling and fiber technology program, as well as offering post graduate training for field officers. Silkworm breeding and genetics, with 10 scientists and 20 technicians, is the strongest section of the Institute. The Institute also supervises eight substations. One at high altitude maintains silkworm breeders' stock. The others, called research/extension centers, perform the triple function of applied field research, advising extension staff and farmers and feeding back farmers' problems into the research pipeline Results have been impressive. In the field of mulberry improvement a high yielding and more nutritious variety has been evolved and tested, together with a package of cultivation practices (propagation, spacing, fertilizing, harvesting), (para 1.07), which has found ready acceptance by farmers. Other improved mulberry varieties are being tested. Silkworm improvement has also been successful. Local varieties have been improved and used for hybrids giving increased filament length and yields. However, the most valuable breakthrough has been adaptation of bivoltine varieties to the tropical environment and their use for hybridizing with local varieties and more recently for bivoltine crosses with high yield and quality potential. Yield and quality improvements of hybrids are illustrated in the table below which shows results of CSRTI tests.

15 -7- Silk Cocoons Content Filament per 100 of Length per Filament Layings Cocoons Cocoon Thickness kg % Meters Denier /a Pure Mysore races to 2.0 Mysore hybrids to 2.2 Bivoltine/multivoltine hybrids to 2.6 Bivoltine hybrids ,000-1, to 3.0 /a Grams silk per 9,000 meters filament. Source: GOK Rearing of bivoltines was initially beset by many problems, but successful intensive research provided solutions and led to introduction of the Japanese method of communal hatcheries locally known as Chawki centers. There, under departmental supervision, silkworm eggs are hatched, and larvae reared during the initial 10 day period, which is a particularly delicate part of the life cycle, before distribution to farmers. Communal hatcheries have increased cocoon yields by an estimated 20% over farm-hatched silkworms, and CSRTI work was largely responsible for adapting this Japanese innovation to Karnataka conditions CSRTI publishes results in the form of advisory bulletins used by farmers and advisory staff. As a result of close collaboration between CSRTI and the Government of Karnataka Department of Sericulture (para 2.12), use of unimproved local varieties is being phased out rapidly Despite these impressive successes there is still a considerable gap between silk yields in India (40-50 kg/ha irrigated mulberry) and Japan (over 120 kg/ha rainfed mulberry). To ensure long-term growth of the industry research activities need considerable strengthening and researchers would benefit from more contact with foreign researchers. The project would, therefore, help to intensify research and provide foreign technical assistance and training. II. Silk Production in Karnataka Agriculture in Karnataka 2.01 The state of Karnataka is situated in Southwest India, has an area of about 192,000 km 2 (19.2 million ha) and a population of about 30 million. Of the total land area, a little over 10 million ha are cultivated, of which about 1.35 million ha are irrigated, partly by canal or tanks and partly by individually owned wells. Foodgrains, including rice, sorghum, finger millet, pearl millet and wheat, occupy roughly half the cultivated area and the state has been substantially self-sufficient in foodgrains for some years. With its climatic range from humid tropical coastal to more temperate upland areas, the state has a large range of cash crops. Cotton and groundnuts are

16 -8- each grown on about 1 million ha and about 130,000 ha sugarcane are spread throughout the state. Coconuts and cashewnuts are important in coastal areas, while the highlands account for three-fourths of India's coffee production. The area near Bangalore, the state capital, has a thriving horticulture industry, famous for grape production. It is also this area and neighboring districts that produce 62% of India's silk. Sericulture, introduced 200 years ago by Tippoo Sultan, then ruler of Mysore, is practiced by 200,000 farmers and provides employment for about 2 million people in the state. Silk Production Area 2.02 The mulberry area is estimated at 110,000 ha including about 30,000 ha irrigated, and 4,000 ha improved M5 variety, and remains largely confined to the five districts 1/ comprising the former Kingdom of Mysore (see map). However, over the last four to five years large scale cooperative trials with farmers have proved the feasibility of profitable sericulture in many other parts of the state and about 1,000 ha have been planted in "new areas". Change from local varieties in traditional areas to M5 is taking place rapidly, now that initial bottlenecks of planting material bulking have been overcome. In new areas, the initial planting program has created strong demand for mulberry area expansion that DOS, with its present meager staff and equipment resources cannot satisfy. The project would intensify production in traditional areas and help to increase production in nine "new" districts 2/ comprising the central and northern portion of Karnataka (see map). Topography, Climate.nd Soils 2.03 The sericulture areas are on an undulating plateau at an average altitude of m in the west and south, and of m in the east and north. The higher areas enjoy a temperate climate. Even summer (March-May) temperatures do not exceed 28-3OoC whereas in the lower areas summer temperatures frequently reach 4OoC. In the higher areas ambient temperatures are suitable for year round silkworm rearing and, fortunately, cooler night temperatures of about 24oC, allow regulation of rearing houses temperatures for successful silkworm rearing throughout the year even in the lower areas. Temperatures are suitable for mulberry in all areas Rainfall, mainly between May and November, ranges from mm average annual precipitation in the higher areas to mm in lower areas, but is erratic. Annual totals frequently deviate by 50% from the average and monthly totals also vary sharply in different years. Mulberry, being fairly hardy, can withstand low rainfall, but irrigation doubles yield even in higher rainfall areas of Karnataka and is essential for economic silkworm production in drier localities. Fortunately, there are sufficient irrigation facilities--canal or privately owned wells--to cater for the 1/ Kolar, Bangalore, Tumkur, Mysore and Mandya. 2/ Chitradurga, Shimoga, Hassan, Bijapur, Bidar, Raichur, Bellary, Dharwar and Gulbarga. In addition, there are parts of the five traditional districts where sericulture has not been practiced to date, which are included in "New Areas".

17 - 9 - comparatively small area of mulberry in dry areas. High humidity, associated with high rainfall years, tends to increase silkworm disease problems, a factor which sometimes offsets benefits from higher mulberry leaf production Red soils grading from sandy soils to clay loams, very suitable for mulberry, cover the southern half of the project area, while black soils varying from medium to heavy cracking clays predominate in the northern half. Mulberry grows well on the black soils, but care is needed to avoid poorly drained or alkaline (ph above 8.5) conditions. Both red and black soils lack nutrients, particularly nitrogen and phosphorus, and mulberry gives good response to fertilizers containing those elements. Production 2.06 Mulberry area, cocoon and silk production have been expanding steadily. The table below indicates production and yield trends, but DOS staff advised that until recently, when most cocoon production started to flow through regulated markets, production data was subject to considerable errors. Silk Production in Karnataka Mulberry Production Yield /a Area (Tons) (Kg/ha) Silk Content /a Year (ha) Cocoons Silk Cocoons Silk of Cocoons % 1951/52 43,000 11, /62 72,000 15, /72 93,000 29,100 1, /78 106,000 31,600 2, /a Mission calculation. Source: GOK The large area of rainfed mulberry, 80,000 ha, mostly in Mysore District, reportedly produced only 16,000 tons cocoons (about 190 kg/ha) during 1977/78, compared to 15,600 tons from 30,000 ha irrigated mulberry (520 kg/ha). While overall cocoon yields are low, those from irrigated mulberry come close to Japanese yields of 600 kg/ha but, as already indicated, there is a wide gap in silk yields between Karnataka and Japan. The difference is due to climate, varieties and rearing and reeling technology and presents a challenge to local research and extension services Improved technology in all branches of silk production has only become available in the field in the last three to four years. Improved silk content of cocoons is the first visible impact. Cocoon yields of 800-1,000 kg/ha in some intensively staffed village schemes and in silkworm seed production areas have proved the value of the new technology. Large-scale adoption requires intensification of research and advisory services, increased and improved seed production and introduction of improved reeling technology, all of which would form part of the project.

18 Holding Size and Tenure 2.09 According to the 1976/77 Agricultural Census, there are 3.8 million holdings in Karnataka and average holding size is 3 ha. Distribution of holdings by size class is illustrated in the table below: Holdings Percentage Share of Average Size Class Number Area Total Holding ha ha Number Area Size ha Below 1 1, , , , Above , Total 3,810 11, Source: GOK. Average farm size in the silk areas ranges from 1.2 ha in Mandya to 5.3 ha in Bijapur and in general is below 2 ha in the higher rainfall areas and above 3 ha in drier districts Tenancies have been abolished by land reform legislation and according to the 1975/76 Agricultural Census all farmers are owner-operators. Sericulture is practiced in 6,300 villages by almost 90% of the farmers. Consequently, the state distribution of holding size also applies to sericulturists. The mulberry area per farmer (which reflects size of rearing operation) rarely exceeds 2 ha, and about 80% of sericulturists with about 60% of the total area grow less than 1 ha mulberries. Usually a sericulturist with irrigation facilities has some irrigated paddy as well as a piece of dry farming land where he grows mostly sorghum and finger millet. However, in non-irrigated areas about 10% of the smaller farmers in "silk villages" devote all their land to mulberry. The reason for the universally small size of operations in Karnataka is the high labor requirement during the final stages of the silkworm cycle and the need for careful timing of operations, which make largescale sericulture operations difficult to manage even for more wealthy farmers. Reeling 2.11 Reeling is predominantly a cottage industry. About 10,000 charkas and 7,500 cottage basins account for 90% of all reeling, with the balance processed mostly in government filatures. Up to about 1957, charkas dominated the reeling industry, but in that year, to improve quality, GOK introduced a 50% capital cost subsidy for establishing cottage basins. As a result, the number of cottage basins increased rapidly and now their output exceeds that of the charkas, which has remained constant. Department of Sericulture (DOS) 2.12 Established in 1914, the Department, with a professional and technical staff of about 2,000, plays a key role in all aspects of raw silk production in Karnataka and provides production, advisory and cocoon marketing services. In addition, the Department fulfills regulatory functions, particularly in the fields of silkworm egg production and cocoon marketing. The

19 Department also used to operate an industrial wing comprised of seven filatures, a spun silk factory and a silk weaving factory, that has been transformed into a newly established GOK Corporation, the Karnataka Silk Industries Corporation (KSIC), which would operate commercially (para ) Silk Farms and Grainages. DOS operates 74 silk farms (average size 10 ha) and 80 grainages that provide farmers with disease-free silkworm eggs. Silk farms multiply breeder stock through two succeeding generations, to final multiplication, which is done by closely supervised farmers in two special seed production areas, one for local "Mysore" races and one for bivoltines. Silk farms also serve as bulking centers for improved mulberry varieties and as demonstrations for improved sericulture practices. In grainages, cocoons are collected from silk farms and from accredited growers, and moth emergence, mating and egglaying take place under carefully controlled, aseptic conditions. DOS sells eggs to farmers at Rs 35 per 100 layings, which covers grainage operating costs In 1979, about half the production of 160 million layings came from departmental grainages and the rest from 833 licensed private grainages, whose product is of variable quality despite inspection by DOS staff. Because of danger of spreading disease from infected eggs, and in response to strong demand from growers for better quality eggs, departmental egg production doubled during 1978/79 and is expanding rapidly. However, even departmental grainages lack modern facilities and are too numerous to allow highest quality supervision. A program to consolidate and modernize grainages and expand their capacity would be supported by the project (para 3.08) Technical Services. To date advisory services have not been intensive with many sericulturists receiving only occasional advisory visits. This type of service has not been sufficient to raise yields markedly and has only been adequate to prevent disaster from silkworm diseases because of the relatively hardy nature of traditional varieties. Introduction of high-yielding but more disease susceptible new varieties requires intensive advisory services. A successful model has been developed in several "Intensive Sericulture Development Projects" (ISDP) as well as in the bivoltine seed production areas. The model is based on a technical service center (TSC) staffed by a sericulture assistant (SA) who supervises 8 sericulture demonstrators (SD). About communal hatcheries are attached to each center. Each demonstrator is expected to visit each of about 100 farmers once every four days while rearing is in progress and supervise one or two hatcheries. Each SA during the course of supervising his SD also visits farmers frequently. Such intensive visits are necessary for close monitoring of disease status of rearings and have also served to improve sericulture practices. Even experienced growers agree that such services are necessary particularly with modern varieties. About 60 TSC and 640 hatcheries have been established but require additional equipment and staff. The project would help to improve existing TSC and to establish similar intensive technical services based on TSC throughout Karnataka silk areas Cocoon Markets. GOK under 1959 legislation introduced regulated cocoon marketing. To meet the requirement of legislation, the Department operates 22 cocoon markets. Designed for 10,000 tons the markets already handle about 30,000 tons cocoons and existing markets are congested and long waiting periods for farmers and insufficient shelter from dust or rain for cocoons are the result. Despite these inconveniences, the vast majority of

20 growers prefers this type of regulated cocoon marketing to former direct trading with buyers and there is urgent need to expand and improve market facilities. The project would support GOK plans for that purpose (para 3.09). A fee of 1% of cocoon value is paid by reelers, which covers operating costs and DOS plans to double the fee to recover a portion of capital costs as well. Credit 2.17 Both cooperative and commercial banking is well developed in all parts of Karnataka. The three-tier short/medium-term cooperative has an apex bank, about 200 District Central Bank (DCCB) offices and 5,000 Primary Agricultural Society offices in project districts; the two-tier medium/long-term Land Development Bank (LDB) has 140 offices; and commercial banks (CB) have about 1,600 branches of which 1,000 are semiurban or rural. There are also several Regional Rural Banks which cater specifically for the poorer section of the rural community. Most banks, particularly LDB and CB, have had considerable experience of Bank Group supported lending, notably through the Karnataka Agricultural Credit Project (Credit 278-IN) and two Agricultural Refinance and Development Corporation (ARDC) Credit Projects (Credits 540-IN and 715-IN), all fully disbursed. Most of them are already engaged in sericulture lending which they are keen to expand Because of currently high overdues that afflict all banks in Karnataka and Reserve Bank of India (RBI) rules regulating cooperative banking, short-term credit cooperatives would be practically precluded from and LDB severely limited in project participation. RBI/ARDC plans for improving cooperative banks are under GOK consideration. In the meantime, coverage of the project area by suitably staffed and qualified CB would be satisfactory A major credit scheme for sericulture development in Karnataka was started in 1974, but has been disappointing to date. The scheme comprised formation of combined sericulture and general service cooperatives that were to have provided all inputs and services needed by sericulturists, including cocoon marketing. The cooperatives were to have been supported by technical staff on deputation from DOS and by CB and eligible DCCB for provision of long and short term credit partly refinanced by ARDC. Formation of cooperatives took several years, provision of technical services divorced from DOS proved impracticable and spread of regulated marketing has reduced the advantages of cooperative marketing. In addition, farmers complain that loan application procedures are so tedious as to discourage many potential borrowers from using credit. Consequently, there has been little demand for credit through these cooperatives. For instance on June 30, 1979 only Rs 1.2 million of a Rs 30 million target had been disbursed by ARDC in 31 long term credit schemes for cooperatives. At the same time both cooperative and commercial banks had, over three years, disbursed well over Rs 50 million for sericulture to individual borrowers, which proves that there is a demand for credit by silk farmers. Consequently, for the project proposed in this report, lending would be to individuals rather than cooperatives in new silk areas. In addition, ARDC would explore ways of improving its ongoing schemes, providing credit in traditional areas to individual borrowers who are not members of cooperatives and, together with GOK, consider measures for easing burdensome loan application procedures (paras ).

21 III. THE PROJECT Project Genesis 3.01 Because of employment generation and potential for improving rural income, both GOI and GOK have for some time been planning measures to expand silk production in Karnataka. Both Governments felt that Bank Group assistance would be helpful for improving the silk industry. Preliminary discussions between GOI and the Bank took place in early As a result project preparation was undertaken by GOK--mainly by DOS--in collaboration with GOI's Ministry of Agriculture Project Preparation and Monitoring Cell with assistance by the Bank's New Delhi Office staff. The project is based on the resulting preparation report dated January 1979 and on findings of the February 1979 preappraisal and September/October 1979 appraisal missions. Project Summary 3.02 The project would be the first IDA assisted scheme in support of Indian sericulture and would cover about three quarters of Karnataka's silk producing area. It would have three major objectives: firstly, to increase raw silk production in Karnataka by about 1,600 tons including 1,000 tons high quality bivoltine silk per year, by providing better silkworm eggs and intensive advisory services to sericulturists already cultivating about 24,000 ha irrigated and 60,000 ha rainfed mulberry; and to those who are projected to plant about 14,000 ha irrigated mulberry in new areas during the project period; secondly, to introduce modern processing facilities and methods that would upgrade raw and spun silk to export grade quality; and thirdly, for longer term improvement of the industry, to introduce the latest technologies from leading silk producing countries and to expand local research. To achieve these objectives the project would include components to expand DOS technical, silkworm egg production and cocoon marketing services; GOK and GOI research facilities; and technical assistance, all of which would be financed directly through GOI and GOK. Additionally, there would be project credit for on-farm investment by sericulturists and for small-scale reelers which would be channeled through ARDC and banks to borrowers; and for modernization of GOK silk processing facilities which would be provided through the Industrial Development Bank of India (IDBI) to KSIC. The following is a list of project components: (a) For Silk Production (i) credit for farmers in new areas for planting 3,500 ha mulberry, purchase of silkworm rearing equipment sufficient for such mulberry area and construction of 1,400 silkworm rearing houses to support the 14,000 ha mulberry planting program; (ii) incremental staff, vehicles, equipment and operating costs for 150 TSC with 1,700 communal hatcheries, four mobile training units, construction, equipment and operating cost of 20 model hatcheries, and improvement of an existing sericulture training institute and establishment of two new ones for expanding and strengthening DOS technical services;

22 (iii) construction, equipment, staff and operating costs of 10 modern grainages to expand and improve silkworm egg supplies from DOS; and (iv) construction, equipment, staff and operating costs of 30 market units to expand 11 existing cocoon markets and to establish 12 new ones. (b) For Silk Processing (i) establishment of a semiautomatic departmental small filature in the new areas; (ii) credit for reelers, for establishing 500 cottage basin units; and (iii) improvement of government silk processing factories by replacing the existing seven outdated filatures with a modern one; and renovating, modernizing and expanding the existing spun silk factory. (c) For Research and Technical Assistance (i) expanding facilities at the CSRTI main station and establishing or improving of two regional stations and 10 substations; supporting programs at three Karnataka universities; and establishing a sericulture research station for the Karnataka State Sericultural Development Institute (KSSDI), which GOK is in the process of setting up; (ii) technical assistance programs including 70 man-months of consultants time and 380 man-months of overseas training to support the production, research and processing components; and (iii) monitoring and evaluation services Short-term effects of the project would be its impact on silk production and resultant considerable increase in rural incomes and employment. The longer-term impact on sericulture technology would be equally important. While mulberry production has reached high levels, there is enormous scope for improving silkworm productivity and quality of local silk products. Project assistance by way of strengthening research, introducing modern processing technology and providing technical assistance and training, would leave India well equipped to meet increasing demand for fine quality silk products due to falling production abroad. The processing industry modernization program would be one of special importance to the Indian silk industry. Introduction of technology for producing high quality yarn is vital in the first instance to support spread of bivoltine silkworm varieties and to replace high quality yarn imports, now necessary for weaving export quality fabrics. There is a huge local market for handloom products, but export oriented production will become important in the longer term, to allow expansion of sericulture. At that time raw and spun silk will need to meet international quality standards and competition. At present there is little sign of private sector investment in modernizing the silk processing industry and GOK is therefore assuming the

23 role of innovator by introducing new technology that may stimulate private sector investment in similar processing plants at a later date. Since the GOK facilities would use only about 5% of available raw materials, there would be ample scope for private sector development of modern silk processing factories. As a first step, however, GOK must introduce and demonstrate the new processing technology and its financial viability, both objectives that would be supported by the project. Silk Production 3.04 Increased silk production would entail intensification of sericulture in traditional areas and expanded production in the new area (para 2.02). Mulberry leaf production would be boosted by encouraging farmers to replace traditional mulberry varieties with the improved variety M5 on 20,000 ha irrigated land in traditional areas and planting the new variety on 14,000 ha irrigated land in new areas. The M5 variety has become very popular and virtually total replacement of unimproved varieties in traditional irrigated areas, which is proceeding at a rapid pace, may well be completed before the end of the project. In new areas demand for expansion of sericulture is strong and at present DOS is hard pressed to provide adequate services quickly enough to cater for the expanding mulberry area. Silk production would be improved by the increase in mulberry leaf production, better leaf quality, better silkworm egg quality, spread of high yielding bivoltine silkworm varieties and, above all, intensification of advisory and other supporting services to foster adoption of proven practices for mulberry and silkworm production. While the main production increase would come from irrigated areas, the larger rainfed areas would also be improved. Components of the silk production program, to be supported by the project, are described in more detail below Credit. Project credit would be provided only for new areas, because traditional areas are already served by ARDC schemes which may have been disappointing to date (para 2.19), but which ARDC is now endeavoring to improve. Besides, most silk farmers in traditional areas own well established silk production units, which enable them to meet development and working capital needs from earnings, without recourse to credit. In new areas, on the other hand, credit would be an important catalyst to expand silk production, by helping to provide finance for farmers who are planting mulberry for the first time. The project credit scheme would serve a second important function by improving the credit delivery system for silk farmers in all areas. However, even in new areas demand for credit is hard to gauge. Therefore, to avoid the problem of a large credit component in the project that may not be fully taken up, only a modest program has been included. It would support 3,500 ha (or 25%) of the 14,000 ha mulberry projected to be planted in parts of the new area covered by the project and, since demand for rearing houses has been small to date even in traditional areas, project credit would support construction of only 1,400 (or 10%) of the 14,000 rearing houses that may ultimately be needed in the new areas. The small size of the credit component would not be an implementation constraint since possible credit demand in excess of project funds, which may well develop, could be met from IDA supported ARDC Credits. Loans would be available to farmers for mulberry planting, purchase of silkworm rearing equipment, construction of rearing houses and recurrent cost for two silkworm rearing cycles. The short-term finance would be consolidated with medium/long-term elements for repayment purposes. Construction of rearing

24 houses would be according to DOS specifications and assurances were obtained that such specifications, acceptable to ARDC and IDA, would be drawn up before December 31, Technical Services. Based on the successful ISDP model (para 2.15) DOS technical services would be expanded by fully staffing and equipping the existing 60 TSC and 640 hatcheries and by establishing 90 additional TSC and 1,060 hatcheries requiring an incremental staff of 150 SA and 1,200 SD. As a result, DOS services in the project area would allow about 90% of all silkworm eggs there to be hatched and initially reared in communal hatcheries and would be able to provide one SD per growers. Project investments would include hatcheries equipment, TSC and hatcheries incremental operating cost, a vehicle, spraying equipment and microscopes for each TSC. To ensure staff mobility necessary to maintain the farm visits schedule, the project would finance 750 light motorcycles, for purchase by SA and SD through loans, which would be provided by DOS. In the past DOS also provided advice for mulberry production. From January 1980, this work has been done by extension staff of the Department of Agriculture, which is being reorganized and strengthened under the Composite Agricultural Extension Project (Credit 826-IN). This arrangement would improve extension for mulberry production and would give DOS staff more time to help farmers with silkworm rearing In support of the technical services, the project would improve and expand an existing training institute and establish two new ones, each with a capacity for 1,200 trainees a year, including staff and farmers. In addition, 2 the project wotid finance 20 model hatcheries, including the cost of a 110 m hatchery builcing, and equipment for each and its operating expenses. These hatcheries would be strategically placed demonstrations, to encourage growers to form groups to operate their own hatcheries. Finally, there would be four demonstration vans with audio-visual equipment, which would travel throughout the project area and support demonstrations by TSC staff Grainages. Private grainages were adequate to deal with relatively hardy local varieties, but many of them are not capable of consistent production of disease-free layings of more disease susceptible modern varieties. Infected eggs are a threat to the industry, consequently GOK, partly reacting to strong demand by farmers, is planning to offer farmers a greater egg supply from its own grainages and would then be able to apply much stricter quality control and licensing procedures to private grainages. All but the largest of the present DOS grainages would be closed or converted into egg sale centers and would be replaced by large modern grainages. The project would finance ten of 5hese grainages. Each one would be a four-floor building with 3,200 m floor area, specifically designed and equipped for aseptic production of 10 million disease-free layings per year. Seven grainages would have a cold store each for egg storage. Such storage would allow year round production and build-up of stocks for the peak demand period following the onset of rains. To avoid egg spoilage in case of power outages, each grainage would have stand by generators. Three grainages would have smaller cold store space for preserving moths to give more flexibility for the breeding and egg laying process. Direction of the grainage operation would be provided by senior experts at DOS headquarters. In addition, project technical assistance and overseas training programs (paras 3.20 and 3.21) are designed for introduction of modern operating and quality control methods for the new facilities.

