BRICS bank must ensure credibility: Rangarajan

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Chennai | Published: December 25, 2014 2:05:45 AM

The new development bank by the group of BRICS countries has to ensure that credibility...

The new development bank by the group of BRICS countries has to ensure that credibility of the institution remains high, as such the assessment should be proper and commercial viability of projects should be a major criterion while giving the loans, said C Rangarajan, chairman, Madras School of Economics and former chairman of the Prime Minister Economic Advisory Council (PMEAC), at an Assocham event in Chennai on Wednesday.

“It should be a bank of projects and not a bank of policies, it should ensure that the loans granted are commercially and economically viable and that will enable the new institution to be able to raise adequate funds from the market and utilise it for the purpose of lending to various institutions,” said Rangarajan while releasing a study titled ‘BRICS Development Bank — Prospects & Challenges’, conducted by the Assocham.

“We should welcome the setting up of the new development bank as it would fill an important vacuum, there is the need for additional institutions to provide infrastructure finance but the new institution will be able to play its role only if it establishes its credibility in the market,” Rangarajan said.

Stressing upon the need for additional institutions to meet the growing infrastructure needs of developing economies, he said, “BRICS Development Bank will be a supplemental institution to complement the existing efforts of multilateral and regional financial institutions.”

He said though the multilateral institutions like the IBRD (International Bank for Reconstruction and Development), ADB (Asian Development Bank), World Bank and IMF have played an important role in providing assistance to India but we need lot more of such institutes. “As far as the World Bank is concerned, India is almost reaching the limit in terms of the total amount of credit that can be given, therefore, there are more than one reason for the need for new institutions,” said Rangarajan.

He further said that in another 25 years, share of present developing economies in the global economy will be equal to share of developed economies because developed economies will at best grow at 2% whereas the minimum rate at which developing economies will grow will be 5%.

“Therefore, the share in the global output will change and unless the existing institutions respond to this and change the structure to reflect the changing times then I think there will always be a cry for new institutions to come up.”

He also said that the management structure of multilateral financial institutions like the IMF or the World Bank and even the regional development banks does not clearly reflect the changing structure of the global economy as BRICS nations have just 11% share in voting power in IMF, however, their share in global economy is almost 20% and in terms of PPP (purchasing power parity) their share is 27%.

India must seek balance outside China-led structures: Study

China having invested its huge foreign exchange reserves in different parts of the world, including in the developed nations, and coming as a crucial founding member of the BRICS-promoted New Development Bank, India has to position itself as an equally relevant voice and strike a balance outside China-led, or likely dominated, multilateral structures, a latest Assocham study has said.

The moot question, according to the study titled ‘BRICS Development Bank — Prospects & Challenges’, conducted by the Assocham, is: How should India place itself in the emerging world economic and political order with China’s overarching influence on the major levers of the global financial institutions and channels. “Obviously, India has to seek a balance outside China-led, or likely dominated, structures, while remaining a relevant voice within them,” said the study.

The New Development Bank (NDB), being created by leaders of the emerging economies — Brazil, Russia, India, China and South Africa (BRICS) — shall have an initial equity funding of $10 billion each. However, by its sheer financial muscle power of $ 3.8 trillion of foreign currency reserves, China wields influence over critical components of the major financial channels, noted the study.

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