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India emerges as the seventh-largest shareholder in the World Bank Vital Breakthrough

Updated: May 15, 2010 10:45 am

India has a new rank in the World Bank charter. It has emerged as the 7th largest shareholder in the Bank, signaling a shift in economic power, something India has for long been lobbying for. At the latest IMF-World Bank meeting in Washington on April 25, a 3 per cent shift in voting rights got the approval of the Board. This helped India’s equity share grow from 2.77 per cent to 2.91 per cent, though way below China’s that jumped to the 3rd rank, next only to US and Japan. India’s shareholding in the Bank had been declining since the 1970s and this trend has been reversed for the first time in a generation.

            In recognition of the global economic changes that are taking place, the voting power of countries like India, China, Brazil, Indonesia, Mexico and Turkey has increased while that of some of the major European and other countries that have traditionally dominated international finance like UK, France, Germany, the Nordic and Benelux countries, Japan, Australia and Canada, has gone down. As a result of this change, India would go ahead of Russia, Canada, Australia, Italy and Saudi Arabia in voting power. These changes reflect the rapid growth of the Indian economy in the past decade and its rising economic weight in global affairs. The Bank has also agreed to review its shareholding five years hence and as India’s economy grows further, this should lead to a further improvement in India’s relative importance.

            Finance Secretary, Mr Ashok Chawla, led the Indian Delegation to the 2010 spring meetings of the World Bank and IMF. In his remarks at the DC meeting, he said “these changes are transformative in nature and will reposition the World Bank

Group in the international financial architecture. Taken collectively, they will strengthen the role the World Bank Group in being an effective multilateral instrument for eradicating poverty, supporting international efforts to manage global public goods, and most importantly, keeping it relevant in a dynamic world.”

            “We are taking momentous decisions today, decisions that will set the direction of this unique institution for many decades to come. Our decisions will ensure that the World Bank Group continues to play a lead role in eradicating poverty and fostering development globally, that its storehouse of knowledge and resources is put to best use. By giving the World Bank Group a new sense of purpose and direction with enhanced governance and strength, we will ensure that the vision of its founding fathers is fulfilled”, Chawla said.

            The IMF-World Bank Development Committee also agreed to raise the capital base of the Bank through a General Capital Increase. This increase is taking place after a gap of over 30 years. There is agreement to raise the authorised capital of the Bank by $ 58 billion with a paid in portion @ 6 per cent amounting to $ 3.5 billion. The Bank is restricted by its Articles to restrict its total outstanding loan commitments to its total authorised capital. As a result of the increase in demand for Bank assistance as a result of the crisis, it was likely that the Bank would have reached its Statutory Lending Limit in a few years. This would have constrained the Bank’s lending capacity and there would have been a decline in Bank assistance to countries.

            The increase in its capital base, along with the capital that would flow in as a result of the realignment in shareholding, would allow the Bank to lend an additional $ 86 billion. As one of the largest borrowers of the Bank, India also would be able to secure additional assistance from the Bank. The enhanced lending capacity would enable India to receive additional assistance to the extent of $ 710 billion in the coming years.

            There, however, is a view that the growth in the voting rights was a marginal one and would only offer some cosmetic leeway in administrative management at the Bank. A section of the economists is of the view that India should have been able to wrest greater increase in voting share. There is a merit in this argument, especially since Finance Minister Pranab Mukherjee, during his address at the earlier IMF board of governor meeting last year had pushed for much greater shift in voting rights for the developing economies led by India.

            Mukherjee in his address had said, “role of developing countries as drivers of future global economic growth needs to be recognised. Resistance to the overdue change will only detract from the legitimacy, credibility and effectiveness of these institutions. As a first step, the early ratification of the April 2008 package of quota reforms for the Fund is an urgent requirement. The next quota review should be completed by January 2011. To preserve the Fund as a quota-based institution, at the minimum there should be a doubling of quotas”.

            He had argued for parity in the vote shares of developed and developing countries would greatly enhance the legitimacy of the Fund. This can be achieved through a 7 to 8 per cent shift in quota shares. Even to achieve the shift of at least 5 per cent called for by the G 20 leaders in Pittsburgh, we would have to work beyond the current quota formula. Other aspects of governance reform should follow and flow from the quota rebalancing, Enhanced political engagement of Ministers in IMF related issues is best achieved through improvements in the functioning of the IMFC, he added.

            India had been lobbying for the chairs in the Executive Board to be redistributed on a more equitable basis amongst the regions of the world. Any changes to the size of the Board should protect the representation of developing countries, it had argued. It is against this backdrop that there is some amount of negativity, especially on what experts call a “marginal shift in voting rights”. There is also anguish on the fact that the next review would only take place five years from now. Government officials view the engagement with the World Bank as a “serious breakthrough” that would pave the way for getting India “soon what it deserved.”

By K Anjna

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