25 Cocoon Markets. To provide adequate facilities for ongoing cocoon production and for its expansion, the project would extend 11 of 22 existing markets and establish 12 new ones. Eight existing and two new markets would be Class I markets, that receive or are projected to receive more than 1 million kg cocoons per month and the remaining 13 would be smaller, Class II markeis. All market expansion or new construction would be based on standard 900 m floor area units that would comprise a hall for waiting sellers; an auction area; offices and stores. Class I markets would have two or more units each while Class II markets would each have one. Seventeen units would be constructed at 10 Class I markets and 13 at 13 Class II markets, a total of 30 units at 23 sites. Unit design is based on experience gained during the last seven years and on advice from the FAO Markets Specialist in Delhi. Silk Processing 3.10 The two main objectives of project processing investments are provision of adequate reeling capacity in new areas and, by improving GOK facilities, introduction of modern technology to increase silk recovery from cocoons and upgrade quality Cottage Basins. Most cocoons in the State would continue to be reeled by cottage basins and the project would provide credit (channeled through ARDC and banks) for about 500 units in new areas. Project loans would finance machinery, a shed and funds for purchasing a two-weeks cocoon supply. As with loans to farmers, the working capital element would form part of the term loan. Each unit would have about one ton raw silk per year capacity. To attract reelers to new areas, GOK provides a subsidy equal to 40% of machinery cost (about Rs 4,000), which has worked well in fostering cottage basin development elsewhere. This subsidy would be necessary to attract enough reelers to the new areas and GOK would continue to provide the subsidy Departmental Filature. In addition DOS would establish and operate one modern semiautomatic filature in the new areas. The filature would test the economics of operating modern reeling equipment in a small-scale enterprise and would be a demonstration and training center for potential private investors. Investments would include a 400 ends reeling unit, a rereeling machine, hot air cocoon drier, boiler, factory building, staff quarters, a truck and a van. The filature would process 400 kg cocoons per day and produce about 11 tons silk yarn per year. Karnataka Silk Industries Corporation Facilities 3.13 The Corporation would own and operate existing departmental filatures, spun silk mill and weaving factory. Modernization of the filatures and spun silk factory would form an important part of the project and is described below Filatures. Because of obsolete equipment the existing filatures cannot achieve export quality yarn, would not be able to exploit the benefits of high quality cocoons and are running at a loss. KSIC would modernize one of the seven filatures and close the rest. The modernization program would mean reduction of the labor force for all proposed KSIC facilites from about 4,000 to 2,300 workers. Part of these 1,700 redundant positions wou'ld be dealt with by not replacing any workers that are retiring or otherwise leaving employment.

26 Many others would be offered employment in expanding DOS facilities that would require almost 6,000 workers. For those who cannot be placed, a compensation program has been planned. Production, presently averaging about 150 tons per year, would be expanded slightly to about 160 tons of export grade raw silk. Investments would include three hot air driers, three cocoon boiling units, six semiautomatic reeling machines (each with 400 ends) and eight rereeling machines. The existing buildings would be used to accommodate the new machinery with some additions. The filature, together with the departmental filature would provide adequate reeling capacity to support bivoltine cocoon production in the earlier project years. Later on GOK would decide whether to expand capacity which may become necessary unless the private sector decides to invest in modern filatures Spun Silk Mill. In view of the increasing and largely unsatisfied demand for spun silk in India and in the world, and the increasing amount of waste silk available locally, the existing spun silk mill would be expanded from 45 tons spun silk production per year to 150 tons. The plant, established in 1936, and expanded and to some extent reconditioned since then, now requires extensive repairs. A renovation program, based on a technical study by Japanese spun silk specialists would be carried out by the KSIC central workshop (para 3.17), to be established at the factory site. Some of the existing machines would be replaced and the renovation program would increase plant capacity to 60 tons spun silk per year. The product would not be suitable for export but would be easily absorbed by the local market. In addition, a new 90 tons per year spun silk production unit would be constructed at the factory, that would be provided with the latest equipment and would produce export quality spun silk. Both units would use modern waste silk degumming methods that would improve spun silk recovery from waste. No civil works would be needed for the existing unit, but a factory building would be constructed for the new unit At appraisal, GOK considered the alternative of scrapping the existing plant in favor of a new 150 tons capacity factory. GOK decided against the latter option because of higher capital cost, lower employment requirement, somewhat lesser flexibility of end product suitable for local requirements, and the fact that financial returns would be almost identical for both options. GOK considered that these factors outweighed advantages of completely new plant such as easier management, raw material economies, and higher quality end product. Since studies confirm that renovation is sound, the modernization program chosen by GOK would be satisfactory Central Workshop. The existing departmental central workshop in Mysore would also be taken over by KSIC and needs to be expanded and reequipped for reconditioning the spun silk mill and for maintenance of the other KSIC processing factories. New equipment would include foundry equipment, lathes, grinders, drills, presses, sawing machines and small tools. The workshop would be located at the spun silk mill which is a satisfactory location for serving other KSIC facilities. Research and Technical Assistance 3.18 Research. The CSRTI had prepared a modest program for intensifying research but the preappraisal team, pointing to the success of intensive research in Japan and Korea, advised increase of program size. As a result,

27 GOI and GOK staff together drew up a plan for expansion of research to be financed by the project. CSRTI would remain the lead institute, but would collaborate with three local universities and with the Karnataka State Sericultural Development Institute (KSSDI) which GOK is establishing. The plan has been reviewed and approved by GOI and GOK expert committees and is satisfactory Funds are required for laboratory buildings, staff housing, equipment, staff and operating costs by CSRTI, to strengthen its central station, establish two regional stations and five substations and to improve five existing substations; by University of Agricultural Sciences, Bangalore for strengthening its ongoing program focussed on silkworm disease control, starting new programs for mulberry and silkworm pest and disease incidence surveys, and for expanding its sericulture teaching faculty; by University of Bangalore, for silkworm genetics and mulberry research; by Mysore University, for specific research on silkworm genetics; and by KSSDI, to develop a research station and laboratories to carry out research into all aspects of mulberry, silkworms and silk processing Technical Assistance. The project would finance 70 man-months of consultants' time and a 380 man-months program for training abroad. In the case of consultancies, about 19 man-months would be needed for visits of 5 or 6 top level scientists to CSRTI to support mulberry and silkworm breeding work and for exchange of ideas on other research topics. About 12 man-months would be used for two visits by a two-man team to help DOS with grainage development and another expert would be needed for two visits of six months to help with the communal hatcheries program, with special Eocus on disease control. In addition, about 27 man-months of consultancy would be used by KSIC for training staff to operate new filature and spun silk factory equipment The overseas training program would benefit 10 senior DOS officials (2 months training), 20 Assistant Directors (3 months training) and 45 SA (4 months training). Particular emphasis of this training would be on grainage and hatchery operation and silkworm disease detection and control. CSRTI would require ten study tours for senior researchers, each for attachment to a top research institute abroad for a 12 month period Japan, the leader in silk technology, would be the most suitable source of expertise and training opportunities. To attract the necessary top-class scientists and technicians, and in view of the proposed frequent and short-term assignments, a high man-month cost of US$15,000 has been allowed, inclusive of air fares, living expenses and local travel. However, even with such high remuneration there is no certainty that all the desirable expertise can be recruited, particularly on a timebound schedule. Arrangements for training should present fewer problems and the Japan International Cooperation Agency would be able to help with arrangements. Cost per training month has been estimated at US$3,400 which would include air travel, local travel, tuition, living and miscellaneous minor expenses. The programs would assist and benefit the project considerably, but no part is so vital that the project would fail without it. With likely difficulties of recruiting consultants in mind, assurances were obtained that the GOI Ministry of Industries in collaboration with GOK, would, by December 31, 1980 draw up a plan and timetable for the technical assistance and overseas training program and would use its best endeavors to implement the plan for employing consultants

28 and study tours on terms and conditions mutually acceptable to GOI and the Association Evaluation Study. The project would fund an evaluation study by a local research institute or university. Arrangements for the study are discussed in para Land for Project Facilities 3.24 About 80 plots of land would be needed for DOS and KSIC components, mostly small building plots. All but six of them are already in possession of DOS and negotiations for official transfer of the remainder, all of which are GOK land, are well advanced and are expected to be completed before the end of CSRTI would require 12 land units ranging from one to eight hectares in size for research substations. DOS has suitable land and agreed to transfer it to CSRTI as and when needed. There would therefore be no land acquisition constraint to impede the project. Environmental Aspects 3.25 The project would have no adverse environmental effects. It would cause change in land use only by replacing traditional with new mulberry varieties or one crop, for instance sugar cane, with mulberry which would cause no environmental changes. On the processing side, large processing plants would be of modern design adhering to Indian factory safety and effluent disposal regulations which are satisfactory. Care would also be taken that the smaller privately owned units, to be sponsored by the project, would adopt satisfactory safety and waste disposal measures. Project Phasing 3.26 GOK had started project activities such as land acquisition, establishment of KSIC, securing the project budget and sanction for appointment of proposed project staff, and implementation of some components prior to negotiations; and has started full-scale implementation from April 1980, the new GOK financial year. In the first project year DOS would improve existing TSC and hatcheries and concentrate on preparing to implement the other components by finalizing designs, calling tenders and recruiting and training staff. Establishment of new TSC and hatcheries and completion of supporting facilities (model hatcheries and training institutes) would be carried out progressively over the following three years. The first grainages are to be commissioned during 1982 and market units financed by the project during late The two programs would each take two more years to complete. Construction of the two KSIC factories would start early in 1981 and is scheduled for completion by mid Detailed designs for most of the major civil works items were already substantially completed at appraisal. The timing of the technical assistance program is difficult to predict and may well extend up to mid Depending on availability of consultants, the technical assistance program has been tentatively projected to take place mainly during the third and fourth project year while the overseas training program would start in the second and extend to the fifth project year. Project phasing is shown in more detail on Table 3.1 and Charts 21303, and

29 IV. COST ESTIMATES, FINANCING, PROCUREMENT AND DISBURSEMENTS Cost Estimates 4.01 Total costs are estimated at US$95.1 million equivalent of which US$20.7 million or 22% would be foreign exchange costs and US$6.6 million would be duties and taxes. Estimates are based on September 1979 prices. A 10% physical contingency has been allowed for civil works and 5-10% for machinery, equipment, vehicles and incremental operating costs. Price contingencies have been applied at 10% for 1980, 7% annually for 1981 to 1983 and 5% annually from 1984 onwards for local costs and at the following rates for imported machinery and equipment: 10.5% for 1980, 9% for 1981, 8% for 1982 and 7% annuallv for 1983 to Total contingencies amount to US$22.8 million or 24% of total cost. Detailed costs are given in Annex 2 and are summarized below. Summary Cost Estimates -----Rs Million US$ Million----- Foreign Category Local Foreign Total Local Foreign Total Exchange On-Farm Credit Plantation Equipment Rearing Houses Credit for Reeling Cottage Basins Subtotal Credit Dept. of Sericulture Grainages Hatcheries Model Hatcheries Tech. Service Cntrs Mobile Demo. Units Training Schools Cocoon Markets Filature Inc. Admin. Cost Subtotal DOS KSIC Filature Spun Silk Mill Hdqrtrs. and Workshop Net Inc. Working Cap./a Subtotal KSIC Research Component Tech. Asst./Study Tours Project Evaluation Study Base Cost Estimate Physical Contingencies Price Contingencies , Total Project Cost /a Working capital to finance incremental inventories, receivables and cash balance necessary for efficient operations.

30 Financing 4.02 The proposed IDA credit of US$54 million would be made to GOI on standard terms and would cover about 61% of project costs net of duties and taxes, 57% of total project costs, or all foreign costs and 45% of local costs. The balance would be met by GOI, GOK, ARDC, IDBI, banks, silk farmers and reelers as shown in the following project financing plan: Financing Plan Farmers! IDA % of Total GOI/GOK ARDC IDBI Banks Reelers Amount Total Rs Million Farmers/Reelers DOS /a KSIC Research TA/Study Total % of Total /a About Rs 75 million is estimated cash generation from grainages, markets and the small filature GOI would onlend US$4.4 million of the IDA Credit to ARDC to refinance silk farming development loans to farmers and cottage basin development loans to reelers; and US$9.5 million to IDBI to lend to KSIC for modernization and expansion of silk processing factories. ARDC and IDBI interest rates are discussed in para GOI would bear the foreign exchange risks for finance onlent to ARDC and IDBI. GOI would use US$5.5 million for implementing the technical assistance, overseas training and CSRTI research programs and would channel the balance to GOK for components to be carried out by DOS, Universities and the KSSDI, in accordance with GOI standard arrangements for IDA assisted state development projects. Retroactive financing to cover early project implementation costs from October 1, 1979, up to US$1 million have been included. This financing would mainly cover expenditure for the departmental program for establishment of TSC and communal hatcheries. Procurement 4.04 Civil works for KSIC, the departmental program and the research program costing about US$8.2 million, would be carried out on about 90 sites over five years. Contracts for such work would not attract foreign bidders and would be awarded after local competitive bidding, using GOI or GOK procedures, which are satisfactory to IDA About 250 motor vehicles (US$1.9 million) would be required by project agencies, mainly DOS. They would be purchased over a five-year period and would be widely spread in rural areas. Adequate maintenance and availability of spare parts would be of paramount importance, and this would necessitate purchase of locally made vehicles of types already in use by project agencies. Procurement would be according to GOI and GOK procedures.

31 Motorcycles (US$0.3 million) would be purchased by individual departmental staff, from loan funds provided by GOK Reeling and spinning machinery and major items of ancillary equipment such as boilers for KSIC and for the departmental filature (US$14.0 million) and cold store equipment, refrigerators, and generators for departmental grainages (US$1.9 million) would be procured by international competitive bidding, following Bank Group guidelines for procurement. A 15% preference on bids based on the CIF price of each item or the actual custom tariff, whichever is lower, would be granted to domestic manufacturers. However, contracts for these items of machinery and equipment costing less than $100,000, when grouped together, may be awarded in accordance with local competitive bidding procedures acceptable to the Association Other equipment would consist of furniture, silkworm rearing equipment, farm and laboratory equipment (US$9.1 million) to be purchased over five years for use over a wide area. These items are not suitable for international bidding and would be purchased by local competitive bidding procedures. Farmers and silk reelers drawing loans for mulberry planting, silkworm rearing equipment and cottage basins (US$8.0 million) would purchase materials and equipment individually from dealers of their choice and would also arrange construction of rearing houses and reeling sheds locally. Technical assistance and overseas study tours (US$2.4 million) and the project evaluation study (US$0.2 million) would be arranged on terms and conditions satisfactory to IDA. The balance of the project cost (US$30.7 million) would cover DOS incremental operating costs and staff salaries and those of participating research agencies, KSIC working capital and land purchase for the research cdmponent, which would not involve procurement. The above figures include physical contingencies (US$4.4 million), but exclude price contingencies, which amount to US$18.4 million Small, off-the-shelf items, costing less than US$10,000 and not more than US$1 million in aggregate, which are required urgently for project execution, would be purchased by prudent shopping, through normal commercial channels. For all contracts for civil works exceeding US$200,000 and for purchase of equipment and supplies exceeding US$100,000, draft tender documents, proposals for advertising, bid evaluations and award proposals would be sent to IDA for review before contract award. Copies of such contracts would be sent to IDA immediately after award. Assurances were obtained that procedures outlined in paras 4.04 through 4.08 would be observed. Disbursement 4.09 Disbursements from the credit would cover: (a) 55% of ARDC refinance of loans to farmers and reelers; (b) 70% of loans to KSIC for civil works, machinery and equipment; (c) 75% of civil works, vehicles, equipment, farm development and incremental staff costs for DOS and participating research agencies; and

32 (d) 100% of the cost of technical assistance, training abroad and evaluation studies Disbursements under item (d) and for expenditures under item (b) and (c) exceeding Rs 50,000 for machinery, vehicles and equipment and for civil works exceeding Rs 100,000 would be made against full documentation supplied to IDA through GOI. Disbursements for item (a) would be made against certification by ARDC and for all other items against certificates of expenditure submitted by implementing agencies including DOS, and research agencies. Supporting documents for these payments would not be submitted to IDA but would be retained by the implementing agency and made available to IDA during the course of review missions. Certificates of expenditure would be audited at least once every six months and a report submitted to IDA promptly thereafter. The cost of land purchases or working capital for KSIC would not qualify for disbursement of IDA funds. A schedule of disbursements is shown in Annex 3. V. ORGANIZATION AND MANAGEMENT Department of Sericulture 5.01 The Department of Sericulture would implement all components connected with cocoon production, including development, grainages, TSC, communal and model hatcheries, training centers and cocoon markets. The Department would cooperate close.y with credit agencies (para 5.12) which would carry out the lending progrim for silk farmers and reelers and finally, DOS would establish and operate a filature in the new areas DOS is part of the State Ministry of Industries and is headed by the Director of Sericulture, responsible to the Secretary of Industries. At appraisal, DOS was essentially organized into four zones each under a Deputy Director supervising about six Assistant Directors (ADS). There were also adequate administrative and finance staff at Headquarters as well as four senior (Deputy Director and Joint Director Level) 1/ specialists for grainages, marketing, cooperatives and supervision of seed areas. The Department is dynamic and well organized and its staff responds well to its strong leadership. DOS is reorganizing in preparation for doubling its technical staff over the project period and the proposed organization and services that it would operate are shown on Chart The field services would be organized on a District basis with a Deputy Director in charge. Each District would have divisions (5 in Mysore, 3 in Bangalore and 2 in all other Districts) headed by an ADS, whose primary task would be organization and supervision of TSC and communal hatcheries. At Head Office, apart from a Senior Technical Advisor, there would be five Joint Directors and a Joint Registrar of cooperatives to broaden the specialities dealt with at Headquarters to include silk farms and technical services. With the exception of the large new grainages and a filature to be constructed under the project, which would be directed 1/ Ranking in most government departments in India is as follows in descending order of seniority: Director, Additional Director, Joint Director, Deputy Director and Assistant Director.

