With emerging economies showing significant growth during the global recession, the big shift in economic power to South countries is becoming visible. For India two decades after liberalisation, one of the biggest (and relatively unsung) shifts has been that she has turned into a lender country to the IMF.
India invested $10 billion from RBI?s reserves which went into buying IMF notes in March 2010 and therefore finally became a lender to the IMF, reversing a twenty year old situation. And over the next few weeks, the Cabinet is set to clear another $4 billion towards buying more IMF notes.
Late last year and in early 2010, India actually was a lender to the Fund, and not a borrower?a huge leap from the years when indebtedness was knocking at its doors in 1990-1 and among the less talked about but stellar changes in the two decades of globalisation India is completing.
Says KP Geethakrishnan, former finance secretary and India?s representative at the IMF in the 1990s, ?A lot needs to change for a substantive shift but we were on bended knees when we went to the IMF for a loan in 1989-90, if we had defaulted on our payments, we would have suffered a huge crisis like Russia did or Indonesia did after their defaulting led to their currencies going into a tailspin. So from that point of view, its a very big psychological boost.?
Sources say the lending to the IMF will have no impact on the fiscal situation, and will come out of the ample foreign reserves India now has. ?It is not a real debt and the net debt of the country is not going to rise. Under the accrual-based accounting which the central bank follows, it is merely swapping its rupee assets with dollar assets with little monetary impact,? said JP Morgan?s chief economist Jahangir Aziz. Had the lending to IMF been from government accounts (which is what most countries are doing to meet their commitment to improve the IMF?s resources and India had also initially planned in Budget 2008-09) it would have had a cash implication and immediately impacted the fisc while there?s already a big deficit. This is averted through an accounting transfer between the government and RBI, Aziz said.
Switching from the US treasuries to IMF bonds would have little immediate impact even on RBI?s gross reserves.
Of course, if the treasuries become more valuable than IMF loans, then mark-to market losses could arise.
Interestingly, even in the new Arrangements to Borrow (NAB) which refers to a newer fund to ?forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation which threatens the stability of the system? the share of the four BRIC countries is slated to go up significantly. Their combined share could rise to as much as 15%.
However, India is keen to push ahead with increasing the vote share it has outside the NAB, as that is where the power is. The process of calculating quota shares at the IMF is complicated and there are five different formulas the country can opt for. However, given the remit of the IMF to push for ?open? economies, it has been the view of emerging economies, that the newly liberalising but small European economies have been able to pull shares for themselves which are much more than what their weight would command internationally. This inbuilt bias towards small countries came up even before the financial crisis had hit home, in an IMF meeting held in 2006 in Singapore, when a decision was taken to grant greater shares to ?under-represented? countries like Mexico, Turkey, China and South Korea. Even then, India, had argued that it was unfair that because of greater weightage to ?openness?, countries like Belgium and Netherlands had a share, greater than India?s ? in effect, emphasizing ?openness? ignored countries like India which had large domestic markets, and did not need to be ?open? to have a large share in the world economy.
This argument, where India, Brazil, Argentine and Egypt among others argued for a change in the ?formula? was accepted and a two year deadline was set to make the playing field more even.
In 2008, when the financial crisis hit home, the point was underscored, that emerging economies, relatively insulated from the crisis would have to have a greater role in the international financial order, and for that, the ?quota share? in the IMF would have to go up.