INTERNATIONAL MONETARY

INSTITUTIONS AND INDIA

The international financial institution (IFI) is a financial institution that has been established by more
than one country, and hence is subject to international law. Its owners or shareholders are generally
national governments, although other international institutions and other organisations occasionally
figure as shareholders. The most prominent IFIs are creations of multiple nations, although some are
bilateral financial institutions i.e. created by two countries and are technically IFIs. The best known
IFIs were established after World War II to assist in the reconstruction of Europe and provide
mechanisms for international cooperation in managing the global financial system.

The international monetary fund (IMF) and the world bank comprise the two major international
financial institutions. Realists view these institutions principally as mechanisms by which powerful
states further their own interest.

The role of international institutions in the current

global economy
The crisis in East Asia, an area which was considered as the most successful developing region in the
world, has had a profound effect on our thinking about development strategies, the international
financial system and the role of international institutions. Some might feel that the crisis is the
inevitable result of government interference in the economy and that by destroying once and for all
the so-called “East Asian Model”. The crisis has proved that free market capitalism is the only viable
economic system. Some has seen the crisis as deliberately engineered by the west to restrain
development in east Asian economies and pressure them to open their markets, a step the critics
see benefitting the west at the expense of East Asia.

BRETTONWOOD SYSTEM

In July 1944, 44 of the states allied against the Axis powers met at Bretton woods, a New Hampshire
resort, to device new rules and institutions that would govern international trade and monetary
relations after World War II. As the world’s preeminent economic and military power, the united
states played the leading role.

The perceived causes of the economic catastrophies of the previous decades well as the states’
beliefs about the need for active US leadership, shaped the proposals. The united states sought free
trade, open markets and monetary stability- all the central tenets of what would become the
“Bretton wood system”. The rules at Bretton woods reflected a remarkable level of agreement. They
rested on three political bases. First, the power was concentrated in the rich western European and
North American countries, which reduced the number of states needed to reach decisions. Second, a
compromise was reached between the contrasting ideologies of the united states and Britain. In
particular, the emergent order honoured both commercial liberal preferences for an open
international economy and the more mercantilist desires for active state involvement in their
domestic economies. This mix of ideologies that underpinned the Bretton woods order was
eventually termed embedded liberalism. Third, Bretton woods worked because the United States
assumed the burdens of hegemonic leadership which others willingly accepted.

The international financial institutions

World bank

“ The world bank needs india more than india needs it”

The world bank is like a corporative made up of 189 member countries. These member countries or
shareholders, are represented by a Board of Governors, who are the ultimate policymakers at the
world bank. Generally the governers are the member countries ministers of finance or ministers of
develop,ent. They meet once ayear at the annual meetings of the board of governors of the world
bank group and the international monetary fund.

The world bank completes 75 years of partnership with India. Since the independence, india has
been on a remarkable development journey. Today, the once low-income nation has attained lower
middle-income status and is home to over 1.3 billion people and a nearly $3 trillion economy. In
2020, when the covid – 19 unleashed a crisis of unprecedented magnitude the world bank supported
India’s immediate health needs, helped the country extend food and cash support to larger numbers
of poor people and worked with it to protect micro, small and medium enterprises. In the next phase
of the partnership, the world bank will help India build a sustainable and resilient economy.

Ccurrentlythe world bank’s support to India is spread to 127 active projects with a combined worth
of over $28 billion. Even so, the world bank remains a small player in India’s nearly trillion-dollar
economy and lends less than one per cent of the country’s GDP.

INDIA AND WORLD BANK RELATIONS

India is one of the founder’s members of IBRD, IDA and IFC. World bank assistance in India started in
1948 when funding for agricultural machinery projects was approved. World bank resident mission
was established in India in 1957. In August 1958, the first meeting of the Aid India Consortium was
held at Washington DC under the aegis of the world bank. The first investment of IFC in India took
place in 1959 with $1.5 million. With its multilateral funding agencies like IBRD, IDA, IFC, World Bank
(WB) is providing development funds to developing and under developed countries for their social
and economic reconstruction. India is one of the oldest members of the bank since 1944. India is the
single largest borrower of the Bank with cumulative lending of more than US $ 47 billion. India is also
the top annual borrower of the WB.

