chapter 33

INTTERNNATIONAL
MONETARY FUND (IMF)
One of the reasons of World War Iand IIwas economic rivalry of different nations. During the
dosingyears ofFWorld VWar II, different countries realised that there must be a common international forum
achievingeconomic cooperation, promoting international trade and providing help to needy nations
duringemergency. IMF was formed for this purpose.
1.,Establishment of International Monetary Fund (IMF)
World War II had its adverse effect on the global economy. To remedy the situation, an
inbornational monetary conference was convened in 1944 at Bretton Woods in America. It was attended
the representatives of 44 countries. India also participated therein. It was decided in this Conference
hat two institutions be set up for the economic development of all countries: (1) International
Monetary Fund, and (2) International Bank for Reconstruction and Development/World
Bank. Consequently, International Monetary Fund (IMF) was founded on 27th December, 1945. The
Fund was established with the objective of solving the problem of balanced growth of world trade,
international monetary cooperation, balance of payments of member countries and their temporary
disequilibrium. In April 2018, the number of membercountries of IMF was 189. Its headquarters are in
Washington DC, USA.
I2. Objectives of International Monetary Fund
(1) To Promote International Monetary Co-operation: The main objective of the Fund is
to promote monetary cooperation among different countries of world. It provides expert
advice for solving international monetary problems.
(2) To Establish a System of Multilateral Payments: The Fund aims at establishing
multilateral payments system among member countries. For this, IMF provides for conversion
of currency of different countries into each other. It also has its own curency, i.e., Special
Drawing Right (SDR) which is acceptable to all member nations. IMF also lends or sells
currencies of other countries to its member countries. By developing system of multilateral
payments IMF promotes international trade.
(3) To Prevent Spreading of Financial Crisis: IMF encourages member nations to adopt
healthy economic policies so that spread of financial crisis could be prevented from one
nation to other nations.
() To Abolish Exchange Restrictions: It will try to remove all restrictions and controls on
Toreign exchange imposed by the member countries.
lo Provide Aid to Members during Emergency: The Fund aims at providing short-term
monetary help to member countries during emergency.
lo Reduce Diseguilibrium in Balance of Payments: The Fund also provides monetary
balance of payments.
nelp to member countries to reduce disequilibrium in their
 424
Business Environment and
(7) To Help in Profitable
member countries investlnvestment
of Capital: Another objective of
their long term funds in profitable activities. fthe
InteFund
rnational Business
isto help the
to rich countries to invest their It
(8) To Promote Balanced
capital in poor countries.
Economic Development: The fund aims at t
provides special
help
development of member naions. For this, it promotes foreign trade promoting economic
employnent opportunities and national income.
(9) To Maintain Stability in thereby increases
of currency of a country canExchange Rate: Exchange rate means the rate at which one.
be exchanged for the number of units of
country. Earlier, maintaining stability in the rate of exchange
But at present this objective is dropped. Now
currerncy
was one off1the of another
market forces of demand and supply. rate of exchange is decided onobjectives
of IME.
the basis of
3. Membership
There are two types of members of the Fund:
(1) Original Members, and (2) Ordinary
took part in Bretton Woods Members. All those countries whose representativee
Conference and who agreed to be the member of the
December, 1945, are called the original members of the Fund. All Fund prior to 31e
those
subsequentBy are called ordinary members. Any country carn cease to be countries
its
who became its member
writing to that effect. Fund can also terminate the member after giving a notce in
membership
rules. In 1945, the number of member countries was 44, in of such a country which does not observe its
April 2018 this number was 189.
4. Organisation and
Management
In order to manage the Fund, the following
(1) Board of Governors: It consists of one
administrative boards have been set up:
Governor and an
member country. It meets once in a year. It frames the policiesAlternate Governor for each
of the Fund.
(2) Board of Executive Directors: It conducts
day-to-day affairs of the
directors, 6 of whom are permanent directors and other 18 are electedFund. It consists of24
directors. Permanent
directors belong to those countries that have the largest quotas in the Fund.
countries Currently, these
are-United States, Britain, France,Germany, Japan and China. Eighteen elected
directors are elected by member countries. India is one of the elected directors. The
Director of IMF is elected by the executive directors. He is the head of MF staff Managing
and is
responsible for its organisaton.Major decisions of IMF are taken with the consent of 85 per cent
voting.
5. Capital
Thecapital resources of the Fund are subscribed by the various member
countries by way of ther
respective quotas. Each member's quota is determined before its enrolment as a member. Each member
country is required tosubscribe its quota partly in gold and partly in its own national currency. The Zo o
quota is to be subscribed in gold or itcan be 10% of the totalgold stock and US dollars held with its centa
bank, whichever is less and the remaining amount of quota is to be subscribed in its national currey
Total capital of the Fund in 1945 was 880 crore dollars, The Fund has affected changes in the quotas Orue
membersfrom time to time. Since 2000, its capital has been raised to270 billion dollars. In the yearr2016
total Special Drawing Rights (SDRS) quota of fund was 477 billion SDRs. Voting power ofeach member
country isweighted on the basis of capital it has contributed to the IME More than 52 per cent of the v
power in IMF is in the hands of only 10countries (USA, Japan, China, Germany, France, UK, laly,
Russia and Brazil). Minimum number of votes of a country is fixed at 250.
naational,Monetary Fund (IMF)

Largest Voting Power 425

Country Countries in IMF

Rank
Percentage
Share of Total Rank
Country Percentage
USA
Voting Power Share of Total
16.54 Voting Power
Japan 6.16 Italy 3,03
2
China 6.09 India
3 9
2.64
4 Germany 5.33 Russia 2.60
10
5
UK 4.04 Brazil 2.23
11 Canada
6
France 4.04 2.22
12 Saudi Arabia
I6. Special Drawing Rights (SDRs)
2.02

