IMF Members' Quotas and Voting Power, and IMF Board of Governors
The presentation talks about India and It's relations with IMF along with IMF's role in developing countries and it's past and current status. The relationship between India and the IMF dates back to the time when India needed economic reform packages to strengthen its international reputation and . India's relations with the International Monetary Fund: India and the IMF has a positive relationship. The IMF . The current relationship between IMF and India.
Narasimham had succeeded in persuading the IMF to permit flexibility to develop a fully home-grown program. In the period, the Government did start changes e. But the pace of reforms was slow. Following the elections, the reforms continued. But there were no major overhauling reforms. Expansionary fiscal policy continued in the s, and the automatic monetization of budgetary deficits by issuing adhoc Treasury bills strained credit policy.
India entered the s with structural rigidities and imbalances in the economy, pronounced macroeconomic imbalances despite a significant growth rate of 5 percent.
Several adverse domestic and external developments precipitated in the balance of payments BOP crisis in From this crisis, emerged a comprehensive reform agenda backed by an IMF program which was effectively implemented.
The long term fiscal policy was to impart a definite direction and coherence to the annual budgets. Secondly it was envisaged to shift to rules based fiscal and financial policies and less reliance on discretionary case-by-case administration of physical controls.
The LTFP projections could not be sustained. The budgetary deficits for the 5 years were significantly off target, there was an expenditure boom and the tax collections were off targets. Although the Economic Surveys kept maintaining that the fiscal management in immediate future must aim at correcting these imbalances to step inflation, contain balance of payments pressures, the policy pronouncements did not translate into effective implementation.
Should India have gone to the IMF in ? Nitin Desai felt that the major problems did not surface till when the rupee trade with the Soviet Union for commodities had collapsed. He also felt that inwhile there was no ideological objection in going to the IMF, but the political judgment was that the sharp fiscal correction advised by the IMF can only be done after the elections. Following the elections inan IMF program was not pursued as Government feared capitalist conditions would be imposed.
The public image of the IMF as a ruthless condition setter, as one that would reduce social expenditures dissuaded the Government. Patel pointed out, India had placed short term political gains ahead of National interests. The Economic Survey for the year said thus: The first signs of the current payments crisis became evident in the second half of when the Gulf war led to a sharp increase in oil prices.
Foreign exchange reserves began to decline from September They declined to a level of Rs.IMF supports India's current economic reforms
In Januarythe Government made a drawing of Rs. The Government indicated its willingness to enter into a comprehensive structural adjustment program, supported by an arrangement under the Extended Fund Facility.
Government agreed to formulate a comprehensive program for tax reform and introduce a detailed tracking system of quarterly expenditure reviews. We are founder members of these two institutions and it is our right to borrow from them when we need assistance in support of our programs. As lenders, they are required to satisfy themselves about our capacity to repay loans and this is where conditionality comes into the picture.
All borrowing countries hold discussions with these institutions on the viability of the programs for which assistance is sought. We have also held such discussions. The extent of conditionality depends on the amount and the type of assistance sought. However, I wish to state categorically that the conditions we have accepted reflect no more than the implementation of the reform program as outlined in my letters of intent sent to the IMF and the World Bank, and are wholly consistent with our national interests.
The bulk of the reform program is based on the election manifesto of our Party. There is no question of the Government ever compromising our national interests, not to speak of our sovereignty.
On the one hand politicians had long viewed the IMF conditionality with some disdain.
Role of International Monetary Fund (IMF) in India
As soon as it became know that the government was applying for a stand-by arrangement, its leaders would be attacked in Parliament, and in the press for subjugating the interests to foreign domination. As had been true for the negotiations, these discussions were amicable and collegial. India had also committed to mobilization of substantial exceptional financing to maintain a minimum level of imports so as to avoid a major disruption to the economy.
The initial stabilization package was accompanied by a special action to maintain reserves at a minimum working level, including gold backed external borrowing, purchases from the Fund and the provision for quick disbursing aid from the World Bank, the Asian Development Bank and several bilateral donors. The structural benchmarks for the program were in the areas of industrial policy, trade liberalization, domestic pricing policies, public enterprises reforms, financial sector reforms, tax reforms and expenditure control.
