India might pledge forex for extra World Bank funding

Such loans are available at concessional rates of 0.75% and India, the largest borrower, needs an investment of $1 trillion in infrastructure over five years

On the brink of breaching its borrowing limit with the World Bank, the government is planning to dig into its foreign exchange reserves to subscribe to a $4.3-billion special bond issue by the global lender.

That would allow the country to get an equal amount of loan from the World Bank, taking the country’s net borrowing limit to $21.8 billion, against $17.5 billion at present.

“The World Bank will issue special placement bonds to the Reserve Bank of India. Additional funding of $4.3 billion will be provided by the World Bank in lieu of these bonds. That will give us some liquidity,” a finance ministry official, who did not wish to be identified, told Business Standard.

KEY FIGURES

$17.5 bn
India’s net borrowing limit for World Bank loans

$11.6 bn
India’s World Bank loan dues

2014-15
Time by when the limit is likely to be exhausted

$288.6 bn
India’s current forex reserves

 

Officials said the forex reserves to be pledged with the multilateral agency would work like collateral with the Bank and India could get a loan against it despite nearing the net single borrower limit — the difference in the loan disbursed and amount repaid.

Currently, our loan dues to the World Bank are $11.6 billion.

The limit is likely to be breached in 2014-15 as the loan volume goes up. The Bank’s long-term loans come at a very low rate and any disruption in funding would affect some crucial projects.

The proposal was approved in principle during the tenure of former finance minister Pranab Mukherjee. The ministry is now planning to move a Cabinet note on the issue after seeking fresh approval from Finance Minister P Chidambaram. Officials agreed concerns were raised by some sections on the rationale behind using dollar reserves for subscribing to World Bank loans.

India is usually averse to deploying its foreign exchange reserves, other than for financing the current account deficit and meeting other obligations. It is not even comfortable using the reserves for investing in a sovereign wealth fund — a common practice in some other countries. India’s foreign exchange reserves currently stand at $288.6 billion, compared with China’s $3 trillion-plus.

India is also other options such as cutting its loan pipeline from the World Bank, prepaying some of the amount, co-financing of some projects from the private sector or an increase in the borrowing limit. It was last increased by $1 billion from $16.5 billion in 2010 in the light of the global financial crisis.

India, the largest borrower of the Bank, needs an investment of $1 trillion in infrastructure over five years. World Bank loans are available at concessional rates of as low as 0.75 per cent. As of March 2012, the Bank had commitments towards 75 projects in infrastructure, agriculture, education, health and environment.