Forincreasing international
liquidity, IMF created a scheme called Special
Ris
also known as paper gold. This scheme was started by IMF to Drawing Rights (SDRS).
international liquidity. International liquidity overcome acute shortage of
means ability of a country to pay for its imports. f any
countryis not in apositionto make payment of its imports, i.e., its
balance of payments is unfavourable,
then that Country can use SDRs for meeting such deficits in balance of payments. This
scheme was started
in the year 1969. In this scheme, member countries are allotted quotas of SDRs. SDRs are like coupons
ch can be exchanged for currencies required by
holder-nation of SDRs for making international
payment.
In 1969, SDR was linked with gold equivalent to one US dollar, i.e., 0.88867 gms of gold. In 1973,
value of SDR was defined on the basis of basket of 16 most widely used currencies of member countries. In
1981, the number of currencies in the basket was reduced to five. These include US Dollar, British Pound,
French Franc, German's Deutsche Mark and Japanese Yen. Later, it was defined in terms of four
aurencies, i.e., Euro, US dollar, British Pound and Japanese Yen. Now, alongwith thsese four currencies,
Chinese Rernminbi is declared as fifth currency in the SDR basket, with effect from lst October, 2016.
Each member country was allocated a quota of SDR. This quota was fixed on the basis of
contribution of member country to the capital of IME. So the rich countries were given bigger quota in
comparison to developing countries, although developing countries needed larger quotas to meet their
dehicit in balance of payments. SDR quotas of member countries are revised after every five years. These
85 per cent of
quotas can be increased with the consent of at least 3/5th of the member-nations having
kept by member countries in
wal votingpower. Equivalent to the quot, IMF will issue SDRs which will be
banks. In case of deficit in balance of payments, the country will apply to IMF for using its
Centtal
payments is in surplus. Now this designated
Ihen IMF will designatea country whose balance of receiving SDRs from applicant
country will provide foreign currency to the applicant country after IME
in the books of
country. SDR transactions are carried out through entries SDRand charges interest at the
per annum on total quota of
pays interest at the rate of 1.5% interest rate is based on market rate of interest
Same rate on SDRS used/withdrawn. At present, this
In year 2016, India's quota of
Germany and Japan).
ievailing 13,114.4
SDR was
in five cocountries(USA, Britain, France,
mmillion SDRs. It was 2.76
per cent of
2016,
the total
total SDR
SDR quota of IME On the basis of
quota of all member nations
was
quantum
477 of quota of: SDRs, India'srankis 8th. In year
USA. The largest SDR quotaholding countries are
SDRS. The largest SDR quota is that of
hownbiliinon following table:
 Business Environment and
Rank
Largest Quotaholder Countries of SDRs of
IMF
International ABusines
Country
Percentage
Share
Rank
in Total Country t
1 USA
SDR Quota
17.47
PerSDRcentinQuotaaTotal
Share ge
7
Japan Italy
3
6.49 8 India 3.17
China 6.42 2.76
9 Russia
4
Germany 5.61 10 Brazil 2.72
5 France 4.24 11 2.32
6 UK Canada
4.24 12 Saudi Arabia
2.32
" 6.1 Benefits of SDRs 2.10
(i) Dependence on gold for making
international payments has reduced.
(i) International liquidity has
increased.
(ii) It has benefitted the member countries
having unfavourable balance of payments.
(iv) Unlike gold, SDRs are costless to produce as it is
paper currency, whereas gold involved huge
cost. Moreover, there is no fear of SDRs being stolen,
unlike gold.
(v) Payment through SDR iseasier and more flexible.
" 6.2 Criticism of SDRs
(i) More SDRs were distributed to rich countries and less SDRs were
distributed to developing
countries. So developing countries have not gained much.
(ii) There is no difference in interest rates charged from developed countries and developing
cOuntries, i.e., no concession is given to developing countries in payment of interest.
(ii) Quotas of SDRs were not fixed according to the development need for finance of member
countries.
(iv) Originally, the interest payable on the use of SDRs was 1.5% per annum. But now interest rate
ischarged at market rate of interest prevailing in five countries. This increased rate of interest
has created burden for developing countries.
I7.Main Functions of IMF
(1) Lending for Meeting Temporary Unfavourable Balance of Pavments Position: I
Thefinancial
lends to member countries that have temporary balance of payment problems.
assistance provided by IMF enables the members to reduce its deficit of balance of paymefive
to
backin three
and other short-term external liabilities. These lendings are to be paid
years.
currenciesofthe
sells the
(2) Purchase and Sale of Foreign Currency: The Fund buys and country fromtheFund
another
member countries. Whenever a country buys the currency of it
concerned,ofwhich
the
the latter makes it. available by purchasing the same from the country purchasefrom
constitutes the national currency. In any one year a member country
can IMFcanraise
cases
25% of its quota. Butin some
Fundforeign currency uptothe maximum of
quota.
this limit to even 100per cent of
nernational
| Monetary Fund (IMF)
427
(3) Bank of Central Banks: The Fund is called the bank of the central banks of different
member cOuntries of the world. Just as a
Commercial banks of the country, central bank holds the cash reserves of the
member countries.
likewiseIMF also holds reserves of the central banks of the
(4) Technical Assistance: The Fund also provides technical assistance to its member
COuntries. The Fund sends its
experts on deputation to member Countries to advise them on
matters like
exchange control, foreign payments, credit control, central banking and
oronomic policy, etc. The Fund also publishes many technical journals and
6) Imparts Training: It also imparts training to the representatives of
magazines.
member countries. This
training is imparted to the senior officers of the central banks and finance
1975, a training centre was set up to departments. In
impart training to policy makers of different nations.
(6 Facilities during Emergency: Although IMF is opposed to any sort of
foreign exchange or on toreign trade, yet member countries have been controls either on
resort to these controls during emergency in the hope that they will lift given the right to
it as early as the
situation warrants.
(7) Increases International Liquidity: IMF has increased
international
new currency in the form of SDR. IMF also lends foreign currency to liquidity creating a
by
this increases international liquidity.
member countries. All
(8) Special Lending Facilities of IMF: Following are the main
IMF to member nations:
lending facilities provided by
(i) Compensatory and Contingency Financing Facility (C.C.EE): Under this
scheme, special financial assistance is provided to the member nations for
compensating them for shortfall in exports, because of some contingencies like flood,
earthquakes, drought, etc.
(ii) Buffer Stock Financing Facility (B.S.FE): Under this scheme, special
financial
assistance is provided to member nations for maintaining buffer stocks (Reserve stock)
of primary products like foodgrains.
(ii) Structural Adjustment Facility (S.A.F): Under this scheme concessional loans are
provided by IMF to least developed member nations for meeting deficit in balance of
payments. Under this scheme, the rate of interest is between 0.5 per cent to l per cent
per annum.
(iv) Enhanced Structural Adjustment Facility (E.S.A.F.): lIt is also known as Enlarged
Access Policy. Under this scheme, enhanced loans are provided to least developed
member nations with heavy debt burdens for making economic eforms.
) Poverty Reduction: For helping low income countries having extreme poverty, IMF has set
up aspecial fund. In this fund, contribution is received from developed nations and from
emerging developing nations, Indiais also contributing US $1 milion per year in this fund.
(10)
Research Functions: IMF has set up aseparate statistical bureau for conducting research
egarding balance of payments, money and banking, finance and fiscal policy etc. IME
publishes report of such research work. Its main publications are Finance and
Uevelopment. IMF Surueu. Balance of Payments Yearbook, Direction of Trade, Internationg!
 428
Business Environment and
Financial Statistics, etc. These
economic policies. International
publications are useful for member nations Business
(11) for
Determining
member Exchange
of the Fund, Rate for
it has to declare Every Member Country: When a framing
par value of its
facilitates multilateralconvertibility of that country
currency in terms of dollar or becomes
market forces of demand and supply, so currency. But now exchange rate is gold Thib
(12) Change in this function has been
dropped. determined
Exchange Rate: IMF
exchange rate: (i) lf any country wantsallows the member countries to
to change the make the changes in tho
noprior permission is par value of its currency upto 10 per
needed from IME Simplyintimation to IMF will be sufficient. (i) lfCont
country wantsto change its exchange rate a
required such change. (iii)If the
for from 11 to 20 per cent, prior permission of IME ie
per cent, then such decision is country wants to change its exchange rate by more than 20
taken with the consent of 2/3 of its
At present, members.
determination of exchange rate and change in
forces, i.e., now a countrycannot decide the exchange rate are decided by the market
par value of its currency, the
demand andsupply of that currency in the foreign exchange rate is decided by the
determination of exchange rate. exchange market, so now IMF has little role in the
8. Role of IMF in
Promoting
(1) Increase in International Trade
International Liquidity: IMF has played significant role in increasing
international liquidity which is a basic requirement of international trade. It has created a new
liquid asset in the formn of SDR, which has
reduced dependence on gold for making
international payments, and has increased international liquidity. Further, payment through
SDR is easier and more flexible. This increased international liquidity has
international trade. promoted
(2) Multilateral System of International Payments: At the time of
establishment of IME.
almost all countries were exercising foreign exchange control in one way or the other. There
were many restrictions on international trade. IMF has played a significant role in persuading
the member nations to reduce these restrictions and in establishing multilateral system of
foreign payments and thereby promote international trade. IMF has played asignificant role
in establishing flexible exchange rate regime and replacing fixed exchange rate system with
flexible exchange rate system. For strengthening multilateral system of payments, IMF
provides for conversion of currency of different countries, urges the member countries to
remove alsorts of exchange control. It has designated four currencies as globally acceptabie
currencies for international payments. These include US dollar, British pound, European
Euro, Japanese Yen andChinese Renminbi. It has promoted international liquidity.
(3) Helpto Member Nations Facing BoP Crisis: IMF acts as lender of last resort to counties
member
facing unfavourable balance of payment position. It provides monetary help to
nations to overcome the situation of diseguilibrium in BoPwhich in turn enables the meie
nations to import essential items. International
(4) Provides Statistical Data and Relevant Information Related to regardingbalance
bureau for conducting research
Trade:IMF has set up a separate statistical such
payments, money and banking, finance and fiscalI policy, etc. It publishes report of o f
of Outlook, 'Balanceand
research work. It publishes various journals, like World Economic Outlook'. 'Finance
Payment Statistics, 'Fiscal Monitor', 'Regional Economic
 information about Survey',
analysis busiglnoinbalessterneconomy.
trends ational FiThese
information for of
analysis helps member of nancial Statistics' etc..These journals 429

