:: Jayati Ghosh

Why is India asking for $5bn from World Bank?

Jayati Ghosh

March.31 : The Government of India has in recent years been emphasising the newly developed global strength of the Indian economy. In the aftermath of the global financial crisis, various officials and government representatives have been at pains to reiterate that the Indian economy is currently far more resilient than almost all other economies in the world, both developed and developing. At the presentation of the last Budget of the UPA government, acting finance minister Pranab Mukherjee repeated in his speech that India has the second fastest GDP growth rate (after China) and then spent much time in a complacent recounting of the UPA government’s achievements since 2004, with almost no sense of urgency in dealing with what is clearly a rapidly deteriorating economy.

In fact, as almost anyone could have told him even then, the Indian economy is far from being in a comfortable situation at present. The real threat of deflation (evidenced in falling manufacturing prices) is being made more complex and difficult by continued increases in food prices, which affect food consumption and living standards of most of the population. It is already clear that most of the burden will be borne by those who did not really gain from the previous boom — workers and peasant whose real incomes barely increased even as national income grew at rapid rates.

The deceleration in output growth has translated very sharply and directly into employment losses, especially in labour-intensive export sectors, construction and some services. As a result many migrant workers are being forced to return home, often to poor and less developed areas with few economic opportunities. Farmers producing cash crops are being hit by the global collapse in crop prices. Meanwhile, retail food prices have not come down, so food consumption of the poor is adversely affected. Real — and sometimes even nominal — wages are falling and incomes of self-employed workers, who constitute more than half the workforce, are also under threat.

Small scale producers in all sectors are being squeezed by the pincer movement of falling demand and credit crunch. Investment projects are being curtailed by the liquidity trap conditions in which banks are willing to lend only to the most secure borrowers who, in turn, are unwilling to invest because of great uncertainty. State governments’ tax receipts have fallen and so they are increasingly strapped for cash and unable to meet even essential spending on basic public services that they are dominantly responsible for, not to mention development.

For a government that is shortly to face elections, all this should surely be of major concern. And the major party in the ruling coalition, the Congress, does indeed seem to be dimly aware of at least some of this — for example, that access to food is increasingly a problem for the bulk of the population. If it did not think so it would not have announced in its manifesto that it would provide food grain at Rs 3 per kilo to the poor through the public distribution system (PDS). Of course, the natural question in this context — what stopped them from doing this when they were in power all these years — is not one they are prone to answer.

But some of the recent moves of the UPA government may be even more startling than what they have not done. Thus far, the fiscal response to the crisis has been pathetic at best, with a tiny direct stimulus from the central government amounting to no more than 0.5 per cent of GDP, too much emphasis on tax cuts that are likely to have little effect, and in general strategies that are more indicative of wishful thinking than decisive action.

That is why the recent news that the Government of India has been actively seeking a large loan from the World Bank, of more than $5.6 billion in two years, comes as such a nasty surprise. The World Bank has already agreed to provide $3 billion, while the remaining amount is being negotiated. This is to be part of the total financing envelope of $14 billion proposed by the World Bank for 2009-2011.

Note that in 2008, India was already the largest recipient of funds from the International Development Agency (IDA), the soft-loan window of the World Bank, and the second-largest recipient of direct World Bank funds which come at interest rates slightly above the reigning interbank rates. Those who are familiar with World Bank lending will realise that the interest rates are the least expensive part of the deal, since the loans that span sectors including infrastructure, education, health and rural development typically also come with unpleasant and often anti-poor conditions such as higher user charges for utilities, enforced "public-private partnerships" that subsidise private providers at the cost of consumers and taxpayers, and the like.

What is this money for? Apparently the most recent World Bank loan is to help the Government of India (the same one that has been telling the Indian people that everything is under control and that we are doing much better than most others) to respond to the financial crisis! According to the World Bank website, the money is likely to be used to provide "a line of credit to the India Infrastructure Finance Company Limited (IIFCL) to help finance private-public partnerships in infrastructure; funding for the Small Industries Development Bank of India (SIDBI) to provide credit to small and medium enterprises; and assistance to PowerGrid to expand its transmission network. Other areas which could receive support from additional financing include the National Housing Bank and the recapitalisation of state banks".

The mystery is, why does the Government of India need a World Bank loan to do these things? The amount in question is around Rs 15,000 crore at current exchange rates, which is peanuts for a government that has just given away more than double that amount in tax cuts for corporate India. Why could it not simply print money to do this, as governments across the world are now doing with abandon? (The argument that it fears inflation is now laughable.)

World Bank loans are expensive, not only because they carry a market rate of interest but also because they have to be repaid in foreign exchange. All the areas of proposed investment are in non-tradeables, that is, in activities that will not generate any foreign exchange, even though the loans will be repaid in US dollars. With a rapidly depreciating rupee, this is not an idle concern.

Furthermore, as noted above, World Bank loans come with conditionalities that force governments (whether at Central or state level) to go in for more commercialisation and privatisation. Why would any government wish to tie its hands in this way?

There seems to be no obvious reason unless one supposes that this government actually wants to tie down the next government in terms of a particular strand of neo-liberal economic policy that has already been widely discredited globally. What a pity that the electorate is not being made aware of the implications of these apparently "harmless" measures.