International Monetary Fund (IMF), Relations with
INTERNATIONAL MONETARY FUND (IMF), RELATIONS WITH
INTERNATIONAL MONETARY FUND (IMF), RELATIONS WITH The Bretton Woods Conference was convened in 1944 for the purpose of formulating postwar currency plans, as a result of which the International Monetary Fund (IMF) was established. India, though not yet independent, was among the countries whose representatives attended the meeting, and it was therefore counted as one of the founding members of the IMF. India's special concern at the time was about the "embarrassing plentitude" of sterling balances and their multilateral settlement and the inclusion, among the purposes of the IMF, of a clause to assist in the fuller utilization of resources of underdeveloped countries. This concern was not appreciated by the Americans and the British on the ground that the problem of wartime balances was too large for the IMF to tackle, and the development of underdeveloped countries was the responsibility of the World Bank. However, as the deliberations of the conference proceeded, it was conceded that the sterling balances would be freely convertible after the transition period, and also that the Articles of Association governing the IMF would include the development of productive resources of all members as a primary objective of economic policy.
India, which became a formal member of the IMF in December 1945, played a significant role in its formation. Each member's contribution to IMF resources, called its "quota," was made partly in gold and U.S. dollars and partly in its own currency, determining its voting rights and the amount it could borrow in the event of need. The quotas are decided generally on the basis of a member's national income, foreign exchange reserves, and its importance in world trade, though political considerations also weigh heavily. In 1945 India's quota was fixed at U.S.$400 million—sixth largest after those of the United States, the United Kingdom, the Soviet Union, China, and France, which entitled those countries to be five permanent members of the Executive Board of the IMF. As the Soviet Union declined to join the IMF, India moved up to the fifth permanent seat on the Executive Board. The board, the main decision-making body, consisted initially of twelve members. IMF membership expanded from thirty in 1947 to 194 by 2004. India's quota has grown from special drawing rights (SDR) of 400 million in 1947 to SDR4.158 billion in October 2004, though it declined relatively, thereby depriving it of a permanent seat on the board. India has, however, retained membership on the board through biannual elections.
Despite India's junior status as a member of the IMF, it exercised considerable influence in shaping IMF policies, being one of the largest developing countries. This was evident by the role it played in the emergence of the SDR, an artificial device for the creation of international liquidity, the shortage of which was felt since the first half of the 1960s. India also, as a prominent member of the Group of Twenty-Four (a subgroup of the leading developing country members of the IMF) worked assiduously for safeguarding the interests of developing countries in the management of the international monetary system.
India's Use of Fund Resources
The year 1947, when the IMF commenced its operations as a provider of resources to members in need of balance of payments support, coincided with the emergence of India as an independent nation. In March 1948, when India's requirements of foreign exchange exceeded its own receipts, India borrowed from the IMF for the first time, SDR28 million, and again SDR72 million toward the end of the year. The impact of the increasing development activity was felt on the balance of payments during 1956–1957, which sharply deteriorated, and India was required to negotiate borrowing of SDR200 million under the "stand-by" arrangement—one of several kinds of borrowing arrangements of the IMF. India returned to the IMF again in July 1961 for borrowing an additional SDR250 million. The relief afforded by the use of IMF resources, however, was short-lived, and despite the policy measures taken by the Indian government, the reserves continued their downward slide, forcing India to approach the IMF again for a loan of SDR100 million. After an interval of a couple of years of trouble-free times, India resumed further borrowing of SDR237.5 million between March 1964 and March 1966. The stresses and strains arising from the unsustainable size of the plans, the misconceived policies of the government, and the drought of 1965–1966 aggravated India's balance of payments problems. This compelled India to seek a loan of SDR90 million from the IMF under a compensatory financing facility (CFF). Thus, the IMF played an important role, through its lending to India, in stabilizing the Indian economy between 1952 and 1970.
During the early part of the 1970s, the Indian external position was comfortable as a result of a commodity boom facilitated by the international currency realignment. But this respite lasted only for a year or two. With rising inflation, drought depleting food-grain stocks, and rising foreign debt servicing, India resorted to borrowing from the IMF. To begin with, it used the CFF because the conditionality associated with it was mild and less onerous. India was soon overwhelmed by the first oil price shock of 1974–1975, which led to a sharp worsening of its balance of payments. The foreign exchange outlay on oil imports rose to $1.3 billion in 1974–1975, from $625 million in 1973–1974. India had no other alternative than to resort to additional resources from the IMF. First, it used "gold tranche" (i.e., borrowing against its contribution in gold) for SDR76.2 million, and a first tranche of its quota of SDR235 million, called "credit tranche" for its less stringent conditions. But this was not enough to fill the gap in the balance of payments. India, therefore, borrowed $400 million under two special oil facilities of the IMF, specially designed to meet the emergency faced by the developing countries in the wake of an upsurge in oil prices. This meant that India had to follow severely restrictive fiscal and monetary policies to contain both inflation and worsening of the balance of payments position.
India adjusted well to the first oil crisis, and there was a favorable turn in the India's external accounts, with invisible receipts rising sharply. History, however, repeated itself again. In 1979–1980, inflation soared to 20 percent, and the external trade deficit widened sharply. India responded to this by first using the CFF for SDR266 million and then approached the IMF for an additional borrowing of SDR5 billion under the extended financing facility (EFF) arrangement. Intense debate, both at home and abroad, marked the negotiations. Within India, controversy centered around conditionality versus economic sovereignty, whereas criticism abroad revolved around the size and the need for such a massive purchase. In particular, the industrialized members of the IMF were averse to the loan, on the grounds that the adjustment program lacked specificity, the balance of payments need was not established, and the investment plan was more suitable for commercial bank financing than that from the IMF. Despite vehement opposition by prominent members of the board, the SDR5 billion loan was approved, which at that time was the largest commitment for the use of IMF resources in history. However, there was heavy criticism from within India of the IMF conditionality associated with the loan. The Indian government tried to weather the storm, by pleading that it was a case of voluntary adjustment through appropriate stabilization and liberalization measures, though it carried little conviction. Eventually, however, India purchased only SDR3.9 billion until April 1984, and requested cancellation of the remaining part of the arrangement.
The next milestone in the IMF-India relationship was in 1991 following the Gulf War, with an increase in oil prices and a generally adverse turn in global developments. India's foreign reserves dwindled and credit ratings lowered, prompting India to seek again IMF financing. The resources borrowed from the IMF, under standby arrangement, amounted to a total of SDR2.2 billion. With the help of these borrowings, India could ride over the grim balance of payments crisis and move onto the path of structural adjustment in the crucial areas of finance, privatization, dismantling of controls, and liberalization of imports. Treading its way cautiously but firmly, India took several radical measures in the areas of trade, industry, and the public sector, which radically transformed the structure and nature of the Indian economy, thereby placing it firmly on a trajectory of steady and rapid growth. For the first time during the history of the IMF-India relationship, for more than a decade India did not approach the IMF for financing. Notwithstanding frequent differences regarding the conditions underlying loans from the IMF, India's association with the IMF has worked, on the whole, to its benefit; it has helped India to turn its chronically vulnerable economy with acute foreign exchange shortages into a self-sustaining one, globally competitive with high growth, relative price stability, and burgeoning foreign exchange reserves. As a result of this growth, India in 2004 has become a net creditor to the IMF—that is, it lends to the latter more than it borrows. As a consequence, India now has a greater voice in the formulation of IMF policies and in restructuring the international monetary system.
Chandi J. Batliwala
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