India must kick the World Bank habit

S. Venkitaramanan
Business Line, April 17, 2006

Withdrawing from the World Bank is the proper response to the hyperactive do-gooders at Washington, who are trying to mould the world's governments in their self-perceived perfect image.

Considering the Balance of Payments and the forex position, there is no need for India to borrow from the World Bank for any project. It only makes our management of forex reserves more difficult. It will be a happy separation too — for the World Bank of the bogey of improving the morals of poorer nations, and for the Government of the need to satisfy visiting missionaries from Washington.

Media reports talk about the Finance Minister, Mr P. Chidambaram, writing a letter to the World Bank President, Mr Paul Wolfowitz, not to delay the loan to India on the health projects. Apparently, the Bank has raised objections on grounds of alleged corruption in procurement practices.

That an external agency, the World Bank, is uncovering corruption in the Government is, no doubt, humiliating. It is appropriate that the Finance Minister should explain the position to the external interlocutor, however demeaning it may sound. The need to eliminate corruption is, of course, accepted by the Government and the facts may disclose that the perceived violations do not exist. But the more important question is: Should we continue to borrow from the World Bank?

Some time back, the NDA Government, in an act of rational exuberance, decided that India can do without aid from bilateral sources. At that time, it looked like a flamboyant gesture. But in a situation when the country has an apparent excess of forex reserves, it does seem justified to end what adds to the embarrassment of riches. The same argument could apply, with some modification, to borrowings from both the hard and soft windows of the World Bank.

NO NEED TO BORROW

It may be well worth the while for the Government to decide that considering the overall Balance of Payments situation, it has no need to borrow from the World Bank for any project, be it in infrastructure or other sectors. If forex is needed for infrastructure projects, it can be provided out of our own reserves. Funding can be organised in terms of rupee resources from our banks and financial institutions. It does not seem necessary to be bound by golden hoops to the World Bank. What would be the overall fiscal implication of such a decision to deny ourselves access to World Bank loans? The Government's receipts budget for 2006-07 shows that estimates of World Bank loans for 2006-07 are around Rs 3,882 crore (less than about $900 million) and from IDA (International Development Association) around Rs 4,584 crore ($1 billion).

Doing without this "aid" will mean that the Government will have to increase its borrowing from domestic sources by around Rs 10,000 crore. This is a blip in the context of a fiscal deficit of nearly Rs 10,00,000 crore, which is bridged by borrowals of various types

It will be a happy separation — for Mr Wolfowitz of the bogey of improving the morals of poorer nations, and for the Government of the need to satisfy visiting missionaries from Washington. Many of the Bank's expert missions derive more enlightenment from the discussions they hold in India than what they bring to the table.

SIGN OF PIQUE

True, it may appear that India by withdrawing from the loan window of World Bank/IDA is showing signs of pique that our external interlocutor is casting aspersions at India's standards of governance. The timing is, of course, to be decided by the Government. But, I feel, this is a proper response to the hyperactive do-gooders at Washington, who are trying to mould the world's governments in their self-perceived perfect image. It would save us a bundle of troubles if we act in time and do discontinue the dependence on the World Bank.

It is, of course, a fact that the World Bank has been a great supporter of India's development plans for the last five decades or more. During the initial period of planned development, India did receive the much needed BoP support from the World Bank . Indeed, the IDA was itself devised as a modus vivendi to channel soft loans to developing countries, chief among them being India. But the time has come to re-evaluate the situation and "graduate" out of World Bank aid.

END THE ADDICTION

Particularly is it necessary to explore why we should borrow dollars or yen or euros for financing what are essentially rupee expenditure in respect of health, education or poverty reduction. It only makes our management of forex reserves more difficult. Time was when we needed to plan on getting forex loans and aid for rupee expenditure. That was till the 1990s. Now that we are out of the forex constraints, it seems desirable to end our addiction to World Bank financing, say at least after the end of the current fiscal.

ERA OF INDEPENDENCE

Old habits die hard. The practice of posing projects to the World Bank is ingrained in the Indian bureaucracy, especially at the Centre. It is also significant attribute of such projects that their design owes a lot to consultants drawn from the Bank network. In a way, separation of India's finances from Bank loans would herald the beginning of independence from Bank-based consultants, a consummation devoutly to be wished for, not the least by some coalition partners.

It is significant that some newspapers also carried a story that the Government reportedly approached the European Union to give grants-in-aid to substitute for the disappearance or delay in World Bank aid.

This seems to have found a negative response in EU headquarters. Perhaps, this is all to the good. The less we depend on foreign governmental assistance for our health projects, the "healthier" will our economy be.

It is time we realised that we have come of age as a nation and economy and if we are to claim a place at the G-7/8 table, we cannot continue to depend on grants-in-aid or even soft loans from those we consider our near equals, at least in the not too distant future.

DISCIPLINE MECHANISM

The question that would remain after "kicking" the habit of Bank loans for projects and programmes is what is to be the substitute for the discipline that Bank intervention brought in respect of governance, procurement and evaluation. I would suggest that we explore the possibility of using IDFC as the constitutional vehicle for funding infrastructure projects.

The newly set up Infrastructural Finance Facility can also do the job. So far as the soft sector projects are concerned, the Planning Commission performs, or should perform, the role of supervision, monitoring and enforcement of proper standards of governance. There is need to make its role come out sharper in terms of judging whether the outcomes are as estimated at the start of the project. This is within its terms of reference, especially with a programme evaluation department functioning under its aegis in the Government.

To be sure, there will be howls of protest from those who will be unemployed in Washington if India "jumps ship," so to say. India's borrowings form a significant source of earnings and justification for the World Bank. It cannot strut about playing a role in poverty alleviation in the world at large if India is no longer a part of its clientele. But such is the destiny of all development institutions. They "grow" their clients so that they no longer need to be nursed with loans.

For these experts at 1818 H. Street, Washington D.C., who are rendered jobless as a result, we can only say "bad luck". All good things have to end — even poverty alleviation with assistance from rich countries. The sooner India takes care of these problems with its own resources, the better for India and the World Bank.