India and the IMF | International Trade | Economics

India is one of the founder members of the International Monetary Fund. It signed the IMF Agreement, on December 27, 1945. India’s subscription quota was the fifth largest until 1970. By virtue of it, this country had the power to appoint a permanent Executive Director on the Board of Executive Directors.

After May 1970, as the subscription quotas of Japan, Canada and Italy increased more than that of India; the latter ceased to hold the position of a permanent Executive Director of the IMF. In the subsequent revision of quota, India has continued to slip further and further.

Before November 11, 1992, India’s ranking was 12th. The quota in the IMF, and the voting power that is linked to it, depends on a nation’s economic strength judged by a variety of factors including the gross national product, foreign trade etc. In the revision of quota in November 1992, India slipped to the 13th position as the quota of Belgium rose above that of India. Before that revision of quota, the U.S.A., the U.K., Germany, France and Japan had held 18.45 percent, 6.38 percent, 5.56 percent, 4.62 percent and 4.35 percent of the quota respectively.

India’s quota was 2.27 percent of the total. Subsequent to November 1992 quota revision, the standing of the leading countries is the U.S.A., the U.K., Germany, France and Japan. Their respective quotas are 17.66 percent, 5.50 percent, 5.50 percent, 4.95 percent and 4.95 percent. After these countries come Saudi Arabia, Italy, Canada, Russia, the Netherlands, China, Belgium and India. India’s quota under the new dispensation is 3055 million SDR’s which is 2.05 percent of the total.

When India became the member of IMF, the par value of Indian rupee was fixed at 0.268601 gram of gold or 30.225 U.S. cents. After the devaluation of Indian rupee on 18th September 1949, its par value got reduced to 0.186621 gram of gold or 21.45 U.S. cents.

There was a further reduction in its par value to 0.118489 gram of gold or 13.33 U.S. cents after the devaluation of Indian rupee again on 6th June, 1966. Its par value declined further subsequent to the U.S. devaluation of dollar in May 1972. After the Second Amendment of the IMF Agreement, the exchange rate of the rupee has been floating like other currencies and it is presently linked to the Special Drawing Rights (SDR’s).

India has been one of the major beneficiaries of the IMF assistance. In order to deal with her balance of payments difficulties, she has sought assistance from the Fund from time to time. She has also been scrupulously meeting her repayment commitments. Between 1947 and 1955, India made two drawings from the IMF amounting to $ 100 million in order to tide over her balance of payments difficulties. Between 1957 and 1975, India made eight drawals from the Fund amounting to $ 1764 million. Between July 1978 and February 1981, India received a loan of 529.01 million SDR’s at the concessional rates under the IMF Trust Fund with the object of meeting its balance of payments deficit.

India had entered into an agreement with IMF for a loan of 5.6 billion dollars or Rs. 5220 crore in 1979. It was equivalent to 291 percent of India’s quota of SDR’s 1717.5 million. The loan was to be financed by the Fund partly from the borrowed resources. India started receiving this loan in installments beginning from November 1981.

Until April 1984, India had drawn 3.9 billion U.S. dollars, when she intimated to the IMF that she would not draw the remaining amount of the loan. India was afraid that the burden of servicing of this loan would be very heavy upon this country. Upto April 1982, the interest charged on the ordinary resources was 6.25 percent. In May 1982, it was raised to 6.6 percent.

In case of the borrowed funds, the rate of interest charged upto December 1983 was 13.33 percent. For the year ending April 1982, it was 14.65 percent. The repayment period for loans from IMF’s own resources was between 4 to 10 years and for the borrowed resources it was between 3-1/2 years to 7 years. The payment of interest and principal together were expected to reach the prohibitive level of 10 billion SDR’s.

Another reason, which made India not to avail of the remaining part of this loan, was the stiff conditionality clause attached to it. India was forced to make changes in her export, import, monetary and other policies as per the guidelines prescribed by the IMF at the time of sanctioning of the loan. This conditionality clause came to be severely criticized as the gross interference in the domestic economic affairs of the country by both Indian economists and political opponents of the government.

From 1990-91 onwards India has made substantial drawals from the IMF under one or the other facility. In 1990-91, besides the Reserve Tranche drawing (RT) of SDR 487 million equivalent to Rs. 1168 crores, India drew SDR 1269 million (equivalent to Rs. 3334 crores). Out of this, SDR 552 million or Rs. 1450 crores was as the First Credit Tranche (FCT) and SDR 717 million or Rs. 1884 crores as the Compensatory and Contingency Financing Facility (CCFF).