As for reform agenda has shifted to the states over the past few years, the WB has reoriented its
strategy to focus mainly on those states who have chosen to embark on a comprehensive program
of economic reforms. All loans to the states will continue to be channeled through the central
government, and then lent-on to the states. For this WB is undertaking fiscal studies of the major
states in collaboration with local research institution. Various states in India are directly receiving
funds for the developmental projects from World Bank specifically in the areas of Sarvashiksha
Abhiyan, Swajaldhara program, AIDS control programmes and other health promotion programmes.
Andhra Pradesh became the first state to get benefit of state focused lending.
Thus WB is the part of India’s reconstruction efforts and is definitely needed as a cooperative
endeavor to risk the HD indicator of India

Key focus areas

In the next five years the CPS will focus on three key areas: integration, transformation, and
inclusion. A common theme across these areas will be improved governance, environmental
sustainability, and gender equality.

International Finance Corporation (IFC)

• The International Finance Corporation, Washington DC, (IFC) was established in 1956 as an
affiliate of the World Bank, but as a separate entity, to promote the growth of the private
sector which would Contribute to the economic development of its member countries.

• India is one of the founder members of the IFC. IFC finances investments with its own
resources and by mobilizing capital in the International financial markets.

• India has been a member of IFC since 1956. India currently holds 81,342 shares of IFC,
representing 3.43% of IFC’s subscribed share capital and 81,592 votes, representing 3.38% of
the voting power. The India-elected Executive Director represents a constituency with
99,234 votes, equal to 4.11% of voting power.

IFC in India

• Over the past few years, IFC has augmented its portfolio in India, improving profitability and
investing in high impact projects.

• India represents IFC’s single-largest country exposure. IFC has a current portfolio of about
US$3.6 billion committed in India (US$ 4.1 billion including syndicated loans).
 • On an annual basis, IFC’s committed total financing for India was US$ 1,044 million in IFC’s
Financial Year 2008 (i.e. 1 July, 2007 to 30 June, 2008),US$ 934 million in IFC’s Financial Year
2009,US$ 1,802 million in IFC’s Financial Year 2010 and US$ 754 million in IFC’s Financial
Year 2011. During IFC’s Financial Year 2012 (through 31 December, 2011), IFC’s
commitments reached US$ 343 million in 14 projects and were concentrated in
infrastructure, manufacturing, financial markets, agribusiness and renewable energy. The
above figures include commitments for IFC’s own account and mobilized financing.

• IFC is scaling up its presence and activities in the Low Income States and NE States (LIS) in
India. A new office has been established in Kolkata to focus on the LIS, and approximately
US$450 million has been invested in the LIS over the past two and a half financial years.
Further, IFC Advisory Services is working in the LIS in the following areas:

i) Promoting the Investment Climate for Private Sector Development and Inclusive
Growth;

ii) Financial Inclusion by working on financial services and Initiatives related to the
sustainability of the MFI sector including Micro credit bureau, Risk mitigation initiatives,
code of conduct setting etc.

iii) Renewable Energy (Solar and Biomass) and cleaner production as well as focus on key
subsectors like agribusiness;

iv) Developing PPP transactions with focus on social services (health and education) and
climate change impact projects.

• Infrastructure, which used to be only about 10% of IFC’s portfolio in 2005 has been stepped
up to 30-40% of the portfolio in India in the last few years and currently accounts for about
US$ 1.1 billion of IFC’s current committed portfolio of about US$ 3.6 billion in India.

INTERNATIONAL MONETARY FUND (IMF)

The international monetary fund or IMF is an international financial institution, in Washington D.C
consisting of 190 countries. The international monetary fund claims to work to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth and reduce poverty around the world. Formed in
1944, started on 27th December 1945, at the Bretton wooinonference primarily by the ideas of harry
dexter white and john Maynard Keynes, it came into formal existence in 1945 with 29 member
countries and the goal of reconstructing the international monetary system. It now, however plays
an important role in the management of balance of paymnets difficulties and international financial
crises. Countries contribute funds to a pool through a quota system from which countries
experiencing balance of paymnets problems can borrow money.

The current managing director (MD) and chairwoman of the IMF is Bulgarian economist Kristalina
Georgieva, who has held the post since October 1, 2019. Gita Gopinath as chief economist of IMF
from 1 october 2 October to her appointment at the IMF, Gopinath served as the economic adviser
to the chief minister of Kerala, India.