33 by Head Office staff, all departmental facilities and services in the field would be supervised by District staff. Other Head Office specialists would provide services, guidance, standardization and coordination for their relevant specialities and would supervise them on behalf of the Director. They can be regarded as senior subject matter specialists. Because of its size, each new grainage would be headed by a Deputy Director who would report to the Joint Director Grainages at headquarters The Department would also strengthen its administrative services at headquarters adequately to deal with the extra workload caused by expansion of staff and services. To carry out the heavy construction program under the project, the Department would establish an engineering cell by secondment of a superintending engineer supported by about five executive engineers and 20 assistant engineers from the State Public Works Department (PWD). Because the project construction program has been planned to commence early during the project period, assurances were obtained that the engineering cell would be established by September 30, Department of Agriculture 5.04 Village level workers of the Department of Agriculture would provide extension for mulberry cultivation using T and,v extension methods. Subject Matter Specialists to support extension staff would come from the Department of Sericulture. There would be close liaison between the two departments at state, district and taluk level. Karnataka Silk Industries Corporation (KSIC) 5.05 The Government of Karnataka established the KSIC in early April 1980, to take over the present DOS run filatures, twisting plant, weaving plant and spun silk mill and implement the filature and spun silk mill modernization program (paras ) to be financed by the project. Main reasons for forming the Corporation are to put operations on a more commercial basis, relieve DOS from the task of operating the processing complex and let it concentrate on the silk production program; and provide access to institutional credit, which is not available to the Department, particularly for financing the modernization program The activities of the processing plants, each with its own management, were coordinated by a small central staff at DOS Headquarters. The Department had installed a satisfactory accounting and reporting system which could serve as the basis of the Corporation's management control system. Existing staff is expected to transfer to the Corporation and would provide factory floor level staff and the core of management level staff. The weaving and spun silk plants have been making profits over the last five years, but overall results from all facilities showed deficits due to losses by filatures, caused by obsolete equipment The Corporation would be controlled by a Board nominated by GOK. The management team would be headed by a managing director, supported by a finance director and a technical director responsible for all manufacturing operations, research and development and centralized cocoon purchasing. These three officers would be on the Corporation Board. Other senior staff to

34 assist the managing director would be the personnel and administration manager, internal auditor, secretary and marketing manager (see Chart 21295). Each plant would be headed by a general manager reporting to the technical director. As with the DOS program, an engineering unit would be deputed by the State Public Works Department to supervise project construction. Agreement was obtained that the unit would be established before December 31, The managing director of the Corporation has been appointed. The two other directors, administration and personnel manager, and the chief accountant (who would report to the finance director) would be needed at an early stage of the project, and assurances were obtained that they would be appointed before September 30, Recruitment of senior management and technical staff would be on a national basis. Some senior staff may be deputed from GOI or GOK service. Since staff continuity would be important for the success of the Corporation, GOI and GOK would endeavor to ensure that deputed staff, unless unsatisfactory to the Corporation, would be retained in their posts for a reasonably long period. Research 5.09 The research component would be carried out by CSRTI, three universities and by KSSDI. The latter had not yet been established at appraisal and assurances were obtained that it would be established before December 31, Responsibility for research programs would rest with the head of each participating institute--director CSRTI, the Vice Chancellor of each university and the director of KSSDI. The latter had not yet been selected at appraisal and assurances were obtained that the director, head of KSSDI administration unit and at least two of the proposed department heads would be appointed before December 31, Coordination of research programs is described in para Credit for KSIC through the Industrial Development Bank of India (IDBI) 5.10 Project loan finance for the industrial component to be undertaken by KSIC would be channeled through IDBI. IDBI, established in 1964, had up to December 31, 1979 approved total financial assistance of Rs 46.1 billion (US$5.5 billion) for a large variety of industrial investments, either directly or together with other financing agencies or as refinance for onlending agencies. IDBI has a large staff experienced in preparation, appraisal and supervision of industrial projects including investments in textile industries similar to processing investments to be financed by IDBI for the project. The Bank Group has already been involved with IDBI through two lines of credit for State Finance Corporations, also for financing development of the fertilizer industry, construction of an apple juice concentrate factory and through a loan for financing joint/public sector projects. IDBI is financially sound and well managed and well qualified for financing the KSIC development program. 1/ 5.11 Under financial arrangements to be made between GOI and IDBI, GOI would onlend part of the IDA credit to IDBI at an interest rate of 7.25% per 1/ Detailed description of IDBI is given in Report No. 1736A-IN of January 15, 1978 updated by notes in Annex 6.

35 annum for periods between 5 and 9 years and at 7.75% per annum for periods between 10 and 15 years, with a rebate of 0.25% for timely repayment in each case. The repayment period would be the same as that of the IDBI subloan to KSIC. Completion of the financial arrangements between GOI and IDBI satisfactory to IDA would be a condition of disbursing the relevant part of the Credit. IDBI would lend up to 70% of construction, equipment and machinery costs for a period up to 10 years, which would include a two-year grace period for payment of capital and interest installments, the latter being capitalized. Annual interest rate would be 9-1/2% for the first Rs 20 million and 11% for the balance which would give IDBI a spread of 3.55%, which is satisfactory. A 1% commitment fee may be charged by IDBI on undrawn amounts. Repayment would be in semiannual installments. These lending terms and conditions were discussed and agreed at negotiations. IDBI would appraise the KSIC modernization proposals on the basis of a feasibility report prepared by Messrs. Tata Consulting Engineers (a local group with international experience) and would send appraisal findings to IDA for review. Appraisal is in progress and is expected to be completed before the end of June Credit for Silk Farmers and Silk Reelers through ARDC 5.12 Under financial arrangements with ARDC, GOI would onlend part of the credit to ARDC for refinancing participating banks which would provide loans to silk farmers and silk reelers. Completion of financial arrangements between GOI and ARDC would be a condition of disbursement of the ARDC refinance components of this Credit. To ensure adequate and suitable banking arrangements, ARDC, in consultation with GOK and local banks, has prepared a draft banking plan which was discussed at negotiations. The plan woull be completed and sent for IDA review by about September 30, 1980, and in any case before submission of applications to IDA for disbursements against ARDC refinance for loans made to farmers and reelers. The final plan would include inter alia a definition of ARDC's role in project implementation and proposals for: banking coverage; preparation, supervision and monitoring of schemes; rehabilitation or development of banks or branches as needed; recruitment and training of staff, as necessary by participating banks; supporting services to be provided by DOS; and proposals for improving lending procedures where possible. As already indicated (para 2.19) ARDC is endeavoring to improve performance of ongoing schemes for cooperatives in traditional areas and would also seek ways of making ARDC refinanced credit available to silk farmers who are not members of cooperatives Project schemes would most likely be prepared on a district rather than on a bank by bank basis, a measure that should speed up preparations for project lending. While banks would be allocated certain areas in which they would canvass loans intensively, lending for project purposes by other banks in that area, due to existing business connections, would also be refinanced from project funds. To ensure effectiveness of credit services, banking arrangements would be reviewed at state level once a quarter and changes made as necessary. With respect to ensuring recoveries, CB in particular were interested in linking loan repayments to marketing. They would, therefore, together with DOS, explore possible procedures for effecting recovery in GOK regulated cocoon or silk markets. If successful, such an arrangement would cover participating cooperative banks.

36 ARDC would also explore measures to improve burdensome and time consuming lending procedures, particulary those connected with obtaining mortgages. Such measures may include possible substitution of a charge on land for mortgages; or introduction of a credit passbook system which would also obviate the need for mortgages. To speed up processing of loan applications, GOK is experimenting with "camps" of all government staff involved in loan approval procedures to process all outstanding applications in the area during the duration of the camp. GOK is also considering amendment of cooperatives legislation, that would enable LDB to accept hypothecation of assets other than land as collateral instead of only mortgages as at present and would facilitate greater LDB participation in lending for rearing houses and cottage basins Through participation in about 40 projects, ARDC has ample experience of Bank Group project execution. 1/ Lending terms and conditions for farmers and reelers are outlined in Schedule A and were discussed and agreed at negotiations. ARDC and IDBI Interest Rates 5.16 Interest charged to final borrowers in lending channeled through ARDC would be 9.5% for small farmers 2/ and 10.5% for other borrowers; and in the case of lending through IDBI, 9.5% for up to Rs 20 million for investments in industrially backward areas and 11% for all other lending. Inflation in India between 1976 and 1979 averaged 2-1/2% annually. Inflation in India between 1974/75 and 1978/79 averaged only 1.5% per annum. With the sharp increase in oil price, during 1979 coinciding with a severe drought, prices spurted by almost 15% between April and December 1979 and are anticipated to increase another 10% during 1980/81. Given past GOI determination and success in containing inflation, and the likelihood of a strong agricultural recovery and improved supply of industrial inputs, the rate of price increase over the project period is expected to average somewhat below 7% per annum. The proposed on-lending rates would be positive in real terms throughout the project period and would compare favorably with real rates in other developing countries. GOI Ministry of Industries 5.17 The Central Ministry of Industries would be the GOI agency responsible for the project. The Development Commissioner Handlooms, acting on behalf of the Secretary of Industries would handle matters connected with the project. The Ministry, through the Central Silk Board, would be responsible for the CSRTI research component and would also arrange technical assistance and the overseas training programs. For this purpose the Ministry would enter into discussions with representatives of Japan for obtaining assistance of the Japanese Ministry of Agriculture in selecting consultants and of the Japan International Cooperation Agency, which informed the appraisal mission that it would be prepared to help arrange project training programs in Japan. 1/ Detailed description of ARDC is given in the Staff Appraisal Report of the Third Agricultural Refinance and Development Corporation Credit project. Report No IN of June 21, / Defined in Schedule A.

37 Training 5.18 Training courses for SA are provided by CSRTI (9-15 months courses); for sericulture inspectors by the University of Bangalore (6 months) and are to be initiated by the University of Agricultural Sciences. Total capacity of those courses would be about 150 trainees per batch. SD training is carried out departmentally and includes courses at the departmental training center and practical training which lasts at least six months at the 74 silk farms and 80 grainages. The project training program for almost 2,000 new technical staff over five years would be formidable. While training facilities would be adequate, particularly after completion of the training center development program, a formal training program had not been drawn up for each staff category. Assurances were therefore obtained that such program, including an implementation timetable would be prepared for IDA review before September 30, In addition, both GOI and GOK would ensure that adequate training facilities and resources would be made available for the SA and sericulture inspectors project training program at CSRTI and at participating universities. Training of KSIC staff in use of new equipment would be conducted by equipment manufacturers and would also be supported by experts under the project technical assistance program (para 3.20). Project Coordination 5.19 State Level. Overall project organizational features are illustrated on Chart The GOK Ministry of Industries under the Development Commissioner would be responsible for the project and has established the Sericulture Project Committee to monitor and coordinate project implementation. GOK Ministry of Finance and PWD representatives, a GOI representative, Director of Sericulture, Director of Agriculture, Managing Director KSIC, a representative each of project research services, ARDC, IDBI and of participating banks are members. The Director of Sericulture would provide committee secretariat. The committee would meet at least quarterly. The committee would, each year, approve the annual project implementation plan and assurances were obtained that the plan would be sent for IDA review by March 31 of each year during the project period, starting March 31, To support implementation of the silk production part of the project, there would be a district level coordination committee in each project district. Convenor and chairman would be the District Deputy Director of Sericulture and membership would include the District Agricultural Officer, representatives of participating banks, inputs supply agencies, PWD and the District Administration. The Committee would meet quarterly or more frequently if necessary. In addition, as already indicated, ARDC would organize quarterly review of banking arrangements at state level Research Coordination. A project Sericulture Research Committee has been set up to coordinate research programs and development programs. The head of CSRTI, KSSDI, Director of Sericulture and representatives of participating universities are members. The Committee would review program proposals from participating institutions and formulate an agreed annual program, based after the initial year, on evaluation of results from previous and ongoing work. Assurances were obtained that the committee would send the first annual

38 program for IDA review before March 31, 1981 and thereafter annually not later than the same date. The committee would also arrange to publish a consolidated summary annually of results of the year's trials. Reporting Requirements and Evaluation 5.22 DOS as main project agency would prepare a quarterly progress summary, and an annual report and, within six months after completion of the project, a completion report acceptable to IDA which would deal with all project aspects; based on data collected by its own staff for DOS activities and on contributions of the other project agencies. Quarterly and annual report formats would be mutually acceptable to GOK and IDA. Quarterly summaries would reach IDA within two months after the end of each calendar quarter and annual reports within two months after the end of the reporting year. The above reporting procedures were discussed and agreed to at negotiations Quarterly and annual reports would constitute a monitoring system of implementation progress both for project management and IDA. Progress of the industrial component would be apparent from statutory annual reports and accounts, but measurement of the impact of the project and its individual components on silk production, employment and rural income would require separate study that should also provide data for management decisions. The Department of Sericulture has already initiated discussions with a local economic research institute and preliminary proposals for relevant studies are broadly acceptable, but require refinement. Assurances were obtained that GOK would, by March 31, 1981, initiate an evaluation study satisfactory to IDA. To ensure adequacy of study design and methodology, GOK would by June 30, 1981, submit an inception report for IDA review, prepared by the institute which would conduct the study, which would detail the work plan, scope, methodology, data processing, analysis and reporting output and which would also include preliminary survey questionnaires. Accounts and Audits 5.24 In accordance with commercial practice, KSIC would install and maintain financial and cost accounting systems which would show the results of each of its factories separately and would allow effective internal control, including inventory management and internal audit. Its annual accounts would be audited by independent auditors acceptable to IDA. Accounting and auditing procedures of ARDC, IDBI and participating commercial and cooperative banks are satisfactory. They would maintain clearly identifiable accounts for project loans GOI and GOK would cause participating research agencies and DOS to maintain separate records of project expenditures, which would be audited, in the case of GOI agencies, according to GOI procedures and in cases of GOK departments and agencies according to GOK procedures, all of which are satisfactory. DOS and research agencies, within nine months after the end of each fiscal year, would submit: (a) a statement of project expenditure during the year certified correct by the Accountant General or other authorized accounting authority; and (b) an account of such expenditures, classified according to the components shown in Annex 2 of this report. Assurances were obtained

39 that accounting and auditing procedures outlined in this and the preceding paragraph would be followed and that audited accounts and audit reports of KSIC, ARDC, IDBI, and participating banks would reach IDA headquarters within nine months after the end of the financial year of each relevant project agency. VI. PRODUCTION, MARKET AND PRICES Yields and Production 6.01 GOK is planning to increase raw silk production in Karnataka from 2,300 tons per year at present to about 4,500 tons. Of the total, production of bivoltine silk is expected to increase from 100 to 1,700 tons. Out of those totals, project activities are projected to increase raw silk production by 1,600 tons per year including about 1,000 tons bivoltine silk over a seven year period. The increase would result from about 17,000 tons additional cocoon production per year and from improvement of silk recovery from cocoons, from about 7.3% at present to about 8.3% (from about 6.5% to 7% in rainfed areas and from about 8% to 9% from irrigated mulberry). Cocoon yields in rainfed areas are projected to increase from about 200 to 250 kg per hectare mulberry and those in irrigated areas from about 530 to 700 kg. Yields from traditional and new areas are likely to be similar. The traditional areas may be climatically slightly more suitable and have experienced growers. However, silkworm disease problems may be more difficult to control there than in new areas and experience may not be a great advantage in tha. newcomers may adopt improved practices more readily than established sericult:urists Several factors would be combined to raise silk production. About half the additional silk would come from the 14,000 ha irrigated mulberry expansion in new areas. Also there would be the spread of improved M5 mulberry variety to over 90% of the 24,000 ha mulberry to be covered by intensive project services in the existing irrigated areas. M5 not only has a 30% leaf yield advantage over existing varieties, but has a more nutritious leaf which in itself would result in greater silk output. Improved silkworm egg production and widespread use of hatcheries would lead to a better start of the rearing cycle which translates into higher silk production. In addition there would be large-scale introduction of bivoltine silkworm varieties with higher cocoon yield, better silk content and better quality than local varieties. One of the most important factors for improving production would be intensive advisory services both for mulberry cultivation and silkworm production. Because there would be five or more silkworm rearings per year, farmers would have much greater opportunity for learning new practices than with normal field crops. The assumption therefore, used in yield projections, that target yields would be achieved over three years (the equivalent of 15 crops) from the time that intensified services start in any area, is considered to be reasonable. World Production, Consumption and Trade 6.03 As a natural fiber, silk has been valued culturally for centuries, and continues to be rooted in social tradition of countries where national

40 dress and ceremonial occasions dictate an irreplacable role for it. Additionally, Western European haute couture has contributed to establishing a reliable market by consistently expressing fashion in silk Over the last five years, world cocoon production has fluctuated between 300,000 to 400,000 tons with estimated raw silk production ranging from 47,000 to 50,000 tons (Annex 1, Table 6.1). Until the early 1960s, Japan was the dominant silk producer and exporter. Since then, the People's Republic of China (PRC), from which information has become available only recently about the extent of its productive capability and potential future supply to the world market, has taken the lead in both respects. Because of the high seasonal labor input required in sericulture, former major producers and trade leaders, notably Japan and Korea, are experiencing decreasing production due to urbanization and relatively higher wage rates of industrialized economies. The comparative advantage has shifted to countries such as the PRC, India and Brazil that have labor available at competitive wage rates Global demand for raw silk is expanding, and with it, the export market. In the period from , total raw silk consumption in countries for which data is available rose from 36,000 to 40,100 tons, an increase of 11% over five years, or about 2.2% annual increase (Annex 1, Table 6.2). Domestic consumption in Japan has gradually increased over the last fifty years to a current level of about 21,000 tons per year. Estimated consumption in the PRC has increased similary, to approximately 10,000 tons in Demand from manufacturers in We!.tern Europe and the substantial domestic market within India each have increased to an.verage annual consumption level of about 4,000 tons Japan's imports represent typically 50-60% share of total traded raw silk, two-thirds of which is supplied by the PRC, another 30% by South Korea, and a small portion by Brazil. Over the last five years, domestic raw silk production in Japan has decreased by 3,000 tons, approximately 18%, and reliance on relatively cheaper imports has been necessary to contain production costs of silk manufactures. The second largest share of imports goes to Western Europe, distributed among five countries with established silk manufacturing industries. These countries, notably Italy, imported 3,160 tons or about 37% of traded silk in The United States, although once the world's largest importer and processor of raw silk, is the third largest importer with typically about 3% of market share (Annex 1, Table 6.3). Exports and the Domestic Market in India 6.07 According to available information, India currently ranks as the world's third largest consumer and fifth largest producer of raw silk. Mulberry silk production has increased steadily over the last two decades (Annex 1, Table 6.4); more rapid growth has taken place in the last five years due to development and dissemination of improved varieties of mulberry and silkworms. Consumption of raw silk reached an estimated level of 4,200 tons in 1978, and by a small margin India was a net importer. Accurate statistics on the domestic market, reported as mill consumption and stocks in sericulturally advanced countries, are not available due to the predominance of small-scale handloom weaving in India. Exports primarily in the form of fabrics and finished garments have expanded considerably, however, registering an average annual

41 increase of 10.7% from 1960 to 1978 (Annex 1, Table 6.4). In 1978, foreigr exchange earnings from mulberry silk exports reached US$45 million from 10.5 million m of silk finished goods and about 1,500 tons of silk waste. 1/ At present, India's silk exports are confined to narrow markets, to a large extent saris for Indians living abroad, because of low quality compared to the international trade standard. Export trade in raw silk demands a quality standard suitable for industrial powerloom finishing, such as the bivoltine Chinese, Korean or Japanese varieties. Two of the primary objectives of the project would be to increase production of bivoltine hybrid cocoons and to improve reeling techniques for production of silk meeting international quality standards. World Raw Silk Price Projection 6.08 Prices for Japanese imported raw silk (standard 20/22 denier, mixed quality grades) for the last nine years in current and constant terms is presented in Annex 1, Table 6.5. Although fluctuations occurred at the beginning of the decade, over the last three years prices have been stable, with an average weighted price of US$40.85/kg for a blend of qualities. If the present supply and demand trends for raw silk continue, and based on the current average annual increase in world consumption, demand will out-pace supply within five to ten years. Assuming demand and supply elasticities of , the relative price increase would be 7-10% over the present level. A median range price of US$43.80/kg for good quality raw silk (standard 20/22 denier) which assumes a relative price increase of 7% has been used as the 1985 projected world market price (expressed in 1979 price levels), as illustrated in Annex 1, Table 6.6. Indian Domestic Prices 6.09 Based on the best available information, cocoon and raw silk prices in constant terms have risen over the last three years, despite increasing production. Quality standards are not in use, but ranges are roughly established for cocoons suitable for charka, cottage basin and filature operations. Accordingly, raw silk produced by type of reeling process falls within a type of basic quality price range, although again, standard quality measurement such as the testing systems used in sericulturally advanced countries has not yet been introduced. To ensure fair and stable prices to induce growth and quality improvement in the industry of Karnataka, GOK has taken the lead of other countries to establish a raw silk exchange (a regulated raw silk market), and a Silk Marketing Board which would be able to buy up part of raw silk market arrivals should intervention be necessary to stabilize prices. For the project, constant financial prices for KSIC silk manufactures have been used based on domestic market averages for 1978/79, and are expressed in late 1979 price levels. For cocoon and raw silk prices, price levels have been used in the analysis that are up to 10% below current levels, based on DOS anticipation of trends with operation of the raw silk exchange. A summary of financial and economic prices is shown in Annex 5, Table 2. 1/ Indian controls exports of silk waste to protect supply to the domestic spun silk and noil yarn industry.