(5) Advice in nations in prenvi

o r
motoi nnment
g of published journals provide provide
various member nations. Thisnecessary
Reformi
necessary changes sinng
Int ernatio nal TradeintPolicles
e rn ational trade. business
nations as are
facing inunfavourabl
experts in reforming the
ternationaletradebalancepolicofies of member nations,
of
Member Nations: IMF advises
t especially
foreign payment such member
nations. For trade position.
advised Indiaexample,
in 1991, lends
policiewass and other economic policiesservices
the of its
to when India
globalisation. introduce economic reforms in thefacing
of member
acute BoP crisis, it was IMF that
form of
(6) Help to Member Nations to liberalisation,,privatisation and
economic and Combat Global Financial Crisis: IMF
financial developments
nolicyadvice and financial worldwide. In case of any constantly tracks
assistance to member nations so as tofinancial
which is the basic requirement
crisis, it provides
achieve financial stability
for international trade. The
threatens international trade. IMF comes to the rescue of situation of financial instability
crisis hit nations to normalise the
economic situation and thereby promote international trade.
aSuccess and Failures of International Monetary Fund
IMF has been functioning for along time. During this period it has achieved its objectives to alarge
otent and at the same time itsprogrammes have also been subjected to criticism.
9.1 Success/Achievements of International Monetary Fund
Fund has performed the
According to Halm, "Fund is like an International Reserve Bank." The
are the main achievements of IMF:
significant functions to attain its objectives. Following is to
Monetary Cooperation: One of the main objectives of the Fund monetary
(1) International countries of the world may be able tosolve their member
most of the
present a forum where among the
fund has created a feeling problems, but of the
cooperation. The
problems by mutual problems are not only their exclusive
economic achieving this objective.
Countries that their succeeded in
international society. IMF has
the efforts ofthe Fund, rich countries
whole Countries: BecauseofMarshall Plan for the reconstruction of
Reconstruction of European
economic assistance under European countries
could not
(<) liberal war-devastated
like America gave COuntries, Without this Plan
war-hit European establishment of the Fund,
time ofthee sale of
have been rehabilitated. Payments: Atthe(restrictions on purchase and trade.
System of Foreign exchange control many restrictions onforeignforeign
(3) Multilateral exercising were
other. There
of
multilateralsystemspayments,
COuntries were the establishing
almost all one way
or andin multilateralI systemof member
same improving the
toreign currencies) in reducing the For
trade. different countries and it urgespurchaseand
succeededin restrictionson
IMF has promoted world
currency of relaxaall
payments andthusconversionexchange
of controls,i.e.,to internationaltrade,
for in liquidasset
IMF providesremoveallsorts of to
Corresponding has
increase
created a new
countries toD currencies. liquidity. t
Liquidity:
international
sale of foreign International
increasing
(4) Increase in in
suucceeded
the Fund has
430
Business Environment and
in the form of SDRs. As a
result of it, international liquidity has increased
International Business
credit facilities to member countries in foreign currency.
(5) Increase in International Trade: The Fund has
manifold.It provides
succeeded in expanding the internatt
trade andImaking it free from restrictions to alarge extent. It has rendered l
international trade payments
easy. By helping thecountries suffering from trade disequilibrium relating
ith
to
promoted their trade. Allthis has resulted into expanding the value ofworld's
billion, US dollars in 1948 to 20,763 billion US dollars in the year 2016. exports frorm 52
(6) Special Aid to Developing Countries: The Fund has donea special
countries in finding a solution to theirproblems. Ithas been actively helping service to developing
then in correctine
their unfavourable balance of payments and achieving monetary stability.
These countries
have been receiving adequate guidance from the Fund in framing their
monetary
export-import and exchange policies. It has provided technical assistance to then besides
imparting training to their senior officers.
(7) Providing Statistical Dataand Information: IMF has set up aseparate statistical bureau
for conducting research regarding balance of payments, money and banking. finance and
fiscal policy. etc. It also publishes report of such research work. These publications are useful
for member nations for framing economic policies.
(8) Helpful in Times of Difficulties: The Fund has come to the rescue of all member countries
faced with economic crisis. On account of hike in petrol prices, manycountries of the worid
experienced acute shortage of foreign exchange. Inorder toease this situation, it set up Petrol
Facility Fund.
(9) Easiness and Flexibility in Making International Payments:Because of use of SDRs
the dependence on gold for making international payments has reduced. Through the facility
of SDRs, international payments have become easier and flexible.
(10) Special Lending to Crisis-hit Nations: In year 2008-09, the growth momentum in
world economy was adversely affected by the global financial crisis. In April 2009, IMF
made a special fund of US $ 750 billion for lending to crisis hit countries. IMF seeks to
inject cash into the world economy and help the crisis-hit nations to overcome global
financial crisis. In year 2012 and 2013, largest borrOwing nations of IMF were Greece.
Portugal, Ireland. All these nations were worstly affected by Eurozone debt crisis.
9.2 Failures of International Monetary Fund
failed to achieve its main objective of
(1) Lack of Stability in Exchange Rate: The Fund hasmaintaining fixed rate of exchange.
exchange rate stability. It succeeded till 1971 in
of stability in exchange rate s
Thereafter, exchange rate became fluctuating once again. Lack determination of exChange
has little role in the
themajor failure of the Fund. Atpresent, IMF
rate as it is determined bymarket forces of demand and supply. ouis
to stable
Lack of Stability in the Price of Gold: Many efforts were made by the Fundkept t
(2)
1971 the price of gold was
stability in the price of gold but it failed miserably. Uptomanifold.
increased
at $ 35 per ounce (oz), but thereafter it has re world
has failed tothe
Inability to Remove Restrictions on Foreign Trade: The Fund countries of
(3) Many
restrictions on foreign trade and control on foreign exchange.
restrictions on foreign trade.
have resorted to policy of protection, i.e.,
 nemational,Monetary Fund (IMF)
431
(4) Rich Nations' Club: Critics say that International Monetary Fund is a club of rich
countries. It works at the behest of
rich countries like America, Britain, etc., and helps their
supporters. It pursues a policy of
nations. discrimination and least developed
against developing