India’s current quota in the IMF is SDR (special drawing rights) 5,821.5 million, making it the 13 th
largest quota holding country at IMF and giving it shareholdings of 2.44%. However, based on voting
shares, India is ranked 17th in the list of 24 constituencies on the executive board.

India’s contribution to lending resources to IMF – in the London summit of the group of twenty, a
decision was taken to triple the IMF’S lending capacity upto US$ 500 billion. In pursuance of this
india decied to invest its reserves, initially upto US$ 10 billion through the notes purchace
agreement and subsequently upto US$14 billion new arrangement to borrow. As of 7 april , 2011,
india has invested SDR 750 million through note purchace agreements with the IMF.

ROLES OF IMF

Exchange Stability

Eliminating BOP Disequilibrium

Determination of Par Value

Stabilize Economies

Credit Facilities

Maintaining Balance Between Demand and Supply of Currencies

Maintenance of Liquidity

Technical Assistance

BENEFITS TO INDIAN ECONOMY

International regulation by IMF in the field of money has certainly contributed towards expansion of
international trade and thus prosperity.
Large Financial Assistance. Not only indirectly but directly also

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.

“Third Window” loans meant to help countries with a per capita income of less than $ 375. India got
a substantial share out of the ‘Third Window’ fund.

The membership of the IMF has benefited India for large foreign capital for her various river
projects, land reclamation schemes and for the development communications.

The International Finance Corporation (IFC) has made substantial investment in Indian companies
engaged in the production of fertilizers, caustic soda, ball and bearings, pumps, etc.

The IDA—loans from it are payable over 50 years, are interest-free; bear only a service- charge of
0.75 per cent per annum.

In 1981 India succeeded in getting a massive loan of Rs. 5000 crores from IMF to tide over the
balance of payments problem faced by it. This was the single largest loan made by IMF to a member
country.

World Bank is about growth. IMF is about stability. World Bank is for development projects in the
developing world. IMF is about balancing the international financial system in both rich and poor
countries [Greece is a recent recipient].

What is the difference between the IMF and the World Bank?

World Bank is about growth. IMF is about stability. World Bank is for development projects in the
developing world. IMF is about balancing the international financial system in both rich and poor
countries [Greece is a recent recipient].

World Bank is your gym trainer – provides you stuff to grow strong. IMF is your doctor in emergency
ward. They will try to bring you back to life & provide you advice on not eating that fatty food again.
World Bank brings no stigma. IMF aid sometimes brings a stigma because it indicates that you have a
disease that needs to be cured.

Both the organizations are for governments to borrow. You go to the World Bank when you want to
build a dam or power plant or a road. You go to the IMF when you are so fucked up that your
currency is dropping like crazy. IMF comes and usually fixes stuff along with providing a mouthful of
advice.

World Bank is a bank. Meaning it borrows money from investors around the world and then lends to
the poor governments that are building projects that help them out of poverty. You can see some of
their projects in India, for instance: All Projects
IMF is a fund. Meaning it has a pool of money given to it by 182 member countries in the past and
just lends out of that fund. It doesn’t usually borrow new money. See where IMF lends: IMF Lending
at a Glance

IMF is comprised of four key credit lines:

FCL (Flexible Credit Line): This is usually given to countries well before they get into a problem. They
are the ones with better policies.

PLL (Precautionary Lending): This is for countries that are beginning to get weak.

SBA (Stand By Arrangement): This is for countries that are quite weak, but can be rescued quick.

EFF (Extended Fund Facility): This is for countries too screwed up and requiring a long term help.

World Bank is a much bigger institution and has two arms:

IBRD (International Bank for Reconstruction and Development): This is the bank portion of it. It
charges a slightly higher interest rate than it borrows and it is mainly for profitable commercial
projects [such as roads and dams]. This interest is still a lot lower than what the governments can
get anywhere.

IDA (International Development Association): This is a grant body. Here interest is not charged and
usually countries are given long periods for repaying. The focus is on social projects such as
immunization and education. This is however open only for the poorest nations. IDA Results

Countries usually graduate out of IDA to IBRD and eventually completely out of World Bank. Dozens
of countries have got World Bank aid and then grown enough to not be eligible for it anymore.