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Lok Sabha TV Insights : BRICS’ New Development Bank and India

Lok Sabha TV Insights : BRICS’ New Development Bank and India

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08/07/2015

New Development Bank formally inaugurated its business yesterday as 7th BRICS summit was held in Ufa, Russia which was also attended by Finance Minister. Initial collective investment in bank is $50 billion and a ‘Contingency Reserve Fund’ is formed with $ 100 Billion. While investment in bank is equal by all member countries, China is major contributor to CRF. Banks Headquarters are at Shanghai and its first president (for 6 years) will be ex-ICICI Bank chief K.V. Kamath.

It is significant development for world economy in the face of Greek crisis. Bank’s main focus will be on member countries, yet it will be accessible to other countries as well. Summit also offered some help to Greece.

Bank seeks to cater to economic needs of its participants. China’s economy is in middle of transformation. With plummeting of global demand it is seeking access to new economies. China is exports led economy while India is domestic demand driven economy. Main reason behind is that in China, savings are substantially more than consumption, in India it is vice versa. In simple terms, money earned by people competes for savings or consumption. If a country (its people+ corporates & government) consumes more, than demand will be more, while if it saves more, than there will be more investment and hence more production of goods and services. As Chinese save/invest/produce more they are in desperate search of customers abroad. Indians, on the other hand, consumes more than they save/invest/produce, as a result they have to Import the excess, hence a market for the world.

This scenario fits perfect for New Development Bank. India is starving for investments in Infrastructure and China is having surplus investible FOREX reserves, which are more than $ 3500 Billion. India is a credible and reputed borrower and NDB will get reasonable returns. Borrowing this money directly from china, might have subverted some security considerations. But now it is channeled through a multilateral Institution, of which India is an important member and also with an Indian president.

However, Infrastructure in India is not marred just because of lack of investment. Lack of land availability is bigger problem. Recent development model relies excessively on Public Private Partnership, which needs to fulfil stringent conditions mandated by new land acquisition act. Passage of ordinance in Lok Sabha is crucial for removal of this hurdle. Because of lack of infra there is significant inter regional disparity in India. For instance, exports from Punjab costs at least 6% more than those from coastal states. Apart from Infra, bureaucratic red tape and environment licence raj are equally responsible. In case of non-addressing of these issues investment will not help, rather it will put additional interest cost burden without any returns. However, there are some indications of improvements across the sectors.

In some international circles, particularly western, BRICs bank is being seen as a challenge to Bretton wood Institutions. So far, these concerns appear to be misplaced. This bank seeks to just supplement what they are already doing, albeit with more transparency and participation. It’s strange that champions of free market are scoffing at competition. Nevertheless, formation and performance of NDB will compel them to think about reforms in these institutions.

‘Contingency Reserve Fund’ which holds $ 100 b will act as buffer for member economies in times of international or domestic distress. China’s contribution is $ 41b, South Africa’s is $5 b, other three countries contribute balance $ 54 equally. Violent instability in international economy since 2008 crisis has made developing economies much vulnerable. International funds are moving back and forth in economies on short term basis. As a result almost all currencies have touched new highs and lows during this short time. Programs like US quantitative easing and contraction are responsible for this, equally responsible are the fluctuation in policy/bank rates in the west. If in a short time India suffers huge outflow from its FOREX reserve (though we have more than sufficient now), so that it is not able to fulfil its payment obligation under current account (excess imports over exports), she will have to approach IMF. This outflow if any will also result in crash of rupee, making things worse. So, CRF hedges member countries against such risks.

Besides this, many in India are wary of relying excessively on China, because of its opaqueness. But there seems to be more complementarity than threat as has already been explained. Threat, if any, is to China on long term basis. India is just taking initial steps to improve its manufacturing sector. In case things go well, in few decades Indian products will start giving stiff competition to China’s. It may be a repeat of US- China story. However, this is a natural transition. As China’s per capita income moves to higher trajectory many businesses will be shut there and move to low cost economies. Also, more economic engagement results into entangled strategic and security interests, which results in global stability and prosperity.

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