The crisis management measures adopted included utilization of gold to raise foreign exchange resources, liberalization in the policy for import of gold, India development bonds and non-resident deposits, liberalization of import licensing, liberalization of tariffs, industrial deregulation, foreign investment policy and significant steps in the exchange rate policy. India was a poster child for the IMF. Post program growth rates were always higher than pre-program growth rates. The repayments were always on schedule.
Inflation was low and export growth remained robust at 20 percent. The country witnessed strong capital inflows adequate to finance an increase current account deficit of 1. It was a period when the Fund needed India than India needed the Fund.
The Fund had become irrelevant in the mid s with several countries building reserves. The Fund was under severe criticism from leading economists Joseph Stiglitz, Martin Feldstein, John Taylor and George Schultz and also by civil society that the IMF had outlived its mission and the time has come for it to go into oblivion. Private capital flows had become much larger. The Fund reinvented itself with a 28 percent allocation for Technical Assistance programs. There was also a realization that macroeconomic stabilization entails more measures than fiscal deficit reduction and exchange rate devaluation.
There was inadequate quota and voice for developing countries resulting in imposition of stringent conditionality for borrowings from the Fund. Major issues and policies were not developed in the Fund but in G7 meetings with close to one half of the voting power of Fund. The IMF did not have any major financing requests from members for crisis resolution.
The Gold sales program was completed by December India and the Global Economic Crisis ByIndia had arrived on the international economic scene. The Indian economy had grown at 8.
It was projected that poverty would be reduced at an unimaginable speed and the 11th Five Year Plan had projected an annual growth rate of 9 percent rising to 10 percent by Indian policy makers had reckoned that India may not be severely affected from the Global Financial Crisis largely because of public ownership of banks, strict prudential rules laid down by RBI and limits on external commercial borrowings. That said, Indian stock markets witnessed a 60 percent loss in values, foreign portfolio investment slowed down and rupee lost 20 percent value against the dollar reaching Rs.
Foreign institutional investors were pulling out. The current account deficit widened. Remittances and earnings from software exports that had propped up the current account in the past showed signs of declining. Software exports to the U.
In the G meeting in OctoberGovernor RBI, DuvvuriSubbarao had urged advance economies to keep the emerging market central banks in the loop on financial market developments as they viewed them and also on their proposed policy responses.
The US Treasury and the Federal Reserve had conducted regular briefings for select emerging market economies including India. The advanced economies had to resort to unconventional monetary policies and quantitative easing and large scale asset purchases to flood the system with liquidity.
The lowest policy rate India reached during the crisis was 3. The Government provided a substantial fiscal stimulus through two packages announced by the Government on December 7, and January 2, to boost demand and aim at increasing expenditure on public projects to create employment and public assets. The Government renewed its efforts to increase infrastructure investments by approving several infrastructure projects.
The Reserve Bank of India took a number of monetary easing and liquidity enhancing measures including the reduction in the cash reserve ratio, statutory liquidity ratio and key policy rates. The objective was to facilitate funds from the financial system to meet the needs of productive sectors. Monetary authorities in China, Russia, Hong Kong, Norway, Ireland and Israel also added the lower yielding dollar asset to their foreign exchange reserves. Headline inflation came down from 13 percent to 4.
Each member-country on joining the Fund has to declare the par value of its currency in terms of gold or U. For further changes up to 10 per cent the IMF will have to be consulted which will have to give the acceptance or refusal to the proposed change within 72 hours. The internal policies of the member-countries to restore equilibrium are not to be interfered with by the IMF.
When a country suffers from a deficit in its balance of payments on current account, it can obtain from the IMF, in exchange for its own currency, the currency which it needs to pay off its deficit.
There is, however, a limit to the amount which it can thus obtain. Currencies which are in great demand by the member- countries and IMF cannot meet all demands for them are declared as scarce currencies and are rationed by IMF among the countries needing them. IMF has to see that the member-countries do not impose exchange restrictions on current transactions. In view of the abnormal conditions existing after the war. IMF allowed a period of transition extending over 3 years during which the members could remain such restrictions.