42 VII. FINANCIAL PROJECTIONS Karnataka Silk Industries Corporation 7.01 Financial Structure and Operating Assumptions. KSIC is projected to start operations by mid Authorized share capital would be Rs 150 million and two thirds of the plant modernization program would be financed by loans. To allow adequate debt servicing capacity assurances were obtained that KSIC would operate within the debt equity ratio stipulated by IDBI. Resulting from discussions during negotiations, agreement was reached that KSIC would not exceed a debt equity ratio of 2:1 without IDBI approval, during the period that loans for the capital works program are outstanding. The assets (mainly current assets) of DOS run filatures, twisting unit, weaving plant and spun silk mill would be transferred to KSIC at net book value. About Rs 10 million equity would be needed to establish the corporation, with additional requirements to finance the project estimated at about Rs 5 million, Rs 13 million and Rs 55 million in the first, second and third year of the project Existing filatures and the twisting unit would be phased out over a two-year period, starting April 1981, during which the new filature would be built. The weaving plant would be operated on a two shift basis, starting March 1980, instead of the present single shift. The present spun silk mill would be reconditioned over a two-year period also starting April 1, 1981 and, since only a few machines would be treated at a time, would continue to produce. The new spun silk unit would become operative in mid 1983, and would increase annual capacity to 150 tons of spun silk. All the raw silk needed by the weaving plant would be supplied from the filature and all the waste silk produced by the filature would be used by the spun silk mill Financial Results. The Corporation is projected to show an operating loss for three years before building up to an operating profit of Rs 35 million (see Annex 4, Table 2). The cash flow projections (Annex 4, Table 1) show that KSIC would be able to dispense with short-term borrowing in the seventh year, start paying dividends in the eleventh and be able to expand facilities thereafter Separate rates of return were calculated for filatures, spun silk mill and total investments (Annex 4, Tables 1-5). A summary of results and sensitivity tests is shown below in percent: KSIC Financial Analysis Results of Sensitivity Tests Spun Silk Total Filature Mill KSIC Capital Cost (US$ million) Base Rate of Return Investment up 10% Revenue down 5% Operating Cost up 10%

43 The rates of return are sensitive to changes in revenue and operating costs indicating the importance of management controlling the profit margins. Any risk involved is considered well worthwhile, in view of the pioneering nature of the proposed investments and the benefits to the Indian silk industry from introduction of modern technology (para 3.03). Departmental Filature 7.05 Financial rates of return were calculated for investment in the departmentally operated semiautomatic filature to be established in the new sericulture area. Based on a 12-year analysis with full capacity operations after three years and conservative assumptions regarding cocoon procurement and silk yarn prices, the return is 14%. Sensitivity analysis indicates that the return is fairly vulnerable to changes in operating costs or benefits. If revenue rises or operating costs drop by 5%, the rate of return rises to 18%; conversely, the rate of return falls to 9-10% by a 5% change in the opposite direction. As the unit would essentially be experimental and would also serve as a training center the conservatively estimated base rate of return is acceptable; however, since the operation of the unit will serve to demonstrate financial viability in reeling for possible replication by private entrepreneurs, DOS should adopt careful measures to curtail operating costs, and as planned, initiate piece-rate wages where possible to induce efficient production. Cottage Basins for Private Reelers 7.06 Incremental analysis based on a charka operator upgrading to cottage basin operation is presented in Annex 4, Table 7. The model is based on a Rs 20,000 total investment in a 5-basin unit reaching full capacity of 910 kg silk yarn (10 tons cocoon throughput) per year, after three years. Financing is calculated on the basis of 10% reeler equity contribution, Rs 4,000 government subsidy and the balance in a 7-year term loan at 10.5% interest with twoyear grace period. Based on a three-year build-up to 250 operating days per year, two years of operating deficit would occur before annual incremental net benefits of Rs 16,700 would be achieved, compared to a before development net income of Rs 3,500. The financial rate of return to total investment over 12 years is 32%. Sensitivity analysis indicates that small changes in operating costs or revenues cause significant changes in the rate of return. However, widespread cottage basin operations in India indicate that entrepreneurs are sufficiently adroit to operate profitably. Additionally, with government subsidy, the return to reeler equity is over 50% and is not sensitive to major changes in operating assumptions. Farm Models 7.07 In general, farmers in Karnataka regard sericulture as the most profitable form of land use. The steady cash flow is as much an attraction as the high total returns. Since crops follow each other in rapid sequence the farmer can quickly recoup losses from a crop failure by better results in the next silkworm rearing cycle. However, because of the number of variables manipulated by a sericulturist in producing farm income, farm models

44 were developed to test the most stringent combination of factors. Thus the base cases presented in Annex 4, Tables , and summarized below represent a high degree of conservatism The variables controlled by the sericulturist include the initial and subsequent area devoted to mulberry, the rapidity of planting or replanting with improved mulberry variety, the number and size of silkworm rearings, the silkworm variety and resulting cocoon quality and yield. General assumptions for the models were based on well-managed farms producing alternative crops under irrigation converting to sericulture with credit assistance for plantation, equipment and working capital for two rearings; average to good sericulturists with irrigated farms upgrading to improved varieties with credit assistance for rearing houses; and improvements in rainfed sericulture due to technical services to be initiated under the project. The models are presented in constant prices (late 1979). While current cost levels have been used, longer-term price levels anticipated by the Department of Sericulture have been used that are up to 10% below current price levels for better quality cocoons. Family labor has been included at the market wage rate. In all models, it has been assumed that full yield is not achieved until the third year. For tropical sericulture where farmers have an average of five rearings and gain experience rapidly, this is an extremely conservative assumption; however, this assumption adequately tests results if project implementation is delayed and production infrastructure and technical services do not become available as scheduled A 0.5 ha and a 1 ha farm model were prepared for sericulturists upgrading to improve muloerry and silkworm varieties with credit assistance, achieving different cocoon qualities (priced at Rs 23 and Rs 25/kg). Rearing house construction is financed with 10-15% farmer equity contribution and the balance by five-year term loan at 10.5% interest. Incremental net benefits at full development are Rs 1,345 and Rs 3,075 for 0.5 ha and 1 ha farms, respectively. Based on a 20-year analysis, the rate of return to total investment is 15-16% for these models. Increasing revenues by 5%, possible with either slightly larger rearings or an additional rearing or improved yield, brings the rate of return to 22%. Lowering operating costs by 5% or capital investment costs by 10% produces rates of return for both models between 17-20% For new sericulturists, a 0.5 ha farm model was prepared testing conversion to mulberry with credit assistance for planting, equipment and working capital for two rearings. Financing is based on 10% farmer equity contribution and a four-year term loan at 10.5% interest, with interest payments only in the first two years. Incremental net benefit at full development is Rs 1,265 compared to Rs 1,950 estimated net income from traditional crops (paddy, maize, cotton) before adoption of sericulture. Based on a 14-year analysis, return to total investment and to the farmer's equity is 13%. An increase of 5% in revenues, or assuming a 10% lower before development net income or 5% lower operating costs results in a rate of return of 18-20% Returns to improved practices in rainfed sericulture are illustrated in a 1 ha farm model that assumes no credit assistance is required. A modest incremental yield of 35 kg cocoons per year and a Rs 1/kg added value in cocoon quality because of improved practices, produces an incremental net benefit of Rs 200 annually. Over seven years, the rate of return is over 50% and is not

45 sensitive to significant changes in parameters. This illustrates the great potential in improving rainfed sericulture, one of the important objectives of the project. Cost Recovery 7.12 About one third of the project cost would relate to credit for on-farm development, reeling and the KSIC modernization program and would be fully recoverable. Another 35% of project cost would finance project technical assistance, overseas training, research and extension programs for which cost recovery is not considered appropriate. The balance of project cost would finance grainages, cocoon markets, the departmental filature and communal hatcheries. All these except the hatcheries (about 12% of project cost) would be self-supporting from fees or sale of products and would generate financial returns from 8% to 18% which are satisfactory for GOK facilities rendering services to silk farmers. Communal hatcheries provide a service that reduces farmers' costs and raises cocoon yields and represent an innovation well proven on a pilot field scale, but not yet accepted by most silk farmers. GOK ascribes importance to fostering widespread adoption of hatcheries by farmers. Based on experience abroad, where it took several years for farmers to adopt hatcheries on a wide scale, GOK has provided full funding for hatcheries to cover establishment and operating costs over the project period. However, GOK plans that ultimately farmers themselves should operate the hatcheries and is considering ways in which those plans can be effected, including the possibility of introducing service charges in future. GOK, in the third project year would exchange views with IDA on possible ways of recovering hatchery costs, once the benefits of hatcheries are understood by most silk farmers. VIII. BENEFITS AND ECONOMIC EVALUATION Benefits 8.01 The project would help to provide a sound technical basis for quality improvement and innovation at virtually every major stage of mulberry sericulture in India, and would assist Karnataka in increasing raw silk production, from 2,300 tons to 3,900 tons per year. In addition to incremental raw silk and silk manufactures production with concomitant export earnings resulting from 14,000 ha new production area and improved yields from better farm practices and silkworm varieties, the project would demonstrate benefits from improved reeling processes by introduction of modern units. Importantly, the project would seek to enhance research and exchange with experts in sericulturally advanced countries to broaden and intensify the Indian research establishment to support long-term development of the industry. A significant number of employment opportunities -- an estimated 180,000 work-years annually -- would be created primarily among the rural population, and project activities would contribute to increasing incomes of producers and processors as well. Benefits from the project would be widely distributed and affect positively the entire spectrum of the estimated two million persons engaged in sericulture and related activities in Karnataka Quantifiable benefits from the project include net incremental income to cocoon producers based on total incremental production of 17,000 tons

46 cocoons annually at full development, resulting in an annual incremental raw silk and silk waste production of 1,600 tons and 480 tons, respectively, valued at about US$75 million. Additionally, benefits from KSIC spun silk mill operations have been taken at the added value in spun silk yarn and other manufactures from processing raw silk and silk waste. Although not included in the analysis, value from by-products of dead pupae (livestock feed), silkworm litter (fertilizer), excess leaf, stem and sticks (fodder, fuel), all of which are recycled in some manner, form a considerable residual benefit from sericulture. Economic Evaluation 8.03 Economic costs of the project would consist of capital investment and operating costs for production and processing infrastructure, on-farm development and cottage basin capital and production costs, and KSIC net incremental working capital. No attempt has been made to quantify benefits from investment in research, technical assistance and foreign training, or the project evaluation study, and costs for these components are not included in the analysis. All costs are net of duties, taxes, price contingencies, interest and other transfer payments, but include physical contingencies of 5-10% for civil works, equipment, vehicles and incremental operating costs. Traded components in construction costs (15%), operating costs (10%), KSIC equipment (45%) and fertilizer (15% of on-farm production costs) have been adjusted by estimated standard conversion factors of to reflect more accurately the value to the economy of utilizing foreign exchange. 1/ Due to widespread unemployment in rural areas, the opportunity cost for unskilled and semiskilled labor, accounting for approximately 65% of on-farm production costs and 35% of incremental employment generated by departmental infrastructure, was valued at 70% of the market wage rate, corresponding to the upper limit of the 50-70% range typically estimated for the economic cost of unskilled labor in various agricultural projects in India A summary of prices used in the economic and financial analysis is shown in Annex 5, Table 2. The export parity price for raw silk is derived from Japanese imports of standard 20/22 denier, mixed grade quality. Japan imports about 60% share of world trade in raw silk. The price for silk waste was derived with reference to Japanese imports, but at lower quality grade. The price for raw silk and silk waste is expressed in domestic currency by conversion at Rs 10 = US$1, reflecting the estimated standard conversion factor for India of 0.8. Added value from KSIC manufactures is taken at domestic prices, because of the specialty nature of production for the domestic market and difficulty in comparison with internationally traded fabrics that include a design element In the future without the project, it has been assumed that 25% of the targeted 14,000 ha for new production would convert to sericulture with existing yield levels, producing about 200 tons raw silk for reeling by cottage basins and charka units, and about 65 tons silk waste. The remaining area 1/ A conversion factor is the ratio of the world market (border) price to the domestic market price, where the domestic price is expressed in dollars converted at the market exchange rate.

47 39- (10,500 ha) would remain under well-managed irrigated farms producing traditional crops (paddy, maize, cotton, sugar cane) with an average annual net income of Rs 3,900/ha. Area and yields for existing rainfed irrigated farms were assumed to remain at current levels 8.06 The analysis was calculated for a 20-year period during which one major equipment replacement was assumed necessary. Yields and processing capacity utilization were conservatively estimated to reach full levels only in the third year after initiating operations (see discussion on farm models, para 7.07). Based on these assumptions, the estimated economic rate of return to the project is 22% (Annex 5, Table 1). A separate rate of return calculation to raw silk production or to processing was considered inappropriate due to the direct linkages between stages of production and the supporting infrastructure which cannot be decomposed meaningfully Although the base estimate represents a stringent set of assumptions, sensitivity analysis was performed to test results under additional changes in major parameters. The most important of these was the assumption regarding the projected raw silk price, but a 10% decrease resulted in a rate of return of 17%, still an acceptable return to the economy particularly with the substantial employment generation impact of the project. Combining a 10% decrease in all benefits with a 10% increase in either capital costs, on-farm production costs or operating costs, or with 10% increased benefits in the future without the project resulted in 15-17% rates of return As an additional test, switching values were calculated for critical variables and are summarized below. The switching value of a variable is that value at which the net present value of the project is zero (or, when the rate of return equals the opportunity cost of capital). The switching point is the percentage change required over the discounted appraisal value to produce the switching value. At an estimated opportunity cost of capital of 12%, the switching point for total costs and total benefits is 44% and -19%, respectively, within acceptable boundaries (see para 8.07). Switching Values of Critical Variables (OCC = 12%) Appraisal Switching Switching Variable Value Value Point -----Rs Million Costs Capital Costs 458 1,444 >100% On-Farm Production Costs 1,018 2,003 97% Operating Costs 756 1,741 >100% Total Costs 2,232 3,217 44% Benefits Raw Silk 3,288 2,302-30% Total Benefits 5,155 4,170-19% Future Without Project Benefits 1,938 2,923 51%

48 Project Beneficiaries 8.09 In India, it is estimated that sericulture is practiced in nearly 5% of all villages, engaging 3.8 million people in various activities, an estimated 30% of whom are from poorer sections of the population. Karnataka, which represents 60% of total Indian silk production and nearly two million workers, reflects the characteristics of the industry nationwide. In the state, there are 6,300 villages where an estimated 90% of the farmers devote at least a portion of their land to sericulture. In the traditional districts, approximately 80% of the sericulturists with about 60% of the total area cultivate less than 1 ha mulberry, and a similar pattern is expected to emerge in the new districts, where the 14,000 ha target for new irrigated mulberry is estimated for adoption by approximately 25,000 farm families. However, virtually all wage earners, from field laborers to those involved in traditional reeling and handloom weaving, would be from the poverty income target group. The DOS estimate of annual incremental employment generated by the project is given below: Estimated Incremental Employment Generated by the Project Work-Years Mulberry cultivation and silkworm rearing 57,300 Fabrication of rearing implements 32,000 Reeling 16,000 Twisting 3,000 Weaving - 80% by handlooms 66,000 20% by powerlooms 4,000 Fabric finishing - 80% dyed and printed 2,000 Total 180,000 In addition, approximately 15,000 work-years of primarily unskilled labor would be involved in construction of supporting infrastructure under the project, and approximately 9,000 incremental positions would be created in the Department of Sericulture to operate supporting infrastructure, about 65% of which would be opportunities for unskilled and semiskilled workers By converting to irrigated mulberry from traditional crops, a farm family would gain an estimated annual increment of Rs 1,265/0.5 ha, compared to a Rs 1,950 estimated net income level before conversion. This incremental income is comparable to about US$300 per family on a 1 ha basis, or about US$50 per capita for an average family of six members. Sericulturists adopting improved silkworm varieties and practices would gain an estimated Rs 3,075/ha net incremental benefit, or about US$365 per family. An additional attraction to sericulture is that the short crop cycle provides a continuous cash flow from an average of five but up to 12 harvests annually. Experience is gained rapidly, improvements can be introduced at frequent intervals and any losses due to a reduced or failed crop can be recovered within two months by better results in the next silkworm rearing.

49 Project Risks 8.11 Main project risks would be small response from silk farmers to adopt improved practices and disease damage to impioved silkworm varieties, which are more disease susceptible than traditional varieties. However, the project has been specifically designed to minimize those risks, by providing exceptionally strong advisory services (para 3.06) and since silkworm eggs could become disease carriers, modern egg production facilities (para 3.08). Technical assistance (para 3.20) and overseas training programs (para 3.21) are also largely focussed on improving services to growers and on silkworm disease prevention and control The project presents a difficult management task for the Department of Sericulture. To increase production and introduce incentives for quality production, DOS staff will need to work efficiently to provide adequate technical services and supporting infrastructure. Stepping up the scale of grainage operations considerably and recruiting, training and managing the large numbers of technical staff needed for the project will present a formidable challenge to DOS. Management of KSIC will also have a challenging task in converting departmental processing units into modern, commercially operated establishments. However, given the priority placed on sericulture by GOK, and the high caliber of DOS staff, the chances for effective project management are good. In view of the employment and income generating nature of the project, promising market opportunities likely to arise from falling production abroad, favorable conditions for silk production in India and benefits for the industry and the Indian economy, project risks are considered well worth taking. IX. RECOMMENDATIONS 9.01 Assurances were obtained at negotiations that: (a) GOI would: (i) by December 31, 1980 draw up a plan and timetable for the technical assistance and overseas training program and would use its best endeavors to implement the plan (para 3.22); (ii) follow agreed procurement procedures (para 4.04 through 4.08); (iii) cause the Research Committee to submit annual programs for participating research agencies by March 31, each year for IDA review (para 5.21); (iv) cause its project agencies to observe project reporting requirements (para 5.22); and (v) cause its agencies to fulfill project accounting and audit requirements (para 5.25);

50 (b) GOK would: (i) by December 31, 1980 draw up rearing house specifications (para 3.05); (ii) follow agreed procurement procedures (para 4.04 through 4.08); (iii) by September 30, 1980 establish one engineering cell in DOS and by December 31, 1980 another in KSIC (paras 5.03 and 5.07); (iv) ensure that KSIC by September 30, 1980 would appoint its technical and finance directors, the personnel manager and chief accountant (para 5.08); (v) by December 31, 1980, establish KSSDI and appoint the director and three senior staff (para 5.09); (vi) by September 30, 1980, prepare a staff training program (para 5.18); (vii) prepare an annual project implementation plan to reach IDA before March 31, 1981 and a similar plan before the same date in each subsequent year, during the project period (para 5.19); (viii) cause its agencies to observe reporting requirements (para 5.22); (ix) by March 31, 1981, initiate an evaluation study (para 5.23); (x) cause its agencies to fulfill project accounting and audit requirements (paras 5.24 and 5.25); and (xi) ensure that KSIC would operate with a debt equity ratio stipulated by IDBI during the period that loans for capital development are outstanding (para 7.01). (c) IDBI would observe agreed lending terms and conditions (para 5.11). (d) ARDC would ensure lending terms and conditions outlined in Schedule A (para 5.15) Completion of financial arrangements satisfactory to IDA between GOI and IDBI and ARDC respectively would be conditions of credit disbursement for IDBI and ARDC components respectively of the Credit (para 5.11 and 5.12).

51 Schedule A Page 1 INDIA KARNATAKA SERICULTURE PROJECT Principal Lending Terms and Conditions 1. GOI to ARDC (a) In respect of ARDC refinancing not exceeding 9 years: (i) interest rate of 6.25% per annum, less 0.25% for prompt payment, and (ii) repayment at the end of 9 years. (b) In respect of ARDC refinancing in excess of 9, but not exceeding 15 years: (i) interest rate of 6.75% per annum, less 0.25% for prompt payment, and (ii) repayment at the end of 15 years. (c) The Borrower (GOI) shall bear the foreign exchange risk. 2. ARDC to Participating Banks (a) Interest rate to be 6.5% per annum for lending to small farmers 1/ and 7.5% per annum for lending to other borrowers; (b) Installment repayments to coincide approximately with collections from ultimate borrowers; and (c) Refinancing to be by purchase of debentures or by loans up to 90% of individual loans. 3. Participating Banks to Ultimate Borrowers (a) Interest rate to be 9.5% for small farmers 1/ and 10.5% for other borrowers; (b) A once and for all evaluation fee of 0.5% of the cost of investments may be charged. This fee may be waived with concurrence of ARDC; 1/ "Small farmer" is defined as "any person primarily engaged in an activity which provides a predevelopment net return to family resources to such person and his family not exceeding Rs 2,000 (based on 1972 prices) per year, and net return to family resources shall mean gross family income from the said activity less cost actually incurred".

52 Schedule A Page 2 (c) Farmer's contribution (including obligatory purchase of cooperative bank or society shares, own labor and other contributions in cash or kind): (i) for lending to small farmers a minimum of 5% of investment cost; (ii) for farmers cultivating land providing a predevelopment net return to family resources to such farmers and his family ranging for Rs 2,001 to Rs 3,500 based on 1972 prices, a minimum of 10% of investment cost (for the purpose of determining the net returns to family resources in the case of borrowers of reeling units, the criteria agreed to under Credit 947-IN (ARDC III) shall apply); and (iii) for other farmers, a minimum of 15% of investment costs. (d) Repayment periods to be based on the ultimate borrower's repaying capacity, but generally not to exceed: Ci) four years on loans for plantation and replantation of improved mulberry; (ii) three -,ears on loans for rearing equipment; (iii) five years on loans for rearing houses; and (iv) seven years on loans for reeling units. Loan periods may be extended for up to two years in each case for small farmers, at the discretion of ARDC. (e) Grace periods may be granted at the discretion of ARDC, provided that the repayment period of such loans is not exceeded; and (f) Technical standards, as agreed by ARDC and the GOK Department of Sericulture, taking into consideration IDA guidelines where applicable, to be observed. 4. General (a) Participating banks to maintain separate accounts for lending to small farmers; (b) Security to be in accordance with arrangements between participating banks and ARDC;

53 Schedule A Page 3 (c) ARDC shall refinance only sound schemes which, on the basis of careful study are considered to be financially and economically viable, and are backed by satisfactory technical and administrative management to be identified at the time of scheme approval; (d) ARDC shall forward all applications for refinance of schemes having total investment costs of US$500,000 equivalent or more together with appraisal reports and all other relevant data, to IDA for its approval; (e) Where necessary, ARDC may approve rescheduling of loans particularly when requests for rescheduling are from districts suffering from adverse climatic conditions; (f) Lending Terms and Conditions from ARDC to participating banks, and to ultimate borrowers, for similar purposes to be identical irrespective of source of funds; (g) Working capital for maintenance of mulberry growing and silkworm rearing expenditures for the first two rearing cycles as well as 10 days working capital requirements for reeling units to be merged in the term loan under a composite limit; (h) ARDC to apply eligibility criteria for financing institutions to obtain refinance fom ARDC, such criteria to be acceptable to IDA. 5. These lending terms and conditions may be amended from time to time as agreed between IDA and ARDC.

