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Devesh Kapur: Graduation day at Bretton Woods

India's engagement with multilateral financial institutions shows little evidence of strategic thinking

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For nearly six decades, India’s primary engagement with multilateral financial institutions – the institutions and the regional development banks – has been at the receiving end. These institutions were a source of external savings, much-needed foreign exchange, advice and technical assistance — and, sometimes, arm-twisting. While much of the earlier rationale underpinning India’s engagement with these institutions no longer exists, there does not seem to have been a commensurate shift in India’s strategic thinking as regards these institutions.

Ongoing discussions with regard to India’s eligibility for (IDA) assistance illustrate the confusion. Currently, the operational threshold for IDA eligibility is set at a (GNI) per capita of $1,165 in real 2009 dollars (there are other considerations, such as capital market access, which are not relevant for India today). India’s GNI per capita was $1,170 in 2009. In practice, countries do not immediately graduate after breaching this income-based threshold — there is a five-year hiatus between exceeding the threshold and the cessation of new IDA lending (that is, formal graduation). This means that IDA-16 (2012-15) would be the last IDA replenishment in which India would be eligible for IDA lending, and the country would graduate in 2016 (the year in which IDA-17 would commence).

Last year, India informally agreed to “graduate” from IDA as per the policy. However, it has reversed course since then and is seeking to remain an IDA recipient country — arguing that although on average India is a lower middle-income country with a per capita income above the IDA cut-off, it still has hundreds of millions of poor people. There is undoubtedly a structural problem facing IDA. With more than three-fourths of the world’s poor now living in middle-income countries, there is a growing disconnect between poor countries and the countries where the majority of the world’s poor live. An agreement appears to be in the offing with India continuing in IDA but with loans at less concessional rates.

For India, the financial gains of reversing course are quite limited. The difference between the revised terms of IDA and those attached to loans from the other agency, the International Bank for Reconstruction and Development, will be very modest; the latter are priced just above Libor, or London Interbank Offered Rate, which itself is extremely low. The development gains are larger if one believes that having the Bank involved in social and other pro-poor sectors provides better discipline and scrutiny.

While agreeing with this proposition, after half-century of IDA lending to India, I believe this argument mistakes the trees for the forest. External concessional lending has become a crutch for the Indian state to forsake its core obligations to its citizens — epitomised by the almost obscene levels of corruption in the National Rural Health Mission. 

But it also reveals a particular mindset still prevalent in the Indian psyche. India wants to be recognised as a major global player, part of G20, a key player in global climate change and trade negotiations, a prospective member of the Nuclear Suppliers Group and all the trappings of an emerging power. Yet in practice its behaviour still has the hesitancy and defensiveness of a weak and poor country. India was recently asked to join the Asian Development Fund, with nominal contribution of $10 million, barely a few million dollars a year. It appears that India has reportedly declined, on the grounds that if it did so, it might have an adverse effect on its claims to the IDA. The larger point, that with China’s inexorable rise India needs to put itself out in Asian multilateral fora to provide a countervailing view, was lost.

India was invited to join the Caribbean Development Bank. This entailed a payment of just a few million dollars to that Bank’s capital. India declined. Given the size of the Indian diaspora in that part of the world, the strategic imperatives of leveraging multilateral institutions to its own advantage do not appear to have been deemed important.

There is a growing contradiction between the idea that India is a poor country that cannot afford to support these modest multilateral initiatives and the relatively massive amounts it lays out without almost any public debate. The increase in India’s share in International Monetary Fund quotas increased India’s voting power by barely 0.3 per cent — and cost more than $2.5 billion, not exactly chicken feed. Between 2003-04 and 2010-11, India provided $5.1 billion in lines of credit, of which $3.3 billion went to Africa, $1.8 billion to South Asia and $131 million to Caribbean countries. In May 2011, India announced $5 billion low-interest loans over the next three years for Africa and an additional $1 billion to pay for education, railways and peacekeeping, a huge increase from the $25 million India provided as aid to Africa a year ago. It also provided $2.1 billion to its South Asian neighbours in grants and loans and $346 million to other developing countries. India has been among the top five donors to Afghanistan — it donated $1 billion from 2002 to 2010 and another $0.5 billion was announced in 2011.

Yet when it comes to taking a strategic view on multilateral financial institutions, India has been niggardly at best, even though for the past half-century it has been the beneficiary – even if modestly – of exactly those institutions. On the one hand, there is much talk of a Look East policy, but when it comes to taking a stake in the Asian Development Fund, the country baulks. It annually holds the Pravasi Bharatiya Divas with much fanfare — but does not deem worthwhile to join the Caribbean Development Bank at modest cost.

There is now talk of launching a BRIC Infrastructure Bank. There could well be some advantages of launching such an initiative. However, given the range of options among bilateral, plurilateral, regional or global multilateral institutions through which India will need to address its increasing global engagement, choosing among these options will require considerably greater analytical thinking and co-ordination than the proclivities and biases of individual ministries.


The writer is director of the Centre for the Advanced Study of India at the University of Pennsylvania

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