Will support 'Made in Asia' projects, says AIIB President Jim Liqun

There was a debate if India should join AIIB. I am glad that India has become an active participant, said Jaitley

This is a borrowers’ bank, said Subhash C Garg, Secretary, department of economic affairs, India’s Finance Ministry about the Asian Infrastructure Investment Bank (AIIB), this week. Jim Liqun, the President of AIIB said they will support “Made in Asia” projects. Between Garg and Liqun lies India’s hopes and concerns about the newest multilateral institution it has helped to emerge and which will hold its third annual general meeting in Mumbai in June, this year.

The earlier two were at Beijing and Jeju in South Korea.

But, first Garg! The secretary’s comments underscore the fundamental difference between AIIB and the league of Bretton Woods institutions like the World Bank, the IBRD and the ADB as India, China and others, see them. “AIIB is a response of the borrower countries. The major shareholders are the borrowers who borrow for the projects”, he noted at the curtain raiser event for a series of workshops lined up by the AIIB in the run-up to its annual meeting slated for June, this year in Mumbai.

For decades countries like India and others have railed at what they perceived as the asymmetrical nature of the relationship under which they transacted with the Bretton Woods group. For every Special Drawing Rights (SDR) the IMF or others sanctioned for the borrowers they also put in some often very onerous conditions. These conditions, mind you, were all well-intentioned.

They were meant to make the loans or even grants perform better. And to make those perform better they mandated that the user agencies would bring in improvement in their operations. So, the Special Assistance Loans (SAL) that were offered by both World Bank and the ADB to states mandated that in the course of the loans, the states would improve the components of the fiscal deficits, if not actually reduce those; cut down on unproductive government expenditures like subsidies for the relatively better off and improve other governance outcomes.

As the history of these loans show, some showed excellent results like the ones offered to Coal India in the early 90s to turn around its performance, while the others like those for reforms in the power distribution sector, a bit later, in states like Odisha, did not. Especially as countries like India went about putting their public finance on sound footing, they chafed against these conditions.To be fair, the institutions too realising the prickly nature of these terms went about softening those.

The other outcome challenge was that rule changes brought in by the Meltzer Commission in the late 90s that made it difficult for the World Bank and its affiliates to offer loan or work as adviser especially to middle income countries which translated as shutdown for support to several class of projects in India, especially in the infrastructure sectors. Support to Indian infra projects has crawled, since then.

It is necessary to put this history in perspective, as Indian government and other agencies begin to set their relationship with AIIB.  

It has a $20 billion to offer now and another $80 billion as commitment, so it's a tidy purse. This is where Garg’s comments, becomes important. AIIB is not in the business of deciding which policies the government of India or the other member countries should follow as they also raise loans from the institution. The AIIB constitution does not have the remit and neither does it aspire to take over this role. So any loans have had only one condition, that it should be repaid with the interest. In that respect, AIIB will come close to the role of the commercial banks, and that is what makes India interested in it. It understands banking from the perspective of the borrowers.

This has also got reflected in the portfolio of the two-year-old organisation. The 25 projects that it has supported so far, including five in India are plain vanilla loans. This is the key difference between the Asia based institution and the older ones. Successive Indian governments have faced stiff political headwinds in reconciling what the other multilateral banks have asked for since those have raised opposition from all sorts of constituencies within the countries.

It is also true that often these prescriptions were nudged for by India’s leaders to get difficult policies passed that would otherwise have got jammed. But it is also true that since the loans were often tied to milestones, governments have often found those impossible to reconcile. As India has moved to aggressively wrest the initiative for its policy-making freedom, no finance minister will want to travel to Washington or Beijing to explain her development imperatives. This is what makes AIIB attractive, as Finance Minister Arun Jaitley put it candidly.  

“There was a debate if India should join AIIB. I am glad that India has become an active participant”.

What he will want to guard against is the possible conflation of the projects under Belt and Roads Initiative of China with those on the table for AIIB. In the boardroom of the bank, it will be extremely difficult for India to approve those projects. The AIIB President offered a way out on Tuesday; he said the way to select the projects was to apply the yardstick “Made in Asia”. It makes the provenance of the projects immaterial. The current list of projects satisfy his dictum and so do those already up for consideration.