54 INDIA ANNEX 1 Table 3.1 KARNATAKA SERICULTURE PROJECT Implementation Schedule Major Items Project Activity Total 80/81 81/82 82/83 83/84 84/85 85/86 Mulberry Area Benefitting Fronm Project Services Per Year Mulberry New Planting (Ha) 14,000 1,400 2,800 4,200 4,200 1,400 - Mulberry Replanting (Ha) 20,000 2,000 4,000 6,000 6,000 2,000 - Existing Irrigated Mulberry Improvement (Ha) 4, ,200 1, Rainifed Mulberry Improvement (Ha) 60,000 6,000 12,000 18,000 18,000 6,000 - DOS Facilities Grainages Completions Cocoon Markets Completions (Units) / Model Hatcheries Completions Technical Service Centers Establishment/Improvement Communal Hatcheries Establishment/Improvement 1, / 300 3/ Training Centers Completions Demonstration Vans Purchased DOS Staff Recruitment and Training Sericulture Assistants 270 4/ Sericulture Inspectors 100 4/ Sericulture Demonstrators 1,500 4/ Credit for Farmers and Reelers Mulberry Planting Through Credit Program (Ha) 3, ,050 1, No. of Rearing Houses Through Credit Program 1, No. of Cottage Basins Through Credit Program Processing Facilities Departmental Filature Completion KSIC Filature Completion KSIC Spun Silk Factory Completion KSIC Central Workshop Completion Consultants (Man-Months) For CSRTI For DOS For KSIC Study Tours (Man-Months) For 6SRTI For DOS Research Laboratories Completion Staff Houses Completion Hostel Completion Farm and Miscellaneous Buildings Completion Farm Development Completion Scientists Appointment / 4 in May 1981 and 4 in March / Improvement of existing TSC and Hatcheries. 3/ One renovated, the other new. 4/ A percentage has been allowed for attrituon. Actual staff required is 250 SA, 100 SI and 1450 SD.

55 ANNEX 1 Table 6. 1 INDIA KARNATAKA SERICULTURE PROJECT World Cocoon and Raw Silk (tons) Production 1/ Cocoon Production Japan 282, ,900 91,200 87,800 79,300 77,600 China 65, , , , , ,000 USSR 22,300 41,000 41,000 41,000 41,000 41,000 South Korea 21,900 37,200 36,100 41,700 31,900 28,000 India 9,400 36,500 33,400 37,900 44,400 48,600 North Korea - 6,000 6,500 6,500 6,800 6,800 Bulgaria 2,200 1,800 1,800 1,800 2,200 2,200 Brazil 400 7,600 7,800 8,100 7,900 7,700 Iran 3,000 3,000 3,000 3,400 3,500 3,500 Turkey 2,300 1,800 1,600 1,700 1,400 1,300 Others 2/ 29,800 3/ 3,200 4,600 3,600 5,600 5,300 Total 439, , , , , ,000 Raw Silk Production 4t Japan 43,150 18,935 20,170 17,885 16,080 15,960 China 4,855 15,600 15,780 16,320 17,760 19,000 USSR 1,900 3,240 3,240 3,240 3,240 3,240 South Korea 1,825 4,385 5,545 5,495 5,580 4,235 India 690 2,445 2,375 2,8:i0 3,080 3,475 Italy 2, North Korea ,000 Bulgaria Brazil ,200 1,200 1,120 1,250 Iran Turkey Others 2/ Total 56,500 47,150 50,120 48,870 48,995 49,360 Source: Mission compilation. Principal references: statistics published by International Silk Association, Government of Japan, Japan Raw Silk Corporation. 1/ Fresh cocoons ("green" weight). Best available estimates for China, USSR, North Korea, Bulgaria, Iran. 2/ Approximately 19 other countries. 31 Of which Italy - approximately 19,900 tons. 4/ Best available estimates for China, USSR, North Korea, Bulgaria, Iran.

56 ANNEX 1 Table 6.2 INDIA KARNATAKA SERICULTURE PROJECT World Raw Silk Consumption 1/ (tons) Raw Silk Consumption Japan 15,000 21,815 23,355 21,435 17,605 21,155 China n.a. 10,225 9,070 9,210 9,865 10,500 3/ India 1,600 2,985 2,940 3,420 3,805 4,200 Italy 765 n.a. n.a. n.a. 2,300 2/ 2,040 2/ South Korea France 2, U.S.A. 23, West Germany Switzerland U.K. 2,) Total 45,145 35,995 36,665 35,850 35,680 40,135 Source: Mission compilation. Principal references: statistics published by International Silk Association, Government of Japan, Japan Raw Silk Corporation. n.a. = not available. 1/ Excluding countries for which data not available. 2I Best available estimate. 3/ Mission estimate.

57 - 49- ANNEX I INDIA Table 6.3 KARNATAKA SERICULTURE PROJECT World Raw Silk Exports and Imports (tons) Exports China 1/ n.a. 3,855 3,530 4,800 5,300 6,400 South Korea - 1, ,150 1,485 Brazil ,005 1, Switzerland Italy 2, France West Germany U.K Japan 29, U.S.A. 1, Total 33,535 6,562 5,300 6,275 7,400 8,780 Imports Japan 1,295 5,920 2,465 2,150 3,355 5,030 Italy ,880 2,275 2,365 2,050 France 2, U.S.A 24, Switzerland Germany U.K. 2, Spain / India 1, / Other Countries 680 n.a. n.a. n.a. n.a. n.a. Total 33,045 7,705 5,430 5,970 7,350 8,510 Source: International Silk Association. Some temporary imports included (re-exported thrown yarn). n.a. = not available. 1/ Best available estimate.

58 INDIA KARNATAKA SERICULTURE PROJECT Indian Mulberry Silk Production and Exports / Production Exports Reeling Raw Silk Quantity _-----Value Total Year Area Cocoons Silk Waste Fabrics 2/ Silk Waste Fabrics Silk Waste Value (ha) (tons) ('000 sq m) (tons) (Rs mil) ,950 21,635 1, ,190 25,045 1, , ,250 34,280 2, , ,090 32,995 2, , ,885 34,255 2, , ,960 38,990 2, ,941 1, ,570 36,535 2, , ,915 33,450 2, , ,045 37,890 2,812 1,044 5,935 1, ,095 44,390 3,079 1,158 7,679 1, ,000* 48,600* 3,473 1,200 10,479 1, Average Annual Increase % 4.6% 6.3% 3.9% 10.7% 5.9% I-,, Source: Central Silk Board Statistical Biennial 1978, International Silk Association, * = mission estimate. 1/ Mulberry fabric exports, minor portion of tasar included in silk waste. Value expressed in current terms. 2/ Sarees, scarves/stoles, dress materials, ready made garments, ties, other specialty items. a?' Z H M H

59 INDIA KARNATAKA SERICULTURE PROJECT Japanese Imported Raw Silk and Silk Waste Prices / 5/ Year Raw Silk 20/22 Denier Quantity Imported (MT) 1/ 4,777 6,881 4,967 4,211 1, ,746 2, Value (Yen '000,000) 1/ 30,537 40,433 44,702 38,390 13,245 6,643 14,565 20,293 6,270 Price/kg in current Yen 6,393 5,876 8,999 9,117 7,861 7,965 8,342 7,745 8,233 Par Rate/Market Rate for Yen 2/ Price/kg in current US$ International Price Index 3/ (Average for 1979 = 100) Price/kg in 1979 US$ Silk Waste Quantity Imported (MT) -/ 1,182 1,453 1,902 1,439 1,264 2,171 1,697 2,542 1,560 P Value (Yen '000,000) 1/ 972 1,049 1,958 1, ,582 1,375 1,911 2,027 Price/kg in current Yen ,029 1, ,299 Par Rate/Market Rate for Yen 2/ Price/kg in current US$ International Price Index / (Average for 1979=100) Price/kg in 1979 US$ / CIF Japan. Japan Exports and Imports, Japan Tariff Association, various issues. 2/ International Financial Statistics, IMF, January 1976 and March / Estimated by Economic Analysis and Projections Department, IBRD. 4/ January through November. 5/ January through July. 6/ The increase from 1978 was prorated for the first 7 months of %

60 -52- ANNEX 1 Table 6.6 INDIA KARNATAKA SERICULTURE PROJECT Financial Price Projection for Raw Silk (Price per kg) 1/ Raw Silk 20/22 denie 2/ 1985 CIF Japan US$43.80 Less: Freight, Insurance (3%) 1.30 FOB Bombay US$42.50 Rs Less: Inland Transport 3.00 Factory Gate, Karnataka 3/ Less: Processing Costs Cost of Cocoons!/ 5/ Silk Recovery (Renditta = 10.5) Less? Cocoon Market Fee 0.50 Farmgate Cocoon Price6/ Rs / Expressed in late 1979 constant price levels. Based on international market projections. See Table 6.5 and para / Average weighted price, mixed grades. See Table / -Includes operating profit margin based on projected KSIC filature operations. See Annex 4, Table / Expressed in raw silk equivalent. 5/ Silk recovery from good quality cocoon at improved filature. 6/ Median expected price within range for good quality cocoons.

61 53 ~~~~~~~~~~ANNEX 2 Table 1 INDIA KARNATAKA SERICULTURE PROJECT FPROJECT COST SUMMARY WITH PHASING (RS '000) TOTALS ON.-FARM CREDIT rlantation :1~.: EQUIFPMENT.;:2'> l7100 REARING HOUSES < CREDIT FOR REELING COTTAGE BASINS <-4>: SUBTOTAL--CREDIT DiEPTi OF SERICULTURE GRAINAGES HIATCHERIUC> MOlIEL HATCHERIES TECH. SERVICE CENTERS MOBILE tiemo. UNITS TRAININ5 SCHOOLS COCOON MARKETS ' ' FI LATURE "35 INC. ADIMIN. COST ' SUBTOTAL--DOS KS IC F ILAT URE SPUN SILK MILL Ht'G(TRS. ANr' WORKSHOP, I0() NET INC. WORKING CAF'ITAL , SUBTOTAL---KSIC RESEARCHi :120 TECH.ASST./STUDiY TOURS 0 22~ ' ,852 F'ROJECT EVALUAT'ION STUDY ) BASE COST ESTIMAT'E 43682' PHYSICAL CONTINGENCIES PFRICE CONTINGENCIES 22' TOT'AL P'ROJECT COST :1I 3,500 HA AT RS 4f000/HA. :23,500 HA AT RS 5,000/-HA. :3.' HOUSES AT RS9 13P500/HOUSE. :'4.: 500 UINI TS AT RS3 32r.000/UNII

62 AIR=2 Table 2.1 INDIa KARNATAKA SERICULTURE PROJECT.,_._ GRAINAGES: ESTIMATED COSTS AND PHASINS _ (RS '000) TOTALS NO. OF GRAINAGES '<1> t0 CIVIL WORKS GRAINAGE BUILDING <2' O AESTIVATION CHAMBERS ) SUBTOIAL FHYS. CONT. (10%) S3 TOTAL EQUIPMENT COLt, STORAGE FLANT 3' GENERATORS <:4' WOODEN TRAYS /?0 DOUBLE STANDS CENTRIFUGES MICROSCOPES /0 MOTH CRUSHING MACHINES REFRIGERATORS z,5> EGG CABINETS ACID TREATMENT EATHS SUBTOTAL FHYS. CONT. (5%) TOTAL VEHICLES SEDAN DIESEL MINIBUS SUBTOTAL PHYS. CONT. (5%) lotal OFERATING COSTS STAFF SALARIES :: SEED' COCOONS R7:> CHEMICALS ANDI SUPPLIES UTILITIES GM CW, VEH, EQUIF U SUBTOTAL S8 FHYS. CONT. (5%) TOTAL L BASE COST ESTIMATE PHYSICAL CONTINSENCIES iltl 5337 TOTAL <1: CAF=10 MIL LAYINGS/UNIT/YR. AFTER 3 YRS., SUPFLYING 2000 HA..2> 4-LEVEL BLDG., 3020 so. M 2 RS 600/SQO H. 3.3> 238 SO. M, 12.5T CAF' IN 7 UNITS, M. 2.5T CAF IN 3 UNITS. 4.- TWO GEN. EACH 60 KVK CAP IN 7 UNITS, 1 GEN. 12 NVK CAP IN 3 UNITS. <5'. IMPORTEII, 286 LITER CAPACITY. (6> FOR DETAILS, SEE ANNEX 4 TABLE 9. <7> 25 MIL BIVOL, COCOONS e RS 50/1000, 15 MIL MYSORE e RS 30/1000/YR.

63 - 55 ANNEX 2 Table 2.2 INDIA K(ARNATAKA SERICULTURE FPROJECT HATCHERIES: ESTIMATEDi COSTS AND PHASING (RS '000) TO0T AL, NO. OF HATCHERIES <:l> EQUIPMENT WOODEN TRAYS WOODEN STANDS LEAF CHAMBERS HYGROMETERS MICROSCOPES GLASS SLIDESP COVERS MANUAL SPRAYERS SUBTOTAL PHYS. CONT. (5%) TOTAL (:2>: OPERATING COST BUILDtING RENTS <3'., FARMER HONORARIUMS LABOR WAGES <5:, PARAFFIN F'AFER, FOAM DISINFECTANTS SUBTOTAL PHYS. CONT. (5%) IOTAL BASE COST ESTIMATE PHYSICAL CONTINGENCIES TOTAL <1:.CAPACITY APPROX. 100,000 LAYINGS/MO/HATCHERY. <2::~2, EQUIPMENT COST/HATCHERY=RS 10t100. <3)> RS 150/MO/HATCHERY. <;4>". RS 200/MO FOR MANAGEMENT SERVICES. <.5> TWO LABORERS PER HATCHERY ~ RS 150/MO/LABORER.

64 -56 - ANINEX 2 Table 2.3 IN it IA KARNATAKA SERICULTUR.E PROJECT MODEL HATCHERIES: ESTIMATEDt COSTS AND PHASING (RS '000) I TOTALS) N.OF MODEL HATCHERIES CIVIL WORKS HATCHERY BUIULDING -'I' O00 S UPTO0T AL PHYS. CONT. (5%) TOTAL E GOU I FME N T LJOODEN TRAYS W4OODEN STAND'S LEAF CHiAMBIE RS 2, HYGIROMETERS 1 I MICROSCOP"ES is GLASS SLIDES,COVERS P'OWER SPRAYER SMALL IMFPLEMENTS n INCUBATORS <-2:: SU'LBTOTAL P'HYS. FONT. (5%,,) IOTAL <> DF'ERATING COSTS STAFF SALARIES <~4>~ PARAFFIN PAPEP~ FORMALIN DISINFECT ANTS MiISC SUPPLIES, UTILITIES SUPTOTAL PHYE. CONT. (5%) TIOTAL Z98 EPASE COST ESTIMATE PHYSICAL CONTINGENCIES 35; TOTAL 7~~ ~ ~~~~~~~~~~~ ;47 1.~*110 SO, h e RS 640/'SO, h..7>4 810O. OXYGEN DEMANDI INCUBATORS/HATCHERYP AT- RS 10r440/INCUBATOR. i TOTAL EOUIPMENT COST PER HATCHEPY=RS 68,760. 4~ FOR DETAILS, SEE ANNEX 4 T'ABLE 9.

65 ANNEI 2 Table Z.4 INDIA KARNATAKA SERICULTURE PROJECI A. TECHNICAL SERVICE CENTERS: ESTIMATED COSTS APT' 9HASINu, B. MOBILE DEMONSTRATION UNITS: ESTIMATED COSTS AND' FHASIN6 (MS '000) 1 2 ~ ~ ~~~3 4 5 TOTALS A. TECH SER CNTRS (150) NO. IF TSC.1>, EQUIPMENT INCUBATORS 2> POWER SF'RATER'S (79 MICROSCOF'ES, SLIDIES III T TYP'EWRITERS OFFICE FURNITURE SUB'TOTAL THYS. CONT. (5%) VEHICLES TOTAL ( ) DIESEL JEEP'S (1/7SC) MOPED'S (5/TSC) ( juetotal FPHYS. CON7. (5%) TOTAL OPERATING COSTS STAFF SALARIES : )T BUILDING RENT 5> DM VEHICLE FORMALIN (1 TON/TIC/YR) MISC SUPPFLIES, UTILITIES SUBTOTAL FHYS. CONT. 155) TOTAL ' BASE COST ESTIMATE ? PHYSICAL CONTINGENCIES TOTAL B. MOBILE DEMO UNITS (4) 4 DIESEL VANS (1,5 TON) >HY5. COAT. (5%.) TOTAL EQUIPMENT F'RIJE CTOINS FILMS EXHIBITS SUBTOTAL PHYS. CONT. (5%) TOTAL OFERATING COSTS STAFF SALARIES / DM VEHICLES SUBTOTAL FPHYS. CONT. 15%) TOTAL BASE COST ESTIMATE PHYSICAL CONTINGENCIES * TOTAL ,IAPPROX. 55 TSC IN RAINFED AREAS ANMD 95 TIC IN IRRIGATET' AREAS..2BIOLOGICAL OXYGEN DEMAND INCUBATORS, 3/TOC AT RS 10,441/UNIT,.3' EQIUIPMENT COST PER TSC=RS 123,840..4, FOR DiETAILS, SEE ANNEX 4 TABLE 9..5 RS 300/M0.

66 ANNIX 2 Table 2.5 Page 1 INDIA KARNATAKA SERICULTURE PROJECT TRAINING SCHOOLS 1>: ESTIMATED COSTS AND PHASING (RS '000) TOTALS A. EXISTING SCHOOL (1) CIVIL WORKS HOSTEL BUILDING <2> SUBTOTAL B PHYS. CONT. (10%) TOTAL EQUIPMENT HOSTEL FURNISHINGS PROJECTOR FILM PRINTS POWER SPRAYER MICROSCOPES TYPEWRITER LIBRARY EQUIPMENT BOOKS SUBTOTAL FHYS. CONT. (5X) TOTAL VEHICLES DIESEL JEEPS SUBTOTAL PHYS. CONT. (5%) TOTAL INC.OPERATING COSTS STAFF SALARIES (3> TRAINEE STIFENDS OSM CW.VEH.,EQUIF MISC SUPPLIES, UTILITIES SUBTOTAL F'HYS. CONT. (5%) TOTAL BASE COST ESTIMATE PHYSICAL CONTINGENCIES L TOTAL L> CAPACITY 100 TRAINEES/MO/SCHOOL. 1-4 WEEK COURSES so. M 2 RS 860/SO. M. ACCOMMODIATIONS FOR 50 TRAINEES. -3 FOR DETAILS, SEE ANNEX 4 TABLE 9.

67 -59 abe2.52 I NDIA KARNATAKA SERICULTURE PROJECT TRAINING SCHOOLS <1>1 ESTIMATED COSTS ANI' P'HASING (RS '000) TOTALS B. NEW SCROOLS (2) CIVIL WORKS SCHOOL BtUILDtING <4> HOSTEL BUILDING <:2>' SUBTOTAL PHYS, CONT. (10%) TOTAL EQUIPMENT HOSTEL FURNISHINGS PROJECTORS ,3 FILM PRINTS POWER SPRAYERS MICROSCOPES TYPEWRITERS LIBRARY EQUIPMENT BOOKS SUBTOTAL PHYS. CONT. (5%) TOTAL VEHICLES DIESEL JEEP'S SUBTOTAL ' PHYS, CONT. (5%) TOTAL OP'ERATING COSTS STAFF SALARIES <3> TRAINEE STIPENDS OSM CW,VEH.,EQUIP, MISC SUPPFLIES. UTILITIES SUBTOTAL >-69 P'HYS. CONT. (5%) TOTAL BASE COST ESTIMATE PHYSICAL CONTINGENCIES TOTAL TOTAL COSTS--ALL SCHOOLS BASE COST ESTIMATE 10S PHYSICAL CONTINGENCIES GRAND TOTAL : CAP'ACITY 100 TRAINEES/MO/SCHOOL, 1-4 WEEK COURSES. 2;' 845 SO. RS 860/SO. M. ACCOMMODtATIONS FOR 50 TRAINEES..3 FOR DETAILS, SEE ANNEX 4 TABLE 9. -4Ž% 550 S50. M 9 RS 860/SO, M.

68 ANNEX 2 Table 2.6 INDIA KARNATAKA SERICULTURE PROJECT COCOON MARKETS: ESTIMATED COSTS AND PHASING (RS '000) TaTALS NO. OF MARKET UNITS <1> CIVIL WORKS. MRKT. BUILDING UNITS <2> SUBTOTAL FHYS. CONT. (10%) TOTAL EQUIPMENT TICKET PRINTING MACHINES WEIGHING SCALES TOP-PAN BALANCES DENIER SCALES METAL CONTAINERS TYPEWRITERS SUBTOTAL PHYS. CONT. (5%) TOTAL OPERATING COSTS STAFF SALARIES 3> MISC. OFFICE EXPENSES UBTOTAL FHYS. CONT. (5%) TOTAL BASE COST ESTIMATE PHYSICAL CONTINGENCIES TOTAL ========== ======= ns==a =-=====a==== ====== ===== :- 30 UNITS e 23 SITES, 12 SITES=NEW MRKTS., 11 SITES=EXISTING MRKTS. 2. UNIT=845 SO. M e RS 590/SQ. n. 3 FOR DIETAILS, SEE ANNEX 4 TABLE 9.