India made a 20 month standby arrangement with the Fund in October 1991 for a total loan of SDR 1656 million. In 1991-92, two installments worth SDR 270 million were drawn as the Upper Credit Tranche (UTC). In April-December 1992, SDR 924 million had been availed of, leaving a balance of SDR 462 million to be drawn till May 1993.

During 1993-94, India made a net drawal of $ 191 million. In the context of marked improvement in BOP, it was decided by the government not to approach the IMF for a medium Extended Fund Facility which has been earlier contemplated. After 1993-94, India did not make any net drawing from the IMF. On the contrary, it made repayments to the IMF amounting to 1143 million dollar in 1994-95, 1718 million dollar in 1995-96, 975 million dollar in 1996-97 and 618 million dollar in 1997-98.

During the last decade, India which was once a chronic borrower has now turned a creditor to the IMF. During 2003, it transferred 205 million SDR’s to the IMF for meeting the balance of payments needs of the least developed countries. The first transfer of SDR 5 million under India’s participation in IMF’s Financial Transactions Plan (FTP) was affected on May 7, 2003. The second transfer of SDR 200 million was made on June 17, 2003 making India a creditor to the IMF.

IMF made two SDR allocations to India- US $ 4.82 billion under the general allocation on 28th August 2009 and US $ 340 million under special allocations on 9th September 2009. In addition, RBI made a purchase of 200 metric tonnes of gold from the IMF in November 2009 under the IMF’s limited gold sales programme at the cost of US $ 6.7 billion as part of its foreign exchange reserves management programme. SDR allocations by IMF to India amounted to 5.96 billion U.S. dollars in 2012-13.

Apart from the availability of loan assistance to meet deficits in its balance of payments, India has benefitted in some other respects from the membership of the IMF.

Firstly, by virtue of India’s membership of the Fund, she is also a member of the IBRD or World Bank. From this institution, India has received long-term development assistance for various development projects. She has received the concessional assistance from the International Development Association (IDA) over the decades.

Secondly, the country has also been receiving the advisory help from the IMF under the Fund Surveillance Conditionality. The IMF teams of specialists exchange views with Indian officials on India’s BOP and exchange rate problems and suggest monetary, fiscal and other measures for resolving them.

Thirdly, the IMF has also been providing short- term training courses to Indian personnel on monetary, fiscal, banking, exchange and BOP policies through its Central Banking Service Department, the IMF Institute and Fiscal Affairs Department.

Thus, India has derived immense benefits from her membership of the IMF.

In May, 1993, the IMF ranked India as the world’s sixth largest economy. It is no doubt a positive development and allays to some extent the pessimism about the Indian economy. It, however, does not mean that the Indian economy has come into its own. That IMF ranking of India had resulted from the adoption of new method for calculating GDP by the IMF on the basis of the purchasing power of the local currency.

This is because the domestic currency commands higher purchasing power of goods and services produced cheap at low wages. A high rank in terms of the size of the economy, though cannot indicate greater well-being of the people in terms of nutrition, health, elementary education, housing and social harmony, yet it reflects a dynamic economic capability of a country.

The new ranking placed the Indian economy even above the economies of the United Kingdom, Canada, Italy, Australia, Spain and Brazil. The IMF endorsement of the view that India had been one of the largest economies in the world should not lead to any euphoria in view of the staggering economic problems faced by the country. It can, however, have some spin-off benefits in the form of larger foreign investment and trade flows. The foreign investors cannot easily overlook this development. Moreover, this recognition on the part of IMF can build up the confidence of Indian people in their economy.

In some quarters the view is also expressed that higher ranking to the Indian economy can entitle this country to claim its legitimate representation and clout in the international economic and other bodies. On the opposite, it is seen by some international experts as a political design by the industrialized West to deny India and China access to concessional aid flow and to mount pressure on them for opening up of their markets to the foreign goods.

The industrialized countries at present accord a high priority to the provision of concessional aid to East European countries, Russia and the least developed countries in Africa. In view of limited resources for concessional multilateral assistance and increase in the number of claimants, the prospects for concessional aid from the IMF and World Bank for India have been receding irrespective of the size of the Indian economy determined on the basis of the new IMF criteria. India has a strong case for receiving concessional aid.

It would be difficult for the lending institutions to overlook India’s under­development reflected by malnutrition, illiteracy, disease and non-availability of basic necessities to a large chunk of its population. They cannot also ignore that a high proportion of India’s population still subsists below the poverty line. Moreover, India’s record related to the repayment of international obligations and the utilisation of concessional economic aid for the economic and social development of the country has remained unblemished despite her enormous economic problems.