The period is over and many countries have relaxed their exchange restrictions. However, their complete removal is not likely in the near future.
Leading Mechanism by IMF: The IMF helps its member countries under a number of different programmes: The most widely used way to lend by IMF is stand-by arrangements. A member country can borrow from IMF from this credit tranche to meet its balance of payments difficulties.
A certain norms regarding government expenditure and money supply targets have to be fulfilled before resources are released, especially in higher credit tranches. It is expected that government of a country borrowing under this arrangement will adopt measures to rectify the balance of payments disequilibrium. Typically, stand-by arrangements last for months period.
Repayments of loans under this arrangement are made within years of each drawing the money from IMF. The Extended Fund Facility was created in to help the developing countries over longer periods upto 3 years than stand-by arrangements months. Further, in this facility developing countries can borrow more than their quota. The loans taken under this facility can be paid back over a period of years.
Under the extended fund facility, since developing countries can borrow to meet for long- term balance of payments difficulties stringent conditions are to be fulfilled for availing borrowing facility under this scheme. A country borrowing under this programme has to provide every year a detailed statement of measures and policies it has adopted to solve its balance of payments problems.
However in recent years other special facilities provided by IMF are being extensively used by the developing countries to tackle their problem arising from balance of payments. The important special facilities are: We briefly explain them below: This was set up in to provide financial assistance to low income i. Prior to this, IMF provided financial assistance to the poor developing countries under a programme known as Enhanced Structural Adjustment Facility ESAF so that they can undertake structural adjustment reforms.
In it was felt to focus more on poverty reduction in the developing countries.
India at IMF relations | INVC NEWS
Assistance under this programme is given by IMF on the basis of Poverty Reduction Strategy Paper prepared by a poor country in cooperation with World Bank and other experts.
Interest charged on the loans given by IMF under this programme is only 0. Moreover, the borrowing country can repay the loans taken under this programme in a long period of 10 years.
This was set up in in response to Financial Crisis in East Asia and other developing countries. Under this facility, IMF provides financial assistance to the member countries who are experiencing exceptional balance of payments problems arising from a sudden loss of market confidence in their currencies.
The repayments have to be made within 2. This facility was established in to deal with the problem of countries who are anticipating a financial crises that well cause capital outflow on capital account of balance of payments.
It was a precautionary measure to provide assistance to a country to overcome the impending crises on capital account. It may be noted that financial assistance under this facility was aviated only when crises actually occurred.
The repayment period for the loan taken is also 2. The oil crises of touched off by the Arab oil producing countries created a most serious balance of payments problem for the developed as well as developing countries. Among the developing countries India was the most severely hit. To aid member-countries, the IMF has started a special fund, from which the member-countries in acute difficulties are helped out. This is called the special oil facility. It is good that India joined the IMF.
There is no doubt that this membership has been greatly beneficial to India. India has, to that extent, benefitted from these fruitful results. Not only indirectly but directly also, her membership has been of great advantage. We know how, in the post-partition period, India had serious balance of payments deficits, particularly with the dollar and other hard currency countries.
She could not possibly reduce her imports, since these consisted of essential foodstuffs, capital equipment and industrial raw materials. Her exports, on the other hand, could not be immediately expanded since under conditions of limited production in the country, increased exports were sure to create serious internal shortages.
Under such difficult circumstance, it was the IMF that came to her rescue. Subsequently, India has been one of the most frequent borrowers from the IMF.
India had recourse to borrowing from the Fund in the wake of the steep rise in the prices of its imports, food, fuel and fertilizers. A total of Rs. In NovemberIndia was given a massive loan of about Rs. What are of greater significance are the crucial timings of and special circumstances under which such assistance was availed of. Such help was forthcoming when the country was faced with critical foreign exchange situations.
The membership of the IMF has benefited India in yet another important way. India wanted large foreign capital for her various river projects, land reclamation schemes and for the development communications.