India and the World Bank: A Quick Glance at a Symbiotic Relationship

Lakshya Bharadwaj
(Source: Business Standard)

The World Bank Group can be described as an intergovernmental body with a mission to “end extreme poverty and promote shared prosperity”. The organization is comprised of five component bodies – the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), International Development Association (IDA), and the International Center for Settlement of Investment Disputes (ICSID). A deeper study would examine and report the functioning of these branches, but given the nature of this article and platform, the focus in the coming paragraphs is on the historical relationship between India and the World Bank.

India was a founding member of the group and began receiving financial benefits in 1948, initiated by an investment by the Bank in the agricultural sector of the country. The first investment by the IFC came in 1959 and amounted to US$ 1.5 million. Over the last few decades, India has maintained a significant presence in both the functioning and the governance of the Bank with many Indians serving in key administrative positions across the globe.

As per 2017 data, India stood second in the list of countries who are the largest borrowers of World Bank funds. China came in first with a staggering US$2420 million in World Bank debt in 2017 alone, with India following close behind with a borrowed amount of US$1776 million. In 2017, the IBRD was funding 783 development projects in India and many more in 172 other countries. In June 2020, the Bank announced another major project – Strengthening Teaching-Learning and Results for States Program (STARS) – to aid development in the quality of school education in six Indian states. STARS is expected to cost $500 million and benefit some 250 million Indian school students.

While a first glance may indicate a noticeable amount of dependence in this relationship between India and the Bank, it truly is about “interdependence”. India has drawn funds from the Bank and used them to make strides, but the World Bank has also relied on India as a stable lending destination with a record of efficient uses of borrowed money. As N.K. Singh put it in 2005, India needs the World Bank, but the Bank needs India as much[i].

The Bank is essentially an international institution that operates on financing from rich member nations. Five countries hold the majority of shares in the World Bank and thus are able to appoint an Executive Director each for its governance. These member states are the U.S.A., the U.K., France, Germany, and Japan. Given the size and the public nature of the organization, it is in the best interests of the Bank to report successful projects. India happens to be a lending market which is not ravaged by destructive wars or undemocratic governance. Indian investments tend to have good returns and eventually provide the Bank with good results to show to stakeholders. This is the primary reason for which N.K. Singh points out the need the Bank has for India.

The history of the relationship between India and the Bank has not always been about successful projects. On the contrary, one of the projects funded by the World Bank in India faced criticism from environmentalists and other concerned citizens worried about displacement of communities. The Sardar Sarovar Dam was completed in July of 2017, built from funding provided by the World Bank in 1985. The US$450 million loan was intended for the construction of the dam on the Narmada River in Gujarat, a move protesters and activists decried as one that would displace 250,000 people. Construction began in 1985, and despite decades of protests from illustrious activists such as Medha Patkar, the government decided to finalize the project. The long-run economic success of the dam is yet to be measured, but the societal costs have evinced themselves already. This is one investment project that the World Bank may not report as “harmlessly” progressive for the economy.

The Sardar Sarovar Dam in Gujarat, India (Source: The Hindu Business)

As mentioned earlier, the World Bank favors India as a market for operations owing to the history of political stability and strong democratic foundations of the country. Nunnenkamp, Ohler, and Andres have affirmed through their research this desirable quality of the Indian market[ii]. However, their study published in Review of Development Economics also reveals less than ideal criteria that the Bank subscribes to while allocating money for projects in the country. Funding does not seem to follow merit, but rather follows a pragmatic plan. The World Bank tends to fund projects in geographic locations most likely to attract foreign investors. While this allocation of funds is free from local political influence, need-based allocation is limited to only certain sectors.

Despite the imperfect allocation of project funding in India, the Bank has been perceptive of the policy changes required to boost economic growth in the country. Bank officials and scholars frequently suggest measures that would help the country make the most out of loan money. Some of these suggestions include increasing efficiency of resource use, connecting villages to electricity, and shifting water allocation in a manner that ensures optimal use of water. Overall, the World Bank recommends investment in infrastructure to match the pace of growth in India.

Conclusions and Final Thoughts

As is evident from the examples and timeline presented in the previous paragraphs, the historical relationship between India and the World Bank has not been perfect. However, crediting this relationship for its relative success, India is still one of the best lending markets among all World Bank members. The World Bank seems to be driven in part by a multitude of business interests that originate in developed countries. While this detracts from the nonprofit image of the intergovernmental organization, it also creates real-world benefits for countries like India. Drawing foreign investors to India is objectively a desired policy for economic growth. As far as the unbalanced allocation of Bank resources are concerned, it is unfair to expect a periphery country to provide perfect circumstances for an organization influenced primarily by countries with advanced economies. The track record of World Bank operations in India could have been better, but even at the current level of efficiency of loans, it is hard to complain.

[i] J A Kirk, India and the World Bank: the politics of aid and influence (Anthem Press, 2010)

[ii] Nunnenkamp, Ohler, and Andres, “Need, Merit, and Politics in Multilateral Aid Allocation” (2005) Review of Development Economics

2 Responses

  1. In fact, World Bank choses it’s projects and then tries to sell that very project on its own terms.And is more than happy to dump it when things don’t go well.

  2. Absolutely wonderful analysis. There should be more on how both can go along in a better way making the relationship more meaningful.

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