(5) No Help for Developmental Projects: IMF has been giving loans only for meeting
temporary balance of payments deficit. It provides no loans for development projects to
promote development.
No Solution of Problem of International Liquidity: Fund is not a proper solution to the
nroblem of international liquidity. Although Fund has createda newcurrency in the torm or
Special Drawing Rights (SDRs) and has increased its capital substantially, yet the problem of
liquidity persists. Consequently, it is difficult for the Fund to lend sufficient resources to
developing countries and help them overcome their balance of payments deficit.
) Interference in Domestic Economies: While providing loans, IMF imposes many
conditions on member nations, e.g., reduction in the arowth rate of money supply, measures
tocontrol wages/salaries and prices, devaluation (decrease in the value of domestic currency
in terms of foreign currency), reduction in fiscal deficit, etc. It results in excessive interference
of IMF in theworking of domesticeconomies of member nations.
(8) Less Aid for Developing Countries: Developing countries have not gained much from
IME. In 1999, 70 per cent of SDRs were distributed to 26 rich countries and remaining 30 per
cent of SDRs were distributed to developing countries. So developing countries have not
developed and
gained much. Similarly, rate of interest charged on SDRs is same for both
of interest.
developing countries. No concession is given to developing countries in payment
Monetary Fund has largely failed to achieve
It is evident from the above account that International
insisting on its re-organisation.
is objectives. No wonder, many countries are
India
10. International Monetary Fund and conference was convened in Bretton Wood to
ponder
founder member of IME When a
India is a
Fund, it was attended by an Indian delegation consisting of 6 members under
Over the plan of Monetary Earlier, India was made a permanent Executive
Director of the
Jermy Raiesman. executive
the leadership of Sir permanent directo. India is now an elected of IMF
present, India is no longer a
board of Directors. At of Governors
minister of India is India's ex-officio Governor in the Board
uirector of IME Finance
Governor in the same. At the time of membership, India's quota
o]SGovernor is India's Alternative increased to 1311.4 crore SDRs. In the total capital of the Fund.
ounted to $ 40 crore. In 2016. it
was
quota of SDRs, India's rank is 8th among 189 member
On the basis of
s Share is 2.76 per cent.
nations. ofIMFto India
Advantages from Membership its membership of IMF:
from
India has enjoyed the following benefitsMembership of the Fund has enabled India to get foreign
exchange, our
(1) Facility of Foreign Exchange:requirements. At the time of crisis of foreign
essential imports.
per its
currencies from the IMF as currency from IMF to make payment of our IMF has reduced.
on
government availed foreian India's dependence offoreigncurrency
of 1991, of the Fund. Indian rupee
hter economic reforms Sterling: to its membershippound-sterling. With the
Prior
(2) Freedom from British Pound currencies through the
medium of UK
other
Was convertible into
 fixation of par Business
Environment and
value
(3)
other currency. of the rupee in
gold, Indian currency is
now freely International
Business
Membership
become
of World Bank:
member of the World Bank. By virtue of its convertibleinto any
economic development. membership
India has secured several
of the Fund, India
loans has al.
(4) from this Bank fou
Importance of India in
fund. By virtue of its status,International Sector: Currently, India is an
has enhanced the India has played elected director of she
(5) Economic prestige of significant role
India in international sphere. in the policy making ofthe fund
valuable Consultation:
advice to
In the
formulation of Five
to India by the government India from time to time. Year Plans, the Fund has givon
of
Fund to suggest
policies of measures for its economicMany economic missions were sent
IME liberalisation,globalisation and privatization weredevelopment. Even the economie
decided per the guidelines cf
as
(6) Help during
economic crisisEmergency:
arising out
India got lot of financial
of natural assistance from the Fund to tide oyer
the time of Chinese and calamities like floods,
earthquake, famines, etc., and at
the wake of hike in oil Pakistani aggressions. In order to meet its
facility fund in year 1979. prices, India secured a loan balance of trade deficit in
(7)
In
1991, Fund sanctioned a loan amounting 2,025 lakh
to
SDRs out of oil
Financial Help for Five Year Plans: of5,000 crore to India.
financing five year plansand for promotingIndia received many loans from the Fund for
1980, under
Compensatory Financing economic development. For example, in August
crore by the Fund. India is Facility, India was sanctioned an amount of
among
receive funds from Subsidy Account by way69 underdeveloped countries that are entitled283to
those
rate of 3 per cent annually. of supplementary
assistance at a nominal interest
(8) Special Drawing
Rights:
SDRs in 2016. From 2002 to India's quota of SDRs was raised from 40 crore to 1311.4 crore
SDRs. February 2006, India made purchase
transactions 49.32 crore
of
(9) Profit from Sale of Gold: By the
end of 1980, IMF sold 200 lakh ounce of
this sale was distributed among the gold. Profit out of
member countries. India got its share of
to 127 crore. Besides, India
also got 8 lakh ounce of gold at the rate of profit
$ 35
amounting
Thus, byvirtue of being themember of IME, there has per ounce.
gold of India. been an increase the stock ot
in
(10) Help in Foreign Exchange Crisis: At
various times
loans to meet foreign exchange crisis. In 1992-93 our India has received foreign exchange
crore SDRsand in the year 1993-94 India receiveda loan government received a loan ot 430
of 500 crore
exchange crisis. These loans helped India to meet its foreign exchangeSDRs
to meet foreign
crisis.
(11) India-IMF Joint Training Institute: In July 2004, India and IMF Joint
Training Instrute
was started. This institute provides policy oriented trainingin economic and related areas.
The first training programme was held during July 2006. This training institute provices
training to Indian officials and officials of other nations.
In short, lndia has gained in many ways by being a member of IMF e.g.. (1) India has received hep
tocorrect its balance of paymentsdisequilibrium. (2)On account of its membership of the Fund, India ne
(3) India
also become amember of World Bank. As aresult, India has received large economic assistance.ffromthe
has also received technical assistance from the Fund. (4) India has received financial lassistance
pATAatonal
I Monetary Fund(MF)
433
event of any emergency. (5) India has a key
inthe role in the policy making of the
todia has an important
Qnsquenty place in Fund.
lME Now because of improvementinternational
Dtorof in our foreigneconomic
exchangefield. At present,
reserves, our India is an elected
government is not
akig
anyloansfromIME. Now India has paid back all the loans taken from IMF.