69 41- ~~~~~~~ANNIEX2 T J NlDIA KARNATAKA SERICULTURE P'ROJECT DEPARTMENTAL FILATURE <1 1: ESTIMATED, COSTS AND P'HASING (RS '000) TOTALS CIVIL WORKS LANED CITE-4 ACRES SUBTOTAL PHYS.CONT.410%) TDTAL CIVIL WORKS SITE DEVELOPMENT ,100 COMP'OUNDI WALL STAFF QUARTERS 42) MAIN BUILDING <3> SUBTOTAL PHYS. CONT, (lox) TOTAL EQUIPMENT REELING UNIT (400 ENDS) RE-REELING UNITS <4> COCOON NOT AIR DRYER BOILER PRESSURIZED COOKING UNIT WOODEN COCOON TRAYS MISC, SMALL EQUIPMENT SUBTOTAL PHYS, CONT. (5%) TOTAL e6-El, VEHICLES TRUCK (3-TON) DIESEL VAN SUBTOTAL PHYS. CONT. (5Z) TOTAL OPERATING COSTS STAFF SALARIES COCOONS 6&' tM CW, VEH, EQUIP' UTILITIES , SUBTOTAL ,33 PHYS, CONT. (5%) ? TOTAL I RiASE COST ESTIMATE Y53 P,HysiCAL CONTINGENCIES TOTAL ~.1 SEMI-AUTOMATIC. CAP=400 KG COCOONSI/DAY WITH DOUBLE SHIFT OFEP. '2': HOUSING FOR GEN. MGR.PSECTION OFFICERS.,3.> 680 S0. M B RI 645/Sg. H..>4> TWO UNITS OF 10 MACHINES EACH..5> FOR DETAILS. SEE ANNEX 4 TABLE 9, KS/D1AY AT RS 23/KG FOR 300 DAYS OPERATION/IKYP

70 ANNEX 2 Table 2.8 INDIA KARNATAKA SERICULTURE PROJECT DOS INCREMENTAL ADMINISTRATIVE COST <1i (RS '000) TOTALS VEHICLES <2> EQUIPMENT INC. STAFF SALARIES INC. OPERATING COSTS ENGINEERING CELL < SUBTOTAL PHYS. CONT. (5%) TOTAL <1> 4 JD, 9 DIST, 15 DIV. OFFICES, 1 MONITORING AND 1 ACCTS. UNIT. <2> 33 VEHICLES (SEDANS, JEEPS). -3> ENG. STAFF DEPUTED FROM STATE PWD FOR SUFERVISION OF CONSTRUCTION.

71 ANNEX 2 T*bO 3. I INDIA KARNATAKA SERICULTURE PROJECT KSIC FILATURE <1>: ESTIMATED COSTS AND FHASING (RS '000) TOTALS CIVIL WORKS SITE DEVELOF'MENT NEW REELING HALLS (2> REMOD. FRESENT HALLS < AUXILIARY BUILDINGS < ADMINISTRATIVE BLOCK (5> MISC. SMALL WORKS * STAFF UUARTERS <7> SUBTOTAL PHYS. CONT. (10%) TOTAL EQ UIPMENT REELING MACHINES COOKING UNIT <9> RE-REELING UNITS o10: COCOON HOT AIR DRY STEAM GENERATORS ELECTRICAL EQUIFMENT FEES AND INSTALLATION FURN., OFFICE EQUIP SUBTOTAL FHYS. CONT. (10%) TOTAL VEHICLES TRUCKS SEDANS SUBTOTAL PHYS. CONT. (5%) TOTAL BASE COST ESTIMATE PHYSICAL CONTINGENCIES TOTAL ANNUAL PRODUCTION CAPACITY=162 TONS RAW SILK. 2-2,318 SQ. M B RS 625/SQ. M. 3 1,160 SQ. M B RS 116/SQ. M. : SQ. M t RS 585i'SO. M. " SQ. M B RS 0o0/SQ. M BOILER SHEDS. WATER TREATMENT, TRENCHES, ROADS, SOIL FIFING, EIC. S00 SCG. M t RS SOO/SQ. M. S 6 IMFOPFEtt machines OF 400 ENDS, CAPACITY 5.6 KG/HR/MACHINE, -,?-. 3 IMPORTED BOILERS, CAFACITY 125 KG/HR/MACHINE. 1' MACHINES. CAFACITY 6 KG/HR/MACHINE. IJ HOT AIR DRYERS, CAPACITY 375 KG/HR/MACHINE.

72 -64- AM= 2 Table 3.2 IN ['IA KARNATAKA SERICULTURE PM)JECT KSIC SPUN SILK MILL <:4>?- ESTIMATED COSTS AND P'HASING CR5 '000) TOTALS CIVIL WORKS SITE DIEVELOP'MENT NEW MILL <2>": AUXILIARY BUILDING <3> ADMIN..BUILDING <,4> STAFF QUARTERS <5> INFIRMARY <"'6> MISC. SMALL WORKS SUBTOTAL PHYS. CONT. (10%) TOTAL ) EQUIUPM EN T IMP'ORTED, EQUIP'MENT LOCAL EQUIP'MENT RE'CONDITIONING 7> FEES AND, INSTALLATION FIJRN.v OFFICE EQIUIP. 0 0 ' SUBTOTAL P'HYS. CONT. (10%) T5 6 TOTAL VE HIC LES SE-DAN SUBTOTAL PHYS. CONT. (5%) TOTAL BASE COST ESTIMATE a ,3220 PHYSICAL CONTINGENCIES TO TA L <1ANNUAL PRODUCTION CAPACITY=150 TONS SPUN SILK YARN AND, BYP'RODIUCTS. 2 4,000 SQ. M ~ RS 625/SQ. M. :<:3>: 204 SQI. RS 700/SO. M. ::4:: 405 SQ. M 9 RS 800/SQ. M. HOUSING FOR GEM MGRP WRKS MGRY O&M SPYVR. 29'7 SQ M 9 RS 800/SQ M. S: 135 SQ. M 9 RS 800/SQ. M..'T;Or WHICH RS 2.5 MILLION FOR PARTS, RS 1.05 MILLION F'OR LAB3OR

73 -- AG Table 4 IND IA KARNATAKA SERICULTURE PROJECT RESEARCH: ESTIMATED COSTS ANti F'HASING (RS '000) TOT6i GOVT. OF KARNATAKA SERI. RESEARCH INSTITUTE CIVIL WORKS ',4P EQUIFMENT ' VEHICLES (O STAFF SALARIES '0 OPERATING COSTS '. SUBTOTAL e4 UNIV. OF AGRIC. SCIENCES CIVIL WORKS EQUIPMENT VEHICLES STAFF SALARIES INC. OPER. COSTS SUBTOTAL UNIV. OF BANGALORE EOUIPMENT VEHICLES STAFF SALARIES INC. OPER. COSTS SUBTOTAL UNIV. OF MYSORE CIVIL WORKS EQUIPMENT VEHICLES STAFF SALARIES INC. OPER. COSTS _0 SUBTOTAL CENTRAL SILK BOARD CSRTI CENTRAL STATION CIVIL WORKS 'i00 EQUIPMENT 'i VEHICLES STAFF SALARIES INC. OPER. COSTS SUBTOTAL REGIONAL STATIONS (2) LAND CIVIL WORKS EQUIPMENT VEHICLES STAFF SALARIES OPERATING COSTS SUBTOTAL SUB-STATIONS (10) LAND CIVIL WORKS EQUIPMENT VEHICLES STAFF SALARIES OF'ERATING COSTS SUBTOTAL GRAND TOTAL RESEARCH LAND CIVIL WORKS EQUIPMENT VEHICLES STAFF SALARIES INC. OPER. COSTS BASE COST ESTIMATE '0 PHYSICAL CONTINGENCIES TOTAL IISOO 73031

74 ANIEX 2 Table 5 INDIA KARNATAKA SERICULTURE PROJECT TECH. ASSISTANCE AND STUDY TOURS: ESTIMATED COSTS AND PHASING (US$ '000) TOTALS TECHNICAL ASSISTANCE NO. OF EXPERTS DEPT. OF SERICULTURE KSIC CSRTI TOTAL NO. OF EXPERTS TOTAL NO. OF MONTHS TRAVEL COST <1> MONTHLY RATE <2> LOCAL SUBSISTENCE <3> TOTAL COST-TECH. ASST ==s==swsssssss=s===c==. s=ss=z=.==s s======= =s == =:======== STUDY TOURS DEPT. OF SERICULTURE NO. OF STUDY TOURS NO. OF MONTHS CSRTI NO. OF STUDY TOURS NO. OF MONTHS TOTAL NO. OF STUDY TOURS TRAVEL COST <1> TOTAL NO. OF MONTHS MONTHLY COST <4> TOTAL COST-STUDY TOURS ====== ===s======== ====== ============ = ===== GRAND TOTAL USS ' RS '000 EQUIVALENT <1> USS FOR RT ECONOMY AIR TICKET..:2 USS 12000/MO. FEES..::3> 20% OF MONTHLY RATE. 4 USS 39000/MO. TUITION AND EXF'ENSES.

75 ANNEX 3 INDIA KARNATAKA SERICULTURE PROJECT Schedule of Estimated Disbursements.1/ (IJS$ millions) Cumulative Dis- IDA Fiscal Year Disbursements During bursements at and Quarter Quarter end of Quarter 1980/81 March June 30 2, /82 September December March June /83 September December March 31 4, June /84 September 30 5, December 31 3, March June /85 September 30 3, December March June /86 September 30 2/ / Assumes Credit Effectiveness September 30, / Assumes Project Completion by June 30, 1985 and Credit Closing on December 31, 1985.

76 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION CASH FLOW PROJECTIONS AND FINANCIAL RATE OF RETURN (Rs 000's) WITHOUT PROJECT WITS PROJECT _- IndEan FP.OY onward R Cash Tfl.fow (1) Reve-ne Long term debt -/ Incresse/(Decrease) in short term debt - (248) (9822) (10000) (6779) Eqoity Total Cash Inflow E i Cash Oatf low (2) Fixed As-et _ (4894)-/ (3) Increass/(Decrease) in working capital 3/ - 12 (276) (8452) (31034)1/ (4) Operating et7eos-es Income tax 3/ _ lnterext on short tern debt 4/ Long term debt sernice-interest 5/ Long tern debt service-priocipal 5t - _ Dividendst Total Cash Outflow 798' t U Net Cash Flow/(autflow) (823) (787) Cumolative Net Cash Flow IT. Financial Rate of Retain Ixcreme-tal Net Besef its before PhvsIcal 8/ (692) (23595) (116242) ( i)- ( 2 ) - ( 3) - (4) Continaancisc Phyiacal Contingencies - (1511) (ilo25) Increemental Net Benefits Including Physical (692) T25106) (127267) Contingencies FINANCIAL RATE OF RETURN 16% 1/ Se Table / At 15% p.o. F/ Salnage value. 2/ 7/3 f Ee..t t 5/ 10 year loan with 2 years grace period at 9.5%. p.a. op to RE 20 million, 8/ Net of Rs million segati-e benefit in 5 bi 3/ Cash, tefore or-pl.s fonda, receivables, at 11% p.a. for the balsoce. "without project" case. -0 is-ent-ies l payahle. 6/ 12% of share capital see Table 3. 9/ Net of reco--ry of RE million of working capital for "without project" case.

77 INDIA RARNATARA ~E ICRU0LT U RIPROJ ECT KARNATAKA S1ILK INDUSTRIII I;UK)RFUATIJN CONSO)LIPATI) IOM ITTPETROJECTTONS2 (R. OGOs.) WITTHOUT PEODJECT - WITH PROJECT Tndian JUY onward / Revenue Pilsiu-es 1/ Weav.ing ill 2/ Sp_t aili mill 3/ Twisting mill L f7 TT73 TTZ- TI2- T Total C Revenue 123 7T5672 7U S2 T23 tf7 Operting Expanse C.~~~..rs I/ ~~~~ Waste CSric i and tnsn ls i Sub Total b 5993Z T 9? Other roots 3( 80 3O 8030 BO Iiaue / Weaving 30 mill / p-c sill, mill 7/ Twitin c/l / Worknlhcp 5/ Headquarters 750 6/ / ~~~~~~6325 Total Operating inpenses Opecaiicg 0t-fIlc/Lnoa (1225) 11505) (5136) ( Depreciation 2-' Inteest n shrt ten dbt A/ Interest or 1L-ne tern debt 9, Net profit/(l-s) brior taxe (4836) (SIlO) (8728) (18602) (4758) Irnrattflent - allowance 10/ (19375) (5127) (517) ~~~~19375 income tax (12589 (17327) (29714) 6et Peafit(ne fte txs(4836) (5116) (6728) (18602) (4738) / For details ee talbles 4.4, Foe details see Table / 10 year loan with 2 years grace period on interet and principal, et /l Fur details see Table p.- up Foe details see Table 5.2. to Rn 20 million, at 111. p.o. far the balnc.. 5/For details se fable / 30 yeats for civil weeks, 10 years foe l0/ %, oh nee fixed assts, revesd 10 year ft-r rho i,cv-tment. T/ For detaile see Table ah-soy aed equipment, straight li-e Tii7 At the rate of of taxai le income. Taxa.ble linsome in determined axing declining 8/ At 151, p... balance deptecietion. Tax losnes are carried forward until absorbed by profits.inet meet credit of 253 of new fined assets lse and 204,~ tan rebate -vai ble far hankward oreas (T. Niarxslpor, Mysere).

78 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION BALANCE SHEET (Rs 000's) March 80 March 81 March 82 March 83 March 84 March 85 March 86 March 87 March 88 March 89 March 90 March 91 March 92 March 93 Assets Cash 1,022 1,115 1,149 1,979 1,155 4,299 7,675 16,827 34,562 53,593 73,920 73,133 80, ,408 Receivables 6,306 6,306 6,169 3,733 6,216 9,352 9,352 9,352 9,352 9,352 9,352 9,352 9,352 Inventories 19, ,797 13,945 15,983 21,059 21, ,059 21,059 21,059 21, Subtotal current assets 27,296 27,389 27,115 19,657 23,354 34,710 38,086 47,238 64,973 84, , , ,121 Net Fixed Assets 1,551 1,287 21, , , , ,450 57,222 43,994 30,766 17,538 - Total Assets 28,847 28,676 48, , , , , , , ,325 i34, ,408 Liabilities Payables Short term borrowings 19,647 19,647 19,399 9,577 16,779 16,779 6, Current portion of long term debt , , Subtotal current liabilities 19,792 19,792 19,541 21,849 29,089 29,115 19,115 12,336 12,336 12,336 12, Long term debt ,800 84,970 72,831 60,692 48,553 36,414 24,275 12, Investment allowance 19,375 24,502 24,502 - Share capital 9,055 14,000 27,000 82,000 82,000 82,000 82,000 82,000 82,000 82,000 82,000 82,000 82,000 82,000 Retained earnings - (5,116) (13,844) (32 446) (37,204) (26,963) (14.676) ,812 34, ,611 21, Net worth 9,055 8,884 13,156 49, ,037 67,324 82, , , , Total Liabilities 28,847 28, , , , , , , , , , ,408 1/ For purpose of rate of return analysis, (Table 1) sale of assets at net value is assumed. ID

79 -71 - ANNEX 4 Table 4.1 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION NEW FILATURE: ESTIMATED OPERATING PROFIT (Hs OOO's) Indian F.Y onward Raw Silk Production (t) Raw Silk Revenue at 340 Rs/kg Waste Silk -/ De&d Pupae Total Revenue Raw Material Cocoons -/ Consumlt_ Sub-Total Utilities Pover-/ _ Coal-/ Sub-Total Salaries & Wages Overheads Repairs & Maintenance Insurance & Other Sub-Total Selling Expenses-/ Training Total Operating Costs Operating Profit/(Loss) (137) (282) / 252 of raw silk production at 25 Rs/kg. 2/ 552 of raw silk production at 2 Rs/kg. 3/ Silk yield 10%. Cost Rs/kg including 0.4 Rs/kg for transportation. 4/ 1 Rs/kg of silk produced. 5/ 165 KVA at 264 Rs, 570 thousand units at 0.11 Rs/unit at full capacity. 6/ 855t at 200 Rs/t at full capacity. 7/ 1% of civil works. 0.5% of equipment starting in / Packing and Transportation at 0.34 Rs/kg, Silk Exchange Commission at 2% of raw silk sales, excluding internal sales to weaving mill.

80 ANNEX 4 Table 4.2 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION SPUN SILK MILL: ESTIMATED OPERATING PROFIT (Rs 000's) Indian F.Y. Without Project With Project onward onward Production (t) 2/ Spun silk yarn Noil yarn Noils - Old process New process Revenue 3/ 16,420 16,420 14,600 37,080 50,164 Operating Costs Raw Material Silk waste 4/ 7,500 7,500 6,625 11,375 15,000 Chemicals 5/ Subtotal 7,770 7,770 6,865 12,035 15,900 Utilities Power 6/ Coal 7/ Subtotal ,015 1,132 Salaries & wages 3,720 3,979 4,266 5,824 5,824 Overheads Repairs & maintenance 8/ ,000 1,300 Others Subtotal 1,100 1,100 1,100 1,500 1,900 Selling expenses 9/ Training Total operatirg costs 13,036 13,295 12,910 20,820 24,983 Operating profit 3,384 3,125 1,690 16,260 25,181 1/ Year same as without project. 2/ Old process used for first three years. New process in operation in at 67% capacity, from onward at 100% capacity, reconditioned equipment operating at 80% capacity in ,100% from onward. 3/ Selling prices: spun silk yarn300 Rs/kg, noil yarn 60 Rs/kg, noils 8 Rs/kg for new process and 20 Rs/kg for old process. 4/ Yields: 15% for old process before reconditioning, 20% after reconditioning, 30% for new process. Cost 25 Rs/kg. 5/ 6 Rs/kg of spun silk yarn produced. 6/ 440 KVA at 264 Rs and 0.9 million units at 0.11 Rs/unit at full capacity for old process; 1,210 KVA and 3.8 million units at 0.11 Rs/unit for new process. 7/ 900 t for old process, 1,100 t for new process at 200 Rs/kg. 8/ 700,000 Rs for existing equipment plus 1% of civil works and new equipment after year 3. 9/ Packing at 0.5 Rs/kg, advertising 100,000 Rs starting third year.

81 ANNEX 4 INDIA Table 4.3 KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION WEAVING PLANT: ESTIMATED OPERATING PROFIT (Rs 000's) WITHOUT PROJECT Unit Selling Price onward Indian F. Y. Rs/m Volume 21 Amount Revenue Plain Fabrics 60g/m Plain Fabrics loog/m Printed Fabrics 60g/m Gold Lace loog/m Operating Costs Total Raw material Raw silk 3/ 7436 Chemicals and dyes 4/ 100 Gold for Gold Lace 5/ 1112 Consumables 6/ 80 Subtotal 8728 Utilities Power 7/ 129 Coal 8/ 36 Subtotal 165 Outside Printing Charges 9/ 400 Salaries and wages 3091 Overheads Repairs and maintenance 50 Insurance and other 130 Subtotal 180 Selling Expenses Packing 10/ 100 Showroom expenses 11/ 144 Discounts 12/ 230 Advertising 13/ 147 Subtotal 621 Total Operating Costs Operating Profit / With project, profit will be Rs 1527 in through 82-83, and Rs 1063 onward due to chanse in raw silk price from 32D Rs/kg to 340 Rs/kg. 2/ In km. 3/ Raw silk loss in degumming process 25%. Raw silk cost 320 Rs/kg without project and for through with project, 340 Rs/kg afterwards. 4/ At 0.5 Rs/m of material produced. 5/ 400 kg at 2780 Rs/kg. 6/ 0.4 Rs/m of material produced. 7/ Based on 200 KVA and 690,000 units at 264 Rs/KVA and 0.11 Rs/unit. 8/ 180 t at 200 Rs/t at full capacity. 9/ Outside charges at 10 Rs/m. 10/ At 0.5 Rs/m. 11/ Rent: 12,000 Rs/year/showroom for the 4 existing showrooms. Office expenses 24,000 Rs/year/showroom. 12/ For bulk purchases: 6 1/4% on 25% of sales. 13/ 1% of sales.

82 INDIA ANNEX 4 Table 4.4 KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION EXISTING FILATURES ESTIMATED OPERATING PROFIT (RS '000) WITHOUT PROJECT WITH PROJECT- Indian F.Y Onward % Capacity Utilization Revenue Raw Silk 2/ 50,240 48,632 22,407 Silk Waste 3/ 1,175 1, Dead Pupae Duppion Silk 5/ Total Revenue 52,565 50,883 23,444 Operating Expenses Raw Material Cocoons 6/ 44,298 42,880 19,757 ConsumabTes 7/ Sub-total 44,455 43,032 19,827 Utilities Power Coal 8/ Sub-total Salaries & Wages 11,041 11,550 8/18,862 9/ Overheads Repairs & Maintenance Insurance & Other Sub-total Selling Expenses 10/ Total Operating Expenses 57,623 56,646 39,701 Operating Profit/(Loss) (5,058) (5,763) (16,257) 4 Year same as without project. i/ 157T without project; 152t and 70t respectively for 81-82, with project. Selling price Rs 320/kg. 3/ 30% of raw silk production. Selling price Rs 25/kg, All sales are internal to Spun Silk Mill. 4/ 60% of raw silk production. Selling price Rs 2/kg. 35 5% of raw silk production. Selling price Rs 120/kg. 6/ Silk yield 9%. Filature gate price Rs 25.65/kg. 7/ Rs 1/kg of raw silk produced. 8/ 3,200t at full capacity, at Rs 200/ton. 9/ Includes provision for retired employes. 10/ Packing and transporation at Rs-0.34/kg. Silk Exchange Commission at 2% of raw silk sales, excluding internal sales to weaving plant and twisting mill.

