The Indian Economy Overview

The World Bank and India

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The Bank-India Relations [1944-1994]

India's involvement with the World Bank dates back to its earliest days. India was one of the 17 countries which met in Atlantic City, USA in June 1944 to prepare the agenda for the Bretton Woods conference, and one of the 44 countries which signed the final Agreement that established the Bank. In fact, the name "International Bank for Reconstruction and Development" [IBRD] was first suggested by India to the drafting committee. The Indian delegation was led by Sir Jeremy Raisman, Finance Member of the Government of India and included Sir C. D. Deshmukh (Governor of the Reserve Bank of India, later to become India's Finance Minister), Sir Theodore Gregory (the first Economic Advisor to the Government of India), Sir R.K. Shanmukhan Chetty (later independent India's first Finance Minister), Mr. A.D. Shroff (one of the architects of the Bombay Plan) and Mr B.K. Madan (later India's Executive Director in IMF).The Bank lending to India started in 1949, when the first loan of $34 million was approved for the Indian Railways. The first decade of the Bank's lending to India (1949 - 1959) saw just about 20 loans for a total amount of $611 million. During the years 1960-69, overall lending to India from the Bank rose to $1.8 billion, about three times the level in the previous decade. Between 1970-79, there was a large increase in the absolute volume of IDA lending and the IDA share in total Bank assistance reached a high of 80% in this decade. However, in the 1980s, India's share in total IDA lending declined to 25% and was updated by the more expensive WB lending. The volume of the WB lending rose to $14.7 billion during 1980-89, almost 10 times the level of $1.5 billion in the previous decade.

50 Years : An Assessment

The aggregate of the Bank's lending in India in the last 45 years was approximately $42 billion. India is the single largest borrower of WB and IDA. India has claimed about 15% of total World Bank lending—9% of WB and 28% of IDA commitments.

The 50 years (1944-94) of relationship between the Bank and India clearly shows certain trends. In the early years of relationship, the Bank involvement was not direct and visible as compared to 1980s and 90s. In the initial years, the Bank closely collaborated with the more active USAID to force policy changes. In fact, an unholy alliance of USAID, the Bank, the IMF and Trans-national Corporations (TNCs) worked hand in hand to pursue economic changes. However, after the 80s, the Bank along with the IMF has started a direct and visible role in India's policy making.]

IBRD-IDA Nexus in India
Years IBRD IDA
1949-59 100 -
1960-69 27 73
1970-79 20 80
1980-89 62 38
1990-93 53 48
1949-93 51 49
Figures in % Source: The World Bank[1994]

Nevertheless, there has been continuity in the basic philosophy and ideology of the Bank over the past 50 years. The philosophy of diluting the basis of economic planning, dismantling of public sector, encourage-ment to private sector (both national and foreign), and greater emphasis to market forces has been forcefully articulating by the Bank since 1950s. The Bank has been proceeding in a methodically manner to force India to accept its philosophy.

The Bank created conditions so that the Planning Commission was relegated to the background in the late 1960s. During the oil shocks of 1973 and 1980, the Bank was able to push forward its ideology of market forces with great impetus. By 1990, the entire economic environment was made conducive for foreign capital to clay a leading role in tapping emerging markets of middle class consumers in India. And the foreign exchange crisis of 1991 provided the opportunities to the Bank to clinch this objective through structural adjustment program. The past 50 years of Bank operations in India clearly reveals that the Bank has exploited the foreign exchange crisis periods. So far, India has faced five major foreign exchange crisis (1957, 1966, 1973, 1980, 1991). In each crisis period, the Bank did not miss the opportunity to force its ideology on the government of India. In the following paras, we will understand in details how did this happen.

"The Bank welcomes the arrangements that have been made to associate foreign firms with the construction and operation of a large number of major undertakings, both in public and private sector."

Eugene Black, The World Bank President, 1957.

The Bank was influential in India's policy making right from the early years of Independence. In 1949, the Bank sent its first Mission to survey the potentialities of Indian economy. Following this, Prime Minister, Jawahar Lal Nehru submitted a special policy statement on foreign capital to Parliament on April 6, 1949. It remains the only document where the role and place of foreign capital in India is stated in explicit terms. It also marked a retreat from the Industrial Policy Statement of 1948. It included the following principles:

The above liberal principles towards foreign capital were fully implemented in the following year's (1949-50) budget. It provided depreciation allowances and income-tax exemption to a wide range of foreign companies. As a follow-up, in 1949-50, the Government fully abolished capital Gains Tax, while the Business Profits Tax, Personal Income-Tax and Super Tax were reduced in 1950-51 budget. All these concessions and commitments to foreign capital were incorporated into the Industrial Development Regulation Act, 1951.

Meanwhile, the World Bank began to intervene in Indian economic affairs in a significant manner. A second World Bank mission visited India in mid-50s. On the basis of its instructions to facilitate the close integration of private capital with foreign capital, the Nehru Government established the Industrial Credit and Investment Corporation of India (ICICI) in January 1955.

However, the Government announced the Industrial Policy in 1956. This policy was a major departure from the early industrial policy of 1948. While the 1948 statement had given private sector ten years to operate before being nationalized. The 1956 policy marked out the areas in which private sector could expand in an uninhibited manner.

Shortly thereafter, the Nehru government earnestly began to flout its own industrial policy. For instance, of the 17 industries listed in Schedule A of the Industrial Policy Resolution, "industries the future development of which will be the exclusive responsibility of the state (and in which) all new units will be set up only by the state", at least seven were opened to MNCs through joint ventures. Schedule B industries which according to 1956 Industrial Policy, were to be progressively state-owned, 12 industries were listed. Out of 12, private sector set up units in 9 industries.

Although the private sector also benefited from changes in the official policy the real beneficiaries were foreign companies. Foreign private capital flowed in larger volumes.

The form in which the World Bank wanted foreign capital to participate in the Indian economy was made clear when the Government had sought the Bank's assistance for financing the Rourkela Steel Plant in 1956. The Bank insisted that the German collaborators supplying technology should have more leverage than had been offered. The negotiations fell through and evidence suggests that the reason for the Indian government to adopt a strong position at that juncture was due to availability of adequate foreign exchange.


For further details contact:PIRG (Public Interest Research Group) 142, Maitri Apt, Plot No 28, Indraprastha Ext. Delhi 110092. India. Ph: 2432054 Fax: 2224233 email: kaval@pirg.unv.ernet.in


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