.EssayType Questions
What do you mean by IMF? Indicate the main objectives of IME Has
beneficial to India? its membership been
o Why was International Monetary Fund
objectives?
established? How far has it succeeded in achieving its
3 What are the objectives of IMF? How does it help a country
having adverse balance of
payments on current account? Explain its advantages to developing economies.
4 Examine the achievements and failures of IME
5 Explain the functions of IME How far has it been successful in discharging its
benefits India has received from membership of IMF? functions? What
6. Writea critical note on the working and achievements of International Monetary Fund.
7. Critically evaluate the functioning of International Monetary Fund.
.Short Answer Type Questions
1. What is IMF? Explain its main objectives.
2. What do you mean by Special Drawing Rights?
3. Explain four main functions of IMF
4. Write four main advantages of IMF to India.
5. Explain four major failures of IMF
6. Explain role of lMF inpromoting international trade.
I. Discuss the role of IMF in promoting international trade.
 the
Common thetuoInternationgl a has Presently, objective
was the of developed and the to to tor among
for bu that IMFhand, was
reconstruction are: is sector.
with aimsgiven been works
Bank developed
objective
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investment
conference
of the
institutions. Its private
1960 interest.1988. loans has It membership
a other
objective all World
be necessary (1) was Bank. It nations.
must of Initially, Its (ICSID):
was were--thewasdevelopment It all to in in to
time, These (|BRD):
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quarantee foreign
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economies therein. It and the 27th with of countries. foreign
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Agency disputes DC.
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189
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r balance advisory loan
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growth. free by of i
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 (ü) World Bank is changing approach from
its
lending, i.e., nowloans are

Termsand
service sector, etc.