83 ANNEX 4 Table 4.5 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION TWISTING MILL: ESTIMATED OPERATING PROFIT (Rs 000's) WITHOUT PROJECT WITH PROJECTV Indian F.Y onward Revenue Twisted silk, llt at 360 Rs/kg Fabrics, 16.5 km at 27 Rs/kg Total Operating Expenses Raw Material Raw Silk 12t at 320 Rs/kg Chemicals & Consumables Sub-Total Dyeing & Printing Power & Coal Salaries & Wages / Overheads Total Operating Expenses Operating Profit (Loss) (358) (358) (1533) 1/ Twisting mill will be closed down in March Includes provision for retired employees.

84 - 76 I ANNEX 4 Table 5.1 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION WORXSHOP:.ESTIMATED OPERATING COSTS (Rs 000's) WITHOUT PROJECT WITH PROJECT Indian F.Y onward onward Annual Staff No. Cost No. Salary No. Cost No. Cost (,eneral Manager Works Manager Design Engineer Draftsman Accounts Officer Administrative Assistant Storekeepers Supervisors Foremen Skilled Mechanics Helpers/Peons Clerks, Typist, Cashier Total Consumables Total operating costs

85 ANNEX A Tal<5.2 INDIA KARNATAKA SERICULTURE PROJECT TARNATAKA SILK INDUSTRIES CORPORATION HEADQUARTERS: ESTIMATED OPERATING COSTS (Rs 000's WITHOUT PROJECT WITH PROJECT Indian F.Y onward onward Annual Staff No. Cost No. Salary No. Cost No. Cost No. Cost No. Cost Managing Director Financial Director Technical Director ] 45 Secretary Personnel Manager Marketing Manager _ Purchase Manager _ Internal Auditor _ 1 30 Chief Account Officer Purchasing Assistants Administrative Officer IL Technical Assistants Cost Accountant Accounts Officer , Audit Assistants Personnel Assistants Research & Development Officer (Filature) Market Economist Marketing Assistants , Civil Engineer Clerks/Stenographer )5-1 Drivers/Peons ; _36 _( 10 Total ~ Other Expenses Rent 20-/ / o8-- Travel Administrative Expenses 'y Total operating costs / 6000 sq ft at 18 Rs/year 2/ Assessment for occupied square space in Department of Sericulture

86 - 78- ANNEX 4 INDIA TABLE 6 KARNATAKA SERICULTURE PROJECT DEPARTMENTAL FILATURE: ESTIMATED NET OPERATING PROFIT AND FINANCIAL RATE OF RETURN (Re '000) OPERATING YEAR PRE CAPACITY UTILIZATION OPERATION 37% 67% 100% 100% SEMIAUTOMATIC FILATURE Cocoon Throughput (tons/yr) Raw Silk Production (kg/yr)- - 4,285 7,805 12,000 12,000 Revenue Raw Silk at Rs 340/kg 3/ - 1,457 2,654 4,080 4,080 Silkwaste at Rs 25/kg Total Revenue - 1,485 2,704 4,155 4,155 Operating Costs Staff Salaries Cocoons - 1,035 1,840 2,760 2,760 O&M CW, Veh., Equip Utilities Total Operating Costs 45 1,245 2,180 3,253 3,253 Operating Profit (Loss) (45) Financial Rate of Return Total Revenue - 1,485 2,704 4,155 4,155 Less: Capital Investment-/ 1,901 2, (720) Operating Costs 5/ 45 1,245 2,180 3,253 3,253 Net Working Capital (52) Net Benefits (FRR = 14%) (1,946) _2,587) ,674 1/ Calculation for semiautomatic filature with five machines of 40 ends each, processing at full capacity 400 kg day cocoons with per double shift operation 300 days per year. 2/ Renditta assumed to improve from 10.5 in first year to 10.0 in third year. 3/ Approx. 2.5% of cocoon throughput. 4/ For details, see Annex 2, Table 2.7. Includes physical cunlingencies. Salvage value of land and assets 5/ in year Two 12. weeks supply of cocoons. Recovered in year 12.

87 INDIA KARNATAKA SERICULTURE PROJECT Cottage Basins: Projected Reeler Income and Financial Returns (Rs ) Before l YEAR Development Cocoon Throughput (kg/yr) - / 2,000 Z,000 6,000 8,000 10,000 10,000 10,000 10,000 10,000 10,000 Silk Yarn Production (kg/yr) CASH INFLOW 4 Revenue from Silk Yarn - 40,000 40, , , , , , , , ,700 Revenue from Silk Waste ,500 3,600 4,500 4,500 4,500 4,500 4,500 4,500 CASH OUTFLOW Capital Investment 6 _ (20,000) _ - 3,000 Operating Costs 2 8 (37,400) (37,400) (138,000) (184,000) (230,000) (230,000) (230,000) (230,000) (230,000) (230,000) Inc. Working Capital (12,000) ,000 NET BENEFIT BEFORE FINANCING Total 3,500 (16,500) C 9,800) 7,250 20,200 20,200 20,200 20,200 20,200 35,200 Incremental - (20,000) (13,300) 3,750 16,700 16,700 16,700 16,700 16,700 31,700 1 INTERNAL RATE OF RETURN = 32b. FINANCING 91 OK Subsidy - 4,000 - _ Loan Receipt - 14,000 12,000 Less: Debt Service (9,375) (8,710) (8,045) (7,380) (6,705) - - NET BENEFIT AFTER FINANCING Total 3,500 1,500 2,200 (2,125) 11,490 12,155 12,820 13,495 20,200 Incremental - (2,000) (1,300) (5,625) 7,990 8,655 9,320 9,995 16,700 31,700 RETURN TO REELER's EQUITY = 50+% 1/ Incremental analysis based on charka operator upgrading to cottage basin (five basin unit). 2/ Before development = 200 day operation per year; cottage basin operations build from 150 to 250 days per year in three years. 3/ Before development renditta of 12, improving to 11 in three years of cottage basin operation. 4/ Charka quality Rs 240/kg; cottage basin quality Rs 270/kg. 5/ Improving from 35% to 33% of silk yarn production, at Rs 15/kg. 6/ Cottage basin capital costs = reeling shed (40 sq Rs 10,000; reeling unit (five basins) I Rs 4,500; re-reeling machine, cleaning stand, skeining and bundling Rs 1,500; denier scale, cooking vessels, Rs 2,000; fees and 2,000; Total Rs 20,000. Salvage value in year 12. 7/ Before development operating costs = Rs 17/kg, labor at Rs 10/day (two workers) and fuel at Rs 4/day. Cottage basin operating costs 2 Rs 21/kg, labor at Rs 50/day (10 workers) and utilities at Rs 30/day. 8/ Two weeks supply cocoon, recovered in year 12. 9/ Farmer equity = 10%, contributed before subsidy and loan. 10/ 407 of equipment cost or Rs 4,000, whichever is lower. 11/ Inc. working capital included in long-term loan. Seven-year loan at 11%, two-year grace with interest capitalized.

88 ANNEX 4 Table 8.1 INDIA KARNATAKA SERICULTURE PROJECT 0.5 Ha Irrigated Farm Model: Projected Income and Financial Returns (Rs) YEAR BEFORE PARAMETERS-I DEVELOPMENT Avg. No. of Rearings No. of Layings3/ 1,500 1,350 1,500 1,500 1,400 1,400 1,400 Cocoon Yield (kg/0.5 ha) Cocoon Price (Rs/kg) / CASH INFLOW Cocoon Revenue 4/ 5,460 4,935 6,710 7,590 8,050 8,050 8,050 Byproduct Revenue Total 6, ,350 8,855 8,855 8,855 CASH OUTFLOW Production Costs Productiond Costsnr 5 Land Tilling Fertil zer: ,175 1,305 1,305 1,305 1,305 Power Rearing Materials-/ Eggs29/ 10/ Field 490 Labor Rearing Laborll/ 2,500 2,000 2,810 3,125 3,125 3,125 3,125 Subtotal 12/ 4,245 3,905 5,085 5,675 5,640 5,640 5,640 Capital Investment- - 6, _ Total 4,245 10,655 5,085 5,675 5,640 5,640 5,640 NET BENEFIT BEFORE FINANCING Total 1,870 (5,130) 2,365 2,675 3,215 3,215 3,215 Incremental - (7,000) ,345 1,345 1,345 FINANCING X/ INTERNAL RATE OF RETURN - 15% Loan Receipt - 6, Less: Debt Service - - 2,385 2,210 2,030 1,850 - NET BENEFIT AFTER FINANCING Total 1, (20) 465 1,185 1,365 3,215 Incremental - (925) (1,890) (1,405) (685) (505) 1,345 RETURN TO FARMER'S EQUITY - 15% 1/ This model is based on a sericulturist producing average quality multivoltine cocoons who upgrades to bivoltine cocoon production. Traditional mulberry variety is replaced with improved variety over years 1 and 2 while multivoltine cocoon production continues at a reduced-level. Credit assistance is taken (based on 10% farmer equity) for construction of a rearing house in year 1, which is used for three rearings of bivoltine silkworms in year 2. Family labor is included at the market wage rate (Rs 5/day). 2/ Cocoon production per 100 layings assumed to increase from 17 hg before development to 25 kg at full development, reflecting improved quality of eggs and lower silkworm mortality with the project. 3/ Price based on two rearings multivoltine, three rearings bivoltine hybrid cocoons. 41 Excess leaf, stems (for fodder), silkworm litter (for fertilizer): reduced from 12% to 10% of cocoon revenue over the period of development. 5/ Bullock team ploughing for seven days at Rs 6/day. 6/ At full development: 90 kg urea; 60 kg N,P,I (compound fertilizer); 10 tons FYM. Approx. half dosage applied to traditional mulberry variety. 7/ Electricity 500 kwh at Rs 0.20/kwh. 8/ Foam, parafin paper, tray replacement, cocooning frame rental, etc. 9/ Rs 25/100 layings before development, rising to Rs 35/100 layings at full development. 1O/ 108 workdays at full development, at Rs 5/day 11/ 125 workdays per rearing at full development, at Rs 5/day. 12/ Rearing house (55 sq m). 13/ Farmer equity = 10%. Five-year loan at 10.5% interest.

89 ANNEX 4 Table 8.2 INDIA KARNATAKA SERICULTURE PROJECT 1 Ha Irrigated Farm Model: Projected Income and Financial Returns (Rs) Before YEAR Development PARAMETERS Avg. No. of Rearings No. of Layings 2/ 3,000 2,300 2,975 3,000 2,800 2,800 2,800 Cocoon Yield (kg/ha) Cocoon Price (Rs/kg) CASH INFLOW Cocoon Revenue 11,960 9,200 14,875 16,500 17,500 17,500 17,500 Byproduct Revenue 3/ 1,435 l,100 1,635 1,650 1, ,750 Total 13,395 10,300 16,510 18,150 19,250 19,250 19,250 CASH OUTFLOW Production Costs Land Tilling 4/ Fertilizer 5/ 1,605 1,950 2,350 2,610 2,610 2,610 2,610 Power 6/ Rearing Materials 7/ Eggs 8/ , Field Labor 9/ ,075 1,075 1,075 1,075 Rearing Labor 10/ 5,000 4,000 5,625 6, ,250 6,250 Subtotal 8,495 7,745 10,170 11,345 11,275 11,275 11,275 Capita-l Investment 11/ Total 8,495 21,245 10,170 11,345 11,275 11,275 11,275 NET BENEFIT BEFORE FINANCING Total 4,900 (10,945) 6,340 6,805 7,975 7,975 7,975 Incremental - (15,845) 1,440 1,905 3,075 3,075 3,075 INTERNAL RATE OF RETURN = 16% FINANCING 12/ Loan Receipt - 11, _ Less: Debt Service - - 4,500 4,170 3,835 3,500 - NET BENEFIT AFTER FINANCING Total 4, ,840 2,635 4,140 4,475 7,975 Incremental - (4,370) (3,060) (2,265) (760) (425) 3,075 RETURN TO FARMER'S EQUITY = 16% 1/ This model is based on an experienced sericulturist producing good quality multivoltine cocoons who upgrades to bivoltine cocoon production. In Year 1, total yield is temporarily reduced while traditional mulberry variety is replaced with improved variety and credit assistance is taken (based on 15% farmer equity) for construction of a rearing house. Family labor is included at the market wage rate (Rs. 5/day). 2/ Cocoon production per 100 layings assumed to increase from 17 kg before development to 25 kg at full development, reflecting improved quality of eggs and lower silkworm mortality with the project. 3/ Excess leaf,, stems (for fodder), silkworm litter (for fertilizer); reduced from 12% to 107. of cocoon revenue over the period of development. 4/ Bullock team ploughing for 15 days at Rs. 6/day. 5/ At full development: 180 kg urea; 120 kg N, P, K (coumpound fertilizer); 20 tons FYM. Approx. half dosage applied to traditional mulberry variety. 6/ Electricity 1,000 kwh at Rs. 0.20/kwh. 7/ Foam, parrafin paper, tray replacement, cocooning frame rental, etc. 8/ Rs. 25/100 layings before development, rising to Rs. 35/100 layings at full development. 9/ 215 workdays at full development at Rs. 5/day. 10/ 250 workdays per rearing at full development at Rs. 5/day. 11/ Rearing house (95 sq m). 12/ Farmer equity = 15%. Five-year loan at interest.

90 ANNEX 4 INDIA Table 8.3 KARNATAKA SERICULTURE PROJECT 0.5 Ha New Irrigated Farm Model: Prolected Income and Financial Returns (Rs) YEAR BEFORE P1/A~TERSif DEVELOPMENT PAtRAMETERS= Avg. No. of Rearings No. of Layings _ ,200 1,400 1,400 1,400 Cocoon Yield (kg/0.5 ) ha) Cocoon Price (Re/kg) CASH IN Crop Revenue 3,150 1, Cocoon Revenue u _ 1,150 3,450 6,900 8,050 3,050 8,050 Byproduct RevenueO TOTAL 3,150 2,850 3,795 7,590 8,855 8,855 8,855 CASH OUT Capital Investment 3/ - Land Prep. and Planting Planting Material Fertilizer4' Equipment5' - 2,500 - Misc Subtotal - 3, Production Cost 4 -' 1, Land Tilling Fertilizer ,175 1,305 1,305 1,305 Power Rearing Materials Eggs Field Labor Rearing Labor ,560 2,500 3,125 3,125 3,125 Subtotal 1,200 1,600 3,290 4,880 5,640 5,640 Net Working Capital ,640 (500) TOTAL 1,200 2,100 3,290 4,880 5,640 5,640 5,140 NET BENEFIT BEFORE INTERNAL RATE OF RETURN = 13% FINANCING Total 1,950 (2,940) 505 2,710 3,215 3,215 3,715 Incremental - (4,890) (1,445) 760 1,265 1,265 1,765 FINANCING' Loan Receipt - 3, Less: Debt Service ' 2,280 2, NET BENEFIT AFTER FINANCING Total 1, ,135 3,215 3,715 Incremental - (1,515) (1,840) (1,520) (815) 1,265 1,765 RETURN TO FARMER'S EQUITY = 13% 1/ This model is based on a well-managed irrigated farm converting to sericulture. Before development net benefits are an average of returns to paddy, maize and cotton production. In year 1, gradual replacement of traditional crop with mulberry allows single cropping plus two small silkworm rearings. Credit assistance (based on 10% farmer equity) is taken for plantation and equipment expenses and working capital for two rearings. Family labor is included at the market wage rate (Rs 5/day). 2/ Excess leaf, stems (for fodder), silkworm litter (for fertilizer). 3/ Approx. 55 workdays at Rs 5/day. 4! 20 kg urea; 30 kg N,P,K; 10 tons FYM. 5/ Rearing trays (60), stands (3), cocooning frame (70), small implements. 6! See footnotes 5-11, Table / Farmer eauity = 10%. Four-year loan at 10.5% interest. 8 Interest payment only.

91 ANNEX 4 INDIA Table R.4 KARNATAKA SERICULTURE PROJECT 1 Ha Rainfed Farm Model: Projected Income and Financial Returns (Rs) Before Year Development PARAMETERS 1/ Avg. Nof of Rearings No. of Layings 2/ 1,175 1,190 1,210 1,175 Cocoon Yield (kg/ha) Cocoon Price (Rs/kg) CASH INFLOW Cocoon Revenue 3,400 3,655 4,140 4,230 Byproduct Revenue 3/ Total 4,080 4,335 4,820 4,910 CASH OUTFLOW Production Costs Land Tilling 4/ Fertilizer 5/ ,030 1,050 Rearing Materials 6/ Eggs 7/ Field Labor 8/ Rearing Labor 9/ 1,575 1,575 1,575 1,575 Total 2,565 3,030 3,140 3,195 NET BENEFIT Total 1,515 1,305 1,680 1,715 Incremental - (210) INTERNAL RATE OF RETURN = 50+% 1/ This model is based on assumed improvements to a 1 ha rainfed mulberry farm as a result of technical services with the project. Net benefits are assumed to derive primarily from increased yield, with only minor quality improvement in cocoons (6% price increase). Family labor is included at the market wage rate (Rs. 5/day). 2/ Cocoon production per 100 layings assumed to increase from 17 kg before development to 20 kg at full development, reflecting improved quality of eggs and lower silkworm mortality with the project. 3/ Excess stems (for fodder), branches (for fuel), silkworm litter (for fertilizer). 4/ Bullock team ploughing for 12 days at Rs. 6/day. 5/ At full development: 20 kg urea; 100 kg N; 50 kg P,K; 10 tons FYM. Approx. half dosage applied before development. 61 Equipment rental. 7/ Rs 20/100 layings before development, increasing to Rs 25/100 layings at full development. 8/ 37 workdays per year at Rs. 5/day. 9/ 315 workdays per year at Rs. 5/day.

92 INDIA KARNATAKA SERICULTURE PROJECT Departmental Facilities: Staff Salaries and Phasinge (Rs' Per Facility-- No. of Annual Indian FY 80/81 81/82 82,83 83/84 84/85 TOTAL FACILITY Staff Salaries (No.) Cost (No.) Cost (No.) Cost (No.) Cost (No.) Cost COST GRAINAGES (10) Deputy Dir Asst. Dir Seri. Asst ,046.0 Seri Inap ,280.0 Serf. Demo ,915.2 Seri. Oper ,649.2 Office Supt UD Clerks 2 1b St-eographer LD Clerks Typist Drivers Attendaots/W.tchmen Unskilled Labor , , Subtotal , , ,200 4, ,200 4,79?.0 1 Staff Allowances Total , , ,200 5, ,200 5,0O0.0 14,673.2 MODEL HATCHERIES (20) Seri. Demo Seri. Oper Unskilled Labor Subtotal ,992.0 Staff Allowances _ Total ,036.6 HATCHERIES (1,700) Unskilled Labor , b00 4, ,400 6, Total ,200 2, ,800 3, ,600 4, ,400 6, , COCOON MARKETS (30) (All markets) Asst. Dir Seri. Asst Seri. Insp Seri. Demo ,215.7 Seri. Oper ,203.6 UD Clerks Typists Attendants/Watchmen Skilled Labor Unskilled Labor Subtotal 426 2, , , , ,739.4 Staff Allowances I 55.4 _ Total 426 2, , , , ,988.6 MOBILE DEMO. UNITS (4) Driver Staff Allowance _ Total / Based on project implementation schedule. Staff generally recr-ited four to sir months prior to opening of facility to all. time for trdlng and pr-operating activities. Thus, number of staff in each year represents total staff on board at close of year; salari-s are calculated r a for assumed staff months on board duriog year. Staff allowances calculated at approximately 47. of permanert staff salaries. 2/ "Per Facility" figures are totals for all markets. 0 x

93 INDIA KARNATAKA SERICULTURE PROJECT Departmental Facilities: Staff Salaries and Phasing (R. '000) --Per Facility--- No. of Annual Indian FY 80/81 81/82 82/83 83/84 84/85 TOTAL FACILITY Staff Salaries (No.) Cost (No.) Cost (No.) Cost (No.) Cost (No.) Cost COST TECH. SERVICE CNTRS (150) Seri. Asst , , , , ,789.0 Seri. Demo , , ,008 6, ,200 8, ,200 8, ,968.3 Clerk Typist ,175.5 Attendant/Watctman ,628.0 Driver i ,628.0 Skilled Labor , ,008 2, ,200 2, ,200 2, ,581.3 Subtotal 24 1C8.8 1,220 3, ,820 9, ,520 12, ,000 15, ,000 15, ,770.1 Staff Allowances ,265.0 Total ,220 3, ,820 9, , ,OO0 15, ,000 15, ,035.1 TRAINING SCHOOLS (3) Principals Lecturers Asst. Lecturers Managers - Supt Stenographers LD Clerks, Typists Drivers Cooks/Attenders Subtotal ,662.7 Staff Allowances _ _ Total ; ,729.0 FILATURE (1) General Manager _ Section Officer Purchasing Asst Accountant _ UD Clerk LD Clerk Storekeepers Supervisor Mechanic _ Drivers _ Cleaner _ Attendants/Helpers Operatives Re-reelers, Sorters Skeiners, Examiners Hot Air Drying Assts _ Subtotal Staff Allowances _ 19 g Total _ GRAND TOTAL ALL FACILITIES , ,024 15, , , ,218 30, ,358 30, lO6, & ~~~~ ~ ~ a x r - of which Casual Labor - Skilled , ,048 2, ,255 2, ,260 2, ,042.3.'. e - Unskilled 1,262 2, ,924 3, ,136 5, ,333 7, ,370 7, ,048.2

94 INDIA KARNATAKA SERICULTURE PROJECT ECONOMIC RATE OF RETURN TO THE PROJECT 1/ (R. Million) Project Year COSTS Capital Investment On-Farm 2/ (18.0) Cottage Basins 3/ (11.0) DOS Infrastructure 4/ ( 5.0) KSIC 1/ _ (10.6) Subtotal (44.6) On-Fare Production Costs 6/ U Incremental Operating Costs Cottage Basins 7/ DOS Incremental Admin. Cost 8/ DOS Infrastructure 4/ KSIC 9/ (15.3) (22.9) Subtotal BENEFITS Total Costs On-Farm 10/ (5.7) I , Production Raw Silk 11/ Silk Waste 12/ KSIC 13/ 0 (1.6) (31.0) (1.1) Subtotal i Total Benefits D , , , , , , , ,134.2 NET BENEFITS (73.6) (130.5) (172.9) FUTURE BENEFITS WITHOUT PROJECT Raw Silk 14/ Silk Waste 15/ Crop Incomse16/ Total INCREMENTAL NET BENEFITS (323.3) (381.0) (425.3) (134.6) ECONOMIC RATE OF RETURN = / Economic costs and benefits expressed in constant late 1979 Rupees. Year I = Indian FY80/81. Costs include physical contingencies, exclude duties, taxes, interest and other transfer payments. Adjustments for economic analysis have been made for traded components by using conversion factors of and for unskilled labor at 70% of the market wage rate. Permanent working capital and salvage value recovered in year 20. 2/ Rearing houses, plantation and equipment. 3/ 500 cottage basins for incremental raw silk production. 4/ For details, see Anne, 2, Tables , and footnote 1. 5/ For details, see Annex 2, Tables 3.1, 3.2 and footnote 1. Includes permanent (net incremental) working capital in year 5, recovered in year 20. 6/ For rainfed, traditional irrigated and new irrigated farms. For details, see farm models Annex 4, Tables / For details, see Annex 4, Table 7. 8/ For details, see Annex 2, Table / For details, see Annex 4, Table 2. 10/ Incremental net benefit to cocoon producers. 11/ Incremental raw silk production; valued at projected world market price. See Annex 1, Table 6.6, and Annex 5, Table 2. 12/ Based on 307. of raw silk production, at R. 35/kg. 13/ Added value to raw silk and silk waste. See Annex 4, Tables 2 and / Future without project assumption of 14,000 ha new area would convert to sericulture, remainder producing traditional crops under irrigation. ' 15/ Based on 33b of raw silk production, at Rs 30/kg. 16/ Net Benefits of R. 3,900/ha fron 10,500 ha traditional crops (see footnote 14); Rn 4,900/ha from 24,000 ha irrigated mulberry in traditional area; Rs 1,515/ha from 60,000 ha rainfed mulberry.

