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The World Bank has just announced a significant loan amounting to $4.3 billion to India. The loan is mainly for four projects. First, it aims at strengthening public sector banks through capital infusion, which will be needed to expand credit.

The other three projects are directed towards strengthening the power distribution network, improving infrastructure and enhancing water supply in Andhra Pradesh.

The announcement of a World Bank loan for public sector banks is a throwback to a similar effort in the crisis years of 1991-1992, when the Government sent a proposal to the World Bank for a banking sector loan. I was at that time the Governor of RBI. India badly needed Balance of Payments (BoP) support. Loans for the banking sector were considered a useful channel of assistance from the World Bank to bridge India’s BoP gaps.

Unfortunately, the discussions ran into ideological bottlenecks. India feared that the World Bank could insist on structural changes in public sector banks in India. The fact that the then President of the Bank, Mr Lewis T. Preston, was a former Chairman of a leading US commercial bank with deep roots in the US banking system did not help the Bank’s cause.

Mr Preston was, however, not personally against the public sector character of the Indian banking system. But, some of his aides had an angle. They mainly represented the just-emerging Washington Consensus, which preferred to reduce the role of the State in the economy. Some Finance Ministry officials were strongly against taking a banking sector loan, fearing that the World Bank would apply pressure for a sharp change in policy.

In view of the seemingly interminable delay in getting the World Bank loan, I turned the attention of the Government to the Asian Development Bank (ADB), which was more than willing to assist. There has always been aspirit of competitive, but constructive, rivalry between ADB and the World Bank.

Aided and abetted by friendly advice from Mr M. Narasimham, who had retired from the ADB a few years earlier, the ADB indicated that it was willing to offer a banking sector loan to India. This loan came in handy not only to meet the BoP problems, but also to establish a precedent that the World Bank cannot dictate its views in the presence of a countervailing power, the ADB.

The latest loan from the World Bank is not only meant to strengthen the public sector banks but also includes provisions to strengthen the Power Grid Corporation of India, which plays an important role in the distribution of power. Power Grid Corporation transmits power to all States over long distances.

The additional element in the latest World Bank loan concerns funds given for strengthening infrastructural facilities. The World Bank will issue a loan to the India Infrastructure Finance Company Ltd (IIFCL). These loans of the World Bank have a long tenure, imperative for all forms of infrastructure financing.

With the latest loan from World Bank, the Government can achieve its objective of strengthening the IIFCL through access to long-term resources. Granted, the implementation of infrastructure projects is a question that remains to be addressed. However, long-term funding is now no longer the problem.

The World Bank’s initiative is a vote of support to the stimulus programme of the Government for further economic growth. The substantial relief offered in regard to the borrowing requirements of the Government through this loan would mean a reduction in pressure on domestic resources. This will lessen the crowding-out impact of the hefty Government borrowing from domestic sources. The monetary authority, the RBI, which is managing the borrowing requirements of the Government should perhaps heave a sigh of relief.

One question, however, remains. When India as an economy with a large foreign exchange reserves invests them mainly in US Treasury bonds that offer a relatively low rate of return, does it make sense for India to borrow foreign exchange from a multilateral institution, at higher rates than the return on US Treasury bonds? The moot point is to take balanced view of access to long-term World Bank resources.

The World Bank’s latest initiative is in tune with the G-20 agenda, which asked for multilateral lending support to fund infrastructural facilities in various countries. There is also a significant difference, in that the prevailing ideology in the Western advanced countries has changed since the 1990s in favour of a more relaxed attitude towards public sector institutions.

Learning from the failure of various banks in the American economy in the recent past, there is greater humility and more respect for the public sector banking model. Maybe, this explains the easy passage of the loan for assistance to Indian public sector banks through the echelons of the World Bank and the US Administration.

The World Bank, as an institution, has always taken interest in India. The Bank’s soft loan window for developing countries was first instituted in the form of the International Development Association (IDA). This was partly built up by profits from the World Bank operation and partly by direct contributions from the budgets of developed countries.

The World Bank under Mr Robert McNamara took a leading role in this initiative. At that time, the senior executives of the World Bank, such as Mr Peter Cargill, who was a former Indian civil servant of British origin, played an important role in establishing the IDA on a sound footing. There was even a quip that IDA was essentially an Indian Development Association!

There is a strong pro-India feeling in the World Bank hierarchy even at present, perhaps because of the increasing economic strength of this country. The World Bank’s pro-India attitude continues to be robust. This indicates the Government’s success in convincing the World Bank and US Administration of the nature of its just demands. It is obvious that this is due to India’s strong record of good governance and sound economic management during the recent decades.

More Stories on : Public Sector Banks | RBI & Other Central Banks | S Venkitaramanan

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