Conditions
givento project-based
various sectors of
economy,lending to
viz., sector-based
439

"IBRD Loans:
of World Bank Lending agriculture, industry,
Repayment period 20 years
Interest rate including period of 5 years
LIBOR + 0.40 per grace
cent
[LIBOR - London (approx)
"IDALoans:
[IDA Interbank Offered Rate]
International
(Subsidiary of World Development Association
Repaymentperiod 35 Bank)]
years including grace
Interest rate Nil period of 10 years
Service charges 0.5 to 0.75 per cent of
Role of World loan.
I8. Bank in Promoting
Encouragement to
international
omotinginternational trade so
trade is one ofInternational
the
Trade
that prominent objective of world bank. It aims
bank in promoting world trade isstandard of living of global
discussed population can be at
raised. The role of
1) Loan for below:
Meeting Deficit in Balance of Payments:f balance of
country is in deficit then world bank
bank helps in provides concessional loan to suchpayments of a member
trade. maintainingequilibrium in BoP situation and thereby country. Thus,world
(2) Export Finance:
promotes international
Finance plays a
provide liberal credit to exporterscrucialfor
role in the
international trade. Almost all countries
financial institutions have been set up promoting exports. For this purpose, specialised
liberal finance toits exporters. World within all the nations, likein India,EXIM bank
Bank
financial institutions, i.e. World Bank lendsprovides refinancing provides
to these financial
facilities to these domestic
their lending capacity. institutions so as to enhance
(3) Loan for
Improving Trade
concessional credit to memberLogistics
in the Global Economy:
nations for infrastructural development World Bank provides
railways, airports, energy generation, warehouses, viz. roads, ports,
Intrastructural facilities constitute trade logistics and are basic telecommunication, etc. These
requirements for
trade. The weak infrastructure in the
developing nations is a big hurdle in international
International trade. World Bank provides liberal loans to member nations for the path of
tade logistics and thereby promote strengthening
(4) international trade.
Provi d es Statistical Data Related to Trade Research: World Bank undertakes
different research projects and it publishes their results in its own journals. World
theDevelopment Report' isa famous journal of World Bank. The member nations can analyse
economic and environment of member nations with the help of information
provided in publishedtrading
journals of world bank. The member nations can formulate better
foreign trade policies considering the information provided in these journals and thereby
promote internationalItrade, which in turn wil promote economic growth and development.
 SS
Assistance: World Bank has
Environment and
as istancIneternational Busines
440
Technical almostall provided technical
(5) professionalexpertguidanceto
countries have technical
received
advice from underdeveloped
the countries of in the

thewotd.Oficals
for Word form a
problems and making economic plans of
theirBank
many
various economic
the planned
economic
development of these
countries has
natio e
nsx.perts tor of
sohing
economic
development of these countries has promoted
Integrated Trade Solutlon: World Bank has
their become
foreign posibleC.onseThequentfyas,ter
trade.
(6) World Trade Solution' for promoting international
Integrated
developed a
trade amongsoftware named Wott
nations to have access to tariff
softwareenables member
non-tarif member
and
poiciviesznat., ofions.member, This
policy guidelines of world
nations. It also integrates theavailability
UNCTAD, etc. The easy
international trade among the member nations
(7) Settlement of
of trade related
lnternationalI Disputes: World Bank
econintegrated
helpsin
omicinsti uitnifoonrms,ation fadlitates IMF, WTO
among the member nations. It has set up an lnternational Centre
Investment Disputes'. It helps to establish
resolving foreconomic isputes
harmonious
relations
which is the basic requirement for internationaltrade. Inthe among
absence harmonimember
'Setlerment of
foreign trade cannot grow. of
ous nations relations,
(8) Growth and Development: World Bank provides concessional credit t
to
growth ofvarithese
oUs
sectors of member nations, especially the developing
nations.
sectors viz. agriculture, industry, tertiary sector promotes
The economic
Wortd Bank has given liberal credit for green international trade. For economic
revolution in
agricultural production and thereby promoted agricultural exportsndia which has promoted
of India.
example,
9. Evaluation
In more than 7 decades of its
existence, World Bank has achieved much success in the
its objectives, although it failed in certain
areas. Working of the World Bank can be fulfiment of
9.1 evaluated as under.
Success/Achievements
(1) Increase in
of World Bank
Capital: The bank has
increased its share capital by about 19succeeded admirably in
times. It has also addedenlarging
its capital. t has
securities. to its resources by seling
(2) Due Accordingly, bank's capacity to advance loans has
Attention to Developed and Underdeveloped increased tremendousy.
Tequrements of both developed and Countries: It has met the loan
the total loans
advanced by the bank,
underdeveloped countries with faimesscountries
and equity
Arica and other about 70 per cent loans have goneto of Asia,
bank has also underdeveloped countries for their economic development. In additon, the
(3) Loans for given large amounts of loans to
the member Productive Purposes: developed countries.
World Bank gives loans only for productive purposes to
countries. The
ports, iigation bank givesloans particularly for the development ofraiways,
(4) works, roads,
Technical Assistance: World generation, etc.
power
prmanyofes count
ionalrleiexpers havet quidance to almBankost alhasl underdevel
providedoped countrieassistance
technical s ofthe word.forOffsoving
cialsof
in the
formof