95 ANNEX 5 Table 2 INDIA KARNATAKA SERICULTURE PROJECT Price Summary for Financial and Economic Analysis Financial Economic- Raw Material Production Raw Silk (Rslkg) Semi-automatic machine 340 Filature Cottage basin Charka Silk Waste (Rs/kg) Cocoons (Rs/kg) Good quality / Average quality Poor quality Silk Manufactures (KSIC)-3 Silk Fabrics (Rs/m) Plain fabrics (60 g/m) Heavy plain fabrics (100 g/m) Printed fabrics (60 glm) Gold lace fabrics (100 g/m) Neckties, scarves (60 g/m) Spun Silk Yarn (Rs/kg) Noil yarn (Rs/kg) Inputs Fertilizer (Rs/kg) N P K Labor (Rs/workday) Unskilled Semi-skilled / Economic prices for traded commodities (raw silk, silk waste, fertilizer) based on world market projections adjusted by an estimated standard conversion factor for India. of 0.8 (Rs 10 = US$1). 2/ Average projected price for standard denier (20/22), mixed grades. 3/ Based on average domestic market prices for / For economic analysis, total unskilled and semi-skilled labor is valued at 70%.

96 INDIA ANNEX 6 Page 1 KARNATAKA SERICULTURE PROJECT Industrial Development Bank of India 1. The Industrial Development Bank of India (IDBI) was established in 1964 and is now the largest single institutional source of industrial finance in India, accounting for about 1.5% of annual total industrial investment. It is wholly owned by GOI and, apart from its main role in providing direct and indirect finance for industry, it has two principal functions: (i) it acts as an apex institution for industrial finance, coordinating the activities of the other all-india and state-level institutions; and (ii) it undertakes promotional and technical assistance activities, including the preparation of industrial surveys and sponsoring the establishment of specialized institutions to assist in project identification, preparation and appraisal. IDBI's financing activities include: granting direct loans, rediscounting commercial bills, refinancing industrial loans made by State Financial Corporations and commercial banks, providing export finance, underwriting, equity investments and guarantee operations. 2. As of December 31, 1979, the total financial assistance approved by IDBI, excluding guarantees, amounted to Rs 46.1 billion (US$5.5 billion), of which Rs 29 billion (US$3.5 billion), or 63%, was in refinance, rediscounting or export finance. O the total approvals, Rs 31.3 billion (US$3.7 billion) has been disbursed ant the total outstanding amounted to Rs 20.6 billion (US$2.5 billion). Approvals of direct assistance 1/ totalled 1,514 applications involving Rs 15.4 billion (US$1.8 billion) or 33% of total approvals: Rs 9.3 billion (US$1.1 billion) had been disbursed and the total outstanding amounted to Rs 8.2 billion (US$1 billion). In , IDBI approved 320 applications for direct assistance totalling Rs 4 billion (US$0.5 billion), compared with 225 applications for Rs 2.7 billion (US$0.3 billion) in IDBI's direct assistance has been mainly to modern types of large industry, including fertilizers (17%), textiles (14%), chemicals (13%), cement (10%) and paper products (9%). The quality of IDBI's direct lending portfolio is reasonable with 4% of principal in arrears and total arrears of principal and interest of 8.6%. However, 36% of the portfolio is affected by arrears, largely due to substantial arrears in sugar and paper products. 3. IDBI has a reasonably sound financial structure: at June 30, 1979, it had a debt/equity ratio of 10.8:1. Its resources have been provided by: Reserve Bank of India loans (54%); bond issues (28%); equity (9%); GOI loans (7%) and deposits (2%). At its head office, five regional offices and eleven branch offices throughout India, it has a large staff experienced in the preparation, appraisal and supervision of industrial projects. Its appraisal standards are satisfactory and it is a well managed institution. The Bank is already involved with IDBI through a credit and loan for the State Financial Corporations, a loan for financing joint sector projects and a credit for financing development of the fertilizer industry. 1/ Including underwriting and direct subscription to shares and debentures of industrial concerns.

97 -89 - ANNEX 7 INDIA KARNATAKA SERICULTURE PROJECT Related Documents and Data Available in the Project Files A. Reports Relating to the Project 1. "Sericulture Project - Karnataka" Joint Report of P.P.M. Cell (GOI) New Delhi and Government of Karnataka. 2. "Modernization of Silk Industries Units Feasibility Report" - Tata Consulting Engineers - 2 Volumes 3. Government of Karnataka "Sericulture Project Karnataka Research and Development." 4. Government of India "World Bank Assisted Sericulture Project in Karnataka - Research Support to be provided by the Central Silk Board (Revised Proposals)." 5. Government of Karnataka Blue Print Plans for: Grainages; Training School; Rearing Houses; Model Hatcheries; Small Filature Buildings; Government Silk Farm Buildings. B. Selected Working Papers 1. Moriculture in Karnataka and its Related Technological Problems. 2. Silkworm Rearing in Karnataka. 3. Technical Problems of Silk Reeling in Karnataka. 4. Marketing and Consumption of Silk. 5. Spun Silk Manufacturing Report. 6. Credit and Banking.

98 INDIA KARNATAKA SERICULTURE PROJECT PROPOSED ORGANIZATION CHART KARNATAKA DEPARTMENT OF SERICULTURE DRCTOR OF SERICULTURE ~~~~ENGINEER SUPENiNTENO DMOIRING O ads JOS OJS CHIEF ACCOEJEITS JOS CON- JOINT RED STRAR A ND EVALU ANTGION TEHIA O DS DEDS DOFFICER ADMINISTRATION D STRLUCTION COOP SOCIETIES CELL AD VISOR TEHIAL SEED PRODUCTION SEE AEAS CON MARKETS IL SERVICES ~~~AND OUALITY AN RELNG FAM ACcOUNTS ADMINISTRATION ENGINEERING ~~ASSISTANT REGISTRAR 13) 14)OTO STAFF STAFF STAFF COOP SOCIETIES.GRANAGE I TRAINING MOIEDS MYSOE BIVOLTINE *FLTR CE NTERS TRAININ 1 El 1101''' 121 I-*. ' '... ; II DISTR ICTI _~j L _I_ I JDS - JOINT DIRECTOR OF SENICOLTORE 4 3} 10 DOS - DEPUTY DIRECTOR OF SERICUJLTURE_AD ADS -ASSISTANT DIRECTOR OF SERICULTURE SOL DVISIONZI COCOON ADMINISTRATION. SA ADS SERlcULT SA MARKETS AND FINANCE SD -- SERICULTURE DEMONSTRATOR_ CL5 NUMtBERS IN EARENTHESIZE INDICATE DISTRICTS DIVISIONS FACILITIES OR STAFF 1/ THERE ARE 14 DISTRICTS IN THE PROJECT AREA BUT SERICULTURE ACTIVITIESr...* 50 ~~~~~ i IN TWO OF THEM, GUL8ARGA AND BIDARI WILL BE SUPERVISED BY ONE / THERE ARE S DIVISIONS IN MYSORE DISTRICT, 3 IN BANGALORE AND?2 EACR COCOON TECHNICAIl... IN THE OTHER I1I DISTRICT UNITSMAKTSEVC... ii _LIAISON SERVICES... TO... SILK FARMERS AND REELERS i ADS ASS STANT DiRECTOH OF SERICULTURE F r)ivision?/ N~~~~~~~~~~~~~~~~~~~~~~~~~~~~~WldB~I D DEPUTYDIECTR ECLTUESILK REELERS SLLK

99 INDIA KARNATAKA SERICULTURE PROJECT KARNATAKA SILK INDUSTRIES CORPORATION PROPOSED ORGANIZATION CHART KABOARD DIRECTORS MANAGING DIRECTOR DIRECTOR NICALWNA MAKEIN FINANCE PURHASNGANDOR MANAGER NGRESARCH DEVELOPMENT PERSONNEL MANAGER SECRETARY INFNAMRKTG AUDITOR L MANAGER CHIEF COTINDUSTRIAL ACCOUNTS ACCOUNTANT ENGINEERING OFFICER T. NARASIPUR l MYSORE CHANNAPATNA filature WEAVING PLANT SPUN SILK MILL PLANT MANAGER PLANT MANAGER PLANT MANAGERl CHANNAPATNA CENTRAL WORKSHOP MANAGER World Bank

100 INDIA KARNATAKA SERICULTURE PROJECT PROJECT ORGANIZATION CHART HEAD OFFICE HEAD OFFICE REGIONAL 2 CENTRAL i ~~~~~~~~~~~ ~TANN ~~~~~~~SILK BOARD INSTITUREES FOR OFF ICE- I~ ~ ~ ~ ~ ~ ~ IDB ~ ~ ~ ~~~~~~~~RJC CENTRALSERI AT IONDC OFFICE PARTICIPATING COM RGK GSE TR C U R BANKS~ ~~~~~~~ ~O CMINDSTRIOES FOR AGRICULTURE I SERICULTURE NT AGRICULTURE I_ DEVLOMET SILK INDUSTRIE J~~~~~~~O IDUTRE CMMSSIONER CHIEF FR ENG GICLTR R PW S H A1SILK RESEARCH i~~~~~~~~~~~~~~~~~~~kratkstt [ DISTRICT 1I TECHNICAL INSMULERR ARANCH KARNATAKA" ~ COORDINATOR -- SERVICES - R PRODUCTION BANKS COMMITTEE 2. S LKWORM EGG A B * ~~~SUPPLY - - DEPARTMENTAL REGIONAL ROJECT MULBERRY PLANTING TANDV 3UNIVED3.... REG L -- MATERIAL SUPPLY EXTENSION 4 COCOON MARKETING SERVICE ' IREEL---ERS ] >;... DIRECTR RICUTURjLj CORPORATION * l l I SILK PROCESSING.-w X91rSILK FARMERS jj SEE CHART / SEE CHART SILK PRODUCTION LINE OF CONTROL _LIAISON OR SERVICES......CREDIT FLOW... World Bank -2t297

101 INDIA KARNATAKA SERICULTURE PROJECT DEPARTMENT OF SERICULTURE I mnplmntation Sdudule of Main Projoct Activitie Xg i82 ISSW 111s4 198X I. GRAINAGIES z i,, Aibn _ 2 3 4_ Duign/Appo._ T.nd., dr.qpn._.- 2. COCOON MARKETS 23. L..dAq.I.do S. C.o.b,.uiw C-m'Vw - I 1. Bi IOU pm.mploo Tdi TRAINING SCHOOL _ 3 r_._ A,uliu t b. Cwft-tio@ Owssiro/ApproWsl H ~ 2 - $ - - TOId...~~~~~~~~~~~~~~~~~S. T.WR.lo.oi.. AND UQO4ATCHERIES S. plan kev tib S. ConSuoIo l4..11s1apm.,on T-od... 3TO"3T40 S. SMALEL FHATCHRIES.. Land AwwW isw taoa 2 b. CO.ldftOio Tands./r.w eu. sin.yeupn. S. SMALFILAECRUTENTTANN SCLTUR ASSISTANT * ).nrae.mt SalOSa T..n.W.Uo,. Trting M1I '.no O.t w~ewp.*i ft St WOd -I

102 INDIA KARNATAKA SERICULTURE PROJECT PROJECT INITIATION, KSIC, TECHNICAL ASSISTANCE AND OVERSEAS TRAINING Implmnentation Schedule of Main Project Activities EARLY PROJECT ACTIVITIES i. EARLY PROJECT ACTIVITES o. lol Awruiea of KSIC Silk ProCeelne D-ielo,misrt PRons b, Appoint H.d of KSICS's FineloI.m, Techn"c AdniNImnmne. Penoflf41l and Aooo,ont' Sectio c. Est.W.1, EnOrneerins 1_ iBi ii t t t I t Uni.WIn odutui KIEY a,un,ntn A Pre 1 of DrtAini. Spcllmietono. i Bid Did Do-ente tnd Clsarens eihh IDA d. PIIpI Ong Pln O Bid Initation a. Estebish Ketrntka Stett C Twndtr Analysit sd IDA Ciereinet Strieuhu OeIoP ntmtv t Deuiwry. Cons.u.tion or IntOmrtnt.rtion IPrituu Wtnd Appoint in E Intttil tion Diretor and Thm Key F Testing wd Corn'tn4.lonkn Staff F_m G identification of sonrstant. or,t,tiningf ilitie.; IDA rw.w.end making I. P.perttion of Tethnikt rw far cxsuxts,tmt' 46it Or tr.nstg; Japtnese Iangtap training Asiastsan mnd Ot.t fon ura oopd. TtrinLng Pl-ImGOBs,di GOK_ I. P~prwtion of 00S Staff TraiSino Ron h. lnitiation of EnaksutonStudy t0091 H Conw.ltoncv or t ntilgpod KARNATAKA SILK INDUSTRIES COMPONENTS 2. FILATURES313 a. CMWI Work. A D Bib. LMehl l...y en Melo Eq.Ipenmrt A l C.. Othew Eqolpnem tr r - I 3. SPUN SILK MILLEl a. CMI Wrks a 4 b. MaVhIneE y ANd MaioR EqLps II G-- c. Other EquIpment A D d. RIUTiUR of DEisting Machinery I P. D El/ F2 4. CENTRAL WORKSHOP A B.. CMiW Works b. Machinery m.d Major EQuslptnet AEF TECHNICAL ASSISTANCE PROGRAM & CSRTI Sllker. Breeder. Solenteim BEhtnos Visit 6. SERICULTURE DEPARTMENT 2 Graintsss Eeparta SHitchory Epoan 7, KSIC aflpimur.-cocoon D.VIg end 2 Refllne Experts Ccoonw Boiling 1d 2 Qoulity Control Exertsl b. Sp..n Silk Fectry 2 H OVERSEAS TRAINING PROGRAM G 2 2 Fall.-hipse Ior Sd.nti.t. I r 1'* 2 9. SERICULTURE DEPARITMENT 21?1H Senio ONfidel, 'H42 Seeiculsu. ApestseutH 11ElecrirOl end Mscharenil Equoiprnent V/ Tvpo st,d notc., of.. P.r", not detorroind V.,. Thar -sold he -odod ci.ro,g 1983/84 Worki 8ock

103 INDIA KARNAJAKA SERICULTURE PROJECT RESEARCH Implementation Schedule of Main Project Activities 1 CSRTI MAIN STATION a. Civil Works A- L b. Equipmnent Local A _ c. Staff Appointment 2 ' Imported A= _ B _ REGIONAL STATIONS AND SUB-STATIONSI a. Land Acquisition A A C A.- - b. Land Developnent _. A _ I*** c. Water Supplies I c d. Civil Works -A - - &C a. Equipment (Only Local) A f. Staff Appointmnent- ' E 5- C 2. KSSDI a. Civil Works _A B C b. Equipment Imported C. c. Staff Appointmen2 D. I F201 I F22 3. UNIVERSITY OF AGRICULTURAL SCIENCE I I a. Civil Works A C Local C b. Equipment Imported B CA c. Staff Appointment D F14 I 4. UNIVERSITY OF BANGALORE a. Civil Works A C b. Equipment Imported A I C c. Staff Appointment F14 5 UNIVERSITY OF MYSORE a. Civil Wo,ks A B C bh Equipment A E c. Staff Appointment 2 6 D_-_ E E I FS F d. Land Development A C e. Water Supplies C A -Preparation of Designs, Drawing Specifications, Bid Douments, Surveys, Plans. B - Tender Procedures C - Construction Purchase D - Obtaining GOK Sanction E - Advertising, Selecting F - Appointment V/ Establishment ol two Regional Stations and improvement of five substation in first phase and establishment ol five new sub-stations in the second phase. World Batk I Scientists I

104

105 I N D IA A KARNATAKA SERICULTURE PROJECT ) I 1 IISTA);0 APei.Umi. IBRD 14378R MAY New areas under mulberry -PAKISTAN < >3 ', _ Traditional areas under mulberry ' N - 0 ROUTUN r BIDAR n Rods Ri- s/oads i MAHA ASHTRA A SolIn azaeug~odt B. ij 0 District heodquarters 20 MAHARASHTRA. Distr t boundar es -AK -..(( "J. BIJA PUR GULBARGA,0.- 5 ANDHRA K ~~~~~~~~~iletes s 0 80 los j >,< j- J +, P R AD ES H t*2_ ). \PRADESH h2\ ~ j l Xl ).S 4t0 -. W ' A PROCESSING l r tmarketing, AND RESEARCH (.o.. j. Ue 5..,3 *\ Proposed cocoon markets - [~~~~~~~~~~7fT\~~~~~~~~~~~~] ~~~~~~~ R ~~~~~~Raichur r' Eaisting cocoon market to Sn made-nied PRODUCTION *. Existing cocoon morkets BbIGAUM \> Z\ - \? PROJECT COMPONENTS B e._ C * PropoSed deiaturetbemn serzall ilatures 11 DAWRC-- whnsteonnical ser-ce IV GOA r. H2R r7 R ro ( ~A, A S IC tilature ros mo dern aed 7 centers GOA). >hor,_ ) A Existing f latures to be c 20 Pruposed Existing ce. (... \.I[,. ' Proposed model hatcheries \ c C grains Ovr O f t k 0 osed ntral uo,kshop tooe closed 0.6 i e < /vebel;ary RE Silk tarms f-\ 74\ Tram ng centers KSIC spur silk mill to be modernized e n NORTH KANARA \ 0.) a. 2 ). 11 -Number of proposed project coumponents \. 0 Proposed KSIC central Aorkshop t 5 ixi~~~~~~~ylm"0n*.*~~~~~~a lo~- be,oot enfiring project conpcsem t Z \ be modern-en Kr E- ra g KSIC silk weing and twisting tactory St 15- Nimber ft H Sting pinject crp f,nrhcentral Ye- ultura Pese-ch andtrl-g no nsitute (C.SR T A ~~~~~~~~(. O~~~~~~~-Th..... Om-//gn ouz Ko-oo kop E,0 niu rg main reseach Oat ot bor /0 f /C- b n/csed euhn rb, posed negional reseorch sat '.CHITR'A_D ROGA ni -// 3P /. t ons V.. 5 % itradu gcf \ P roposed sub-stationi-cum-extens on centers,s SHIMO.A j.... _sed /a.gz grz_r zpzs baght OSZRZhOt \:t; wen IcenonnonsAniecoreme Enisriri sub-stato.-cumr-ntersicn centers 0 r,sshiimoga '.J > ), \ g \ ( r R >,05 k X t ~~~~~ g-x <~~~~ or y _ 0 < $; i j e a ( < 4_ 0 i/ (0 8un9 Oa: C Omp vs~~~~~~~~~~~~~~~bagalre omp CHIKMAGALUR UMKOR ~ / KOLAR Jn * - G Uni-ers ty of Bango ore CKERAGAOe.5 / O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~h -ruxr ty of Mysore ~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~.. C Karnataka State Sericultura HASSAN : K. \. Deceloperent eproposed) InstitutD SOUTH t j nolorebongo)rl/o KAAR MN A A AOR CCueHsson / ' Rb N.- At7AB/AN SBA ' MYSORE ~ >+ t "9w *? rs Cin =Jne si:.nioor o,r KERALA TAM L NADU.ERALA$, TAMILNADU C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~TMLND