vaious economic received technical advice from the World Bank expertsConsequenty,
the planned developrobl pment emsofand for making economic plans of their nations.
these countries has become possible.
 Third Window Scheme:
(5) Loans given
underdeveloped countbyrieWorl
Association(|DA) to
deficiency, both these instifutions s d Bank and 441

a inadequateI.ntIn
Third Window inernatorder
ionalto Devel
were
providingsjointlyonfounded
been instrumentallin
of interest. The window has
loansa makeopment
up this
Sri Lanka, Ghana, Uganda, etc. availablelaloansrge-scaltoe manydeveloping countries wiatnlowdow has
made to 1975. This
(6) Coordination of Lending Activities of countries like India, rate
Pakistan,
World Bank coordinates the
lending Lenderof Countries and
institutions. World Bank
convenes their activities lender Other
ries toand Instotheritulending
tions:
different underdeveloped countries.
(7) Settlement of Disputes
meetings and promptscountthern advance to
among Nations: loans
settling mutuall economic World Bank has made
disputes among
between UK and United Arab nations. Indo-Pak river watersuccessful atternpts in
only through the mediation of Republic on the
World Bank. Fornationalisation of Suez Canal dispute and dispute
World Bank has set up an
International settlement of could be settled
Centre for foreign i nvest m ent
(8) Fight against Poverty:Through its
has undertaken various loans, advice andSettlement of
Investm ent Dis dies.sputes,.
put
standard in the programmes aimed at reducing
underdeveloped
technolo gi
poverty
cal assistance,
and
Word Bank
ensuring that countries. The global fight against improving living
d for their people everywhere in this world have achance poverty is aimed at
children. For eradicating poverty, for abetter lfe for
department in the year 1997
named World Bank has established athemseves
0 Aoriculture and
Rural "Department of Poverty Reduction'. separate
worldbank has set up Development:Fund
For promoting
agriculture and rural development,
International
fund, financial aid is provided for
to poor nations for Agriculture Development. From this
(10) Training: Bank agriculture development.
arranges training for officials of member
planning, development policies, countries in the areas of economic
agricultural research,
water management, major
irigation projects, railways,healthcare, power
etc. It has set upmanagement,
Development Institute for imparting training to officials of member Economic
01) Research: World Bank coutries.
undertakes different research projects and it publishes their results in
its own journals. World
Development Report is a famous journal of World Bank. This
intormation helps in economic planning and research projects of
) Financial Assistance to Welfare
member countries.
Institutions: World Bank has provided financial
dssistance world welfare institutions like UNICEF UNESCO, WHO, ILO, FAO, etc. Thus,
to
World Bank promotes welfare by funding these welfare institutions.
h
short,
ment of
World Bank has made a significant contribution to the reconstruction and economic
member countries.
92FaiIlunradequat
) es e WorldFinancialBank
of
needs According
meet the rising financial Help: to critics,
of the member
capital of World Bank is not suficientto
countries. The bank provides very little
2) financial assistance to the underdeveloped countries compared to their requirements.
towards rich and p0or
Dicountscrireism. inating
COuntries has
Behaviour: The treatment of the World Bank
inclined towards European
been discriminatory. The bank is more favourablyreceived comparatively less
On the underdeveloped countries have
Contrary,
 Business
442 Environment and

(3)
financial assistance. It has
countries.

High Rate of
not been much

Interest on Commercial
successful in eradicating
Credit: According to
Inpteorvnearitoynal romBusines
porx
World Bank has been very
high. Underdeveloped countries feel crtheitics, rate of
interest rates.
Policy: The Bank has a rigid loan policy. It takes
pinch tihneseterest
of
hic
ti
(4) Defective Loan more stresss on the repaying long time
fromit. The bank lays capacity of thel to
proper policy from the point of view of
underdeveloped
capacity enhances only after making the productive use of the
countries borrowing countheirrreycei.tivse
because
lbam
not
(5) Loans for Limited
Objectives: The bank gives loans only for limited funds.borrowed repajtn,
developed countries need loans for all-round
specific projects. They need such loans as can be
development.
utilized by
Their loans objectives.
need not be tiUndeedo.
them acCording to ther owm
priorities.
Foreign Currency: The condition of the
(6) Repayment of Loansin was taken earlier is hardbank to
the same foreign currency in which it to be repay the loanin
underdeveloped countries. Many atime, it becomes very difficult forthese by the
to rer
fulfil ed
countries
the loans in foreign currencies.
When loan is provided by bank, then
(7) Interference in Domestic Affairs:
are imposed by the World Bank on borrowing nation; like reduction in certain conditionsin
tariff, changes
domestic budget, interference in economic planning, management of public enterprises, etc.
This promotes unnecessary interference in domestic affairs of loan receiving co
But. despite the above shortcomings, World Bank has made a significant contribution in he
development of all the member countries.
10. India and World Bank
Monetary Fund. Indiais
India has been a founder member of World Bank along with International
establishment of the bank. The benefits that
one of those 44 countries who signed the initial draft for the
India has derived out of membership of World Bank are as follows:
beenamember of the Board of Executive Directors for many
(1) Increase in Status: India has
years. It adds to the status of India in the world.
World Bank for its development projects u
(2) Loans: India has received enough loans from billion. In year 2016-17 (1stJuky
was US$9.22
year 2011-12, World Bank's lending to India was US $ 2.31 billion. Indiaisthe
2016 to 30th June 2017), World Bank's lending to India around US $ 112.6 billionfromthe
ofthe
largest borrower of World Bank. India has borrowed development
for the Purchase
World Banktill June 2017. India has secured loans esspecially /4)
Irrigation Projects; (7)Coal
following projects: (1) Railways; (2) Power projects; (3) Thermal power
projects;
DevelopmentBank
ports; (6)
of aircraft by Air India; (5) Development of lassistancetoIndustrialTelecommunications
industry; (8) Tata Iron and Steel Co.; (9) Financial (20) projectand
of India, Industrial Credit and Investment Corporation ofIndia; Offshorepetrol2017. Word
(11) Water supply and sanitation; (12) Road construction; (13) on 30th
June
Commitment ofU5
etc. As
refineries; (14) Cement, rubber and electronic industry, total lending follows:
Bank had 105 active developmenttprojects in India with the years is
as
25.8 billion. The World Bank's lending to India in recent past
 Table 1. World
Yeari Bank's Lending to India
2006-07
2010-11
Lending by IBRD
1.50 Lending2.25by IDA (US $billion)
443

2011-12
2014-15
3.44
4.83 2.13 Total3.75Lending
2015-16
2016-17
2.10
2.82
4.39
1.69 5.57
1.78 1.03 9.22
3.79
Table 2. World (Source: World Bank Lending 0.533,85
Year 2 Bank's Active Projects in India with Database) 2.31
2006-07
No. of Active
Projects Total Total Lending
2010-11
2011-12
67 oaia Lending Commitment
(in US Commitment
2014-15
81
106
$bil ion)
14.3
2015-16 88 25.6
2016-17 93 28.7
105 27.0
28.3
World Bank is (Source: World Bank Projects 25.8
infrastructure, skillproviding liberal lending to India. This Database)
formation, lending is
environmental protection, etc. agricultural growth, health, supplyhelping India to improve
(3) Aid India Club or India of safe drinking water,
founded with the efforts of theDevelopment Forum: In August
foreign currency to India. World Bank with a view to 1950, Aid India Club was
Germany, Canada. The Club Among its members are providing financial assistance and
has given
Currency to India. In the year 1995, substantialcountrieslike
amount of
America,
loans in theEngland, Japan,
This forum this club was form of foreign
provides financial assistance for renamed as India Development Forum.
improving infrastructure and rural various developmental projects and for
9)
Mediation in Indo-Pak River Water development India.
of
Tivers of Punjab, serious dispute took place
a Dispute: On the matter of sharing of water of the
tothe problem, World between India and
ne negotiating table inBank acted as mediator. As a result, both thePakistan. find asolution
To
5) 1952 and in 1960 the dispute was countries were brought to
FacilitiGeneral
Bank. es for General Loans: India has
obtained
amicably settled.
Iloan refers to such loan as can be facilitiesfor rgeneral loans from the World
Special
the poorestHelp
and
for Poor States:
utilized by borrower as per iits own disCretion.
World Bank has framed aspecialIprogrammeto develop
Utar weakest states of India. World Bank has identified seven states - Bihar,
and
d Prproavidesdedh, special
Odisha, Chhatisgarh, Madhya Pradesh, Rajasthan Jharkhand
aid to these states.
and for this

AdInemvabentrageofts thefromWorldMembership of Associate Institutions of World Bank: As a

I1sne9cs5to6tritoutioncompani
0)
s.provideelsoInternational
Bank, India has benefitted from the membership of its associate
ans to the private sector of the member countries. So far many private
Finance Corporation: This corporation was set up in
of India have secured foreign currency loans through this
 Business
444
corporation. (ii) International Environment
|Development Association: ts
and
the objective of providing loans to poor
large amount of loans from this association
population control and development of roads. (iii)
countries on concessional ratewas
These loans are
In te rnation al Busines
mainly foIunndidaedihasn 960wiN
Agency: It was established in 1988 Its Multilateral meant tot dotaineta
countries. India became its member in
objective
1992. This
is to give
private investors and to encourage toreign investment in guarantee for
agency
the
has private sector\o Iprovidednvestmnent
ans
a
Gugi
aa
ra
of givenb
ut
nu
te
quarante deveoin
loans for lndia.
(8) Technical Assistance: World Bank has provided, from time to to mary
India for its varied projects. It has sent about 15 time.
expert
development projects in India,these experts gave their teams to lndia. After
valuable
technical as istance
to
surveyed different parts of the country and gave
several suggestions. as eSSingthe
World Bank has its resident representative at New Delhi.suggestions
Government of India regarding
government for various developmentaldevelopment
projects.
He has
projects. He provides
for
constant
useful
their Badnekvseeloxppmeretnst
liaison with the
(9) Population Control Assistance: World Bank has
given loans to
suggestions
to the
implementation of population control programme. India for efiectiye
(10) Help to Non-governmental
Organisations: World Bank has given
many non-governmental organisationss financial
activities are (i) National leprosy involved in public welfare activities. SomeIassioftstance to
development project, etc. elimination, (ii) Basic education project, (iü)themiRurain
(11) Human Development
health. In education, World Projects: World Bank is assisting India in promoting
Bank is assisting in project 'Sarva education and
providing vocational education. In health, World Shiksha Abhiyan and in
Bank is
combating diseases like tuberculosis, AIDS, etc. World providing financial assistancz in
improving rural drinking water supply and Bank is also providing funds ior
(12) E-Bharat Scheme: India has sanitation.
Bank for implementing National received concessional loan of 700 crore from the Wora
online services in the Governance Plan. This plan aims to provide easy actessu
government
approved setting up of 1,00,000 Common and social sector. Under this
scheme, governmen
SOCial sector services to citizens of Seryice Centres for delivering governnet
India. It is a plan in the
Criticism direction of e-governane.
Many decisions of the
afected Indian planning. In World Bank relating to India are criticised on various counts, like(1) Bankhas
Planning Commission. (2) Worlcertain
d situations World Bank unnecessarily interferes in the working ofot
multinational
(4) India's coporat ions. (3) It
Bank has promoted
was at Bank's foreign capital investment in India for the 1991.
benetit

dependence on
freedom. (5)to World Bank is Bank has been
World instance that India devalued its rupee
It has adversely affected India's
economic
in 1966and
According critics,these largely willresponsible forincreasing.
the Economic Reforms introduced in 1991in
India.
In short, critics reforms benefit
freedom of India. But inare of the viewthat the MNCs only. ofPoorWorldmassesBankwillhasnotendangered
from it.
gain economic
the
development of agriculturreality, membershi
India has gained p
e, industry, energy,roads,muchrailways,
from being the member of
the
World Bankfor
etc.