WORLD BANK (WB), RELATIONS WITH

WORLD BANK (WB), RELATIONS WITH India was one of the forty-four original signatories to the agreements reached at Bretton Woods that established the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). It was also one of the founding members of the International Finance Corporation (IFC) in 1956 and the International Development Association (IDA) in 1960. India later became a member of the Multilateral Investment Guarantee Agency in January 1994.

IBRD lending to Indian commenced in 1949 with a loan to the Indian railways; the first investment by the IFC in India took place in 1959, and by IDA in 1961 (a highway construction project). The World Bank has been India's largest source of external capital and, in turn, India has been the largest borrower from the World Bank, with loans accounting for 11.4 percent of total lending by June 2003. During this period, the World Bank had lent India a total of $60 billion in 441 projects, almost equally divided between the IBRD and the IDA, which constituted nearly 8 percent of IBRD lending and 20.7 percent of IDA lending. India's share of IFC loans has been somewhat less: $2.7 billion for 162 enterprises; 4.6 percent of total lending, including syndications.

During the 1950s, the IBRD was India's sole source of World Bank borrowings. By the end of the decade, India's mounting debt problems became an important factor in the launch of the IDA, the soft loan affiliate of the World Bank (WB) group. As India increasingly turned to a state-dominated economic model, the WB was skeptical, but mindful of the hypersensitivity of Indian policy makers, it refrained from overt criticism. These reservations notwithstanding, the imperatives of the cold war and India's pivotal position as a democratic role model for newly independent countries, distinct from Communist China, as well as the high quality of India's interlocutors ensured continuous support by the industrialized countries.

By the mid-1960s, India's economic problems were compounded by back-to-back failures of the monsoons. With the specter of famine looming, the WB mounted an ambitious mission in 1966 (in conjunction with the U.S. Agency for International Development [U.S. AID] and the IMF) to persuade India to undertake sweeping policy reforms. This attempt, popularly known as the "Bell mission," recommended both internal and external liberalization, currency devaluation, and a focus on agriculture. Except for agriculture (which was instigated by U.S. AID and even more by some Indians themselves), this highly visible attempt at policy reform by the WB proved to be a singular failure. The episode left a deep mark on both Indian policy makers and the WB. While the latter became much more deferential to India's sensibilities in the next two decades, Indian policy makers also became much more cautious in undertaking ambitious policy reforms.

By the end of the 1960s, the United States, until then India's largest source of external resources, sharply cut its bilateral aid program. Since then, the WB emerged as the most important source of official long-term finance. During the 1960s and 1970s, the IDA accounted for nearly three-fourths of all WB lending to India and, in turn, India was by far the largest recipient of IDA funds, accounting for more than two-fifths of all its lending. The subsequent decade, with China joining the WB in 1980 and accordingly entering its own claims to limited IDA resources, the worsening economic fortunes of Africa, and India's better performance, saw a sharp decline in India's share in IDA. Instead, its share of IBRD lending grew sharply in the 1980s, buoyed by its improving credit-worthiness and the Indian government's waning inhibitions with regard to non-concessional borrowing. Prior to the launch of the economic liberalization program in 1991, the WB accounted for nearly a third of India's long-term debt and 60 percent of official debt.

The share of WB debt in India's total external debt has been around a quarter since 1980. Non-concessional IBRD debt peaked at about 37 percent of total WB debt in 1990, in part due to faster repayment schedules of IBRD debt and a postliberalization drop in IBRD lending. The latter was the result of several factors: sanctions imposed after India conducted nuclear tests in 1998, which curbed new IBRD loans; the slow pace of policy reforms that reduced the supply of new loans in certain sectors; and mounting transaction costs of IBRD lending that reduced the demand for new loans in other sectors.

Despite India's salience in the WB's loan portfolio and the WB's importance in India's external borrowings, these financial flows were, in the aggregate, modest for India's economy, comprising less than 1 percent of gross national product and seldom more than a couple of dollars per capita. However, their relative importance has been greater in certain sectors and time periods. In particular, the WB has been one of India's most reliable sources of external financing when the country suffered balance of payments problems, such as in the 1960s, after the first and second oil shocks, and in 1990–1991.

Lending Portfolio

In its early decades, WB lending to India was largely in support of India's five-year plans that concentrated on infrastructure (railways, dams) and development finance companies. The heyday of WB lending to India was during the 1970s and 1980s. More than three-fourths of lending in this period was in energy, agriculture and rural development, and industry. In the 1970s, India's emphasis on agriculture and poverty rhetoric dovetailed well with the WB's own lending priorities. India's large size and its need for external capital also meshed well with the WB's emphasis on expanding lending volumes. With many of the WB's other poor borrowers plagued by political instability and weak administrative capacity, India offered a convenient sponge to absorb WB resources and meet its annual lending targets.

The early 1980s were pivotal years for the WB. Its greater emphasis on liberal economic policies, however, did not lead to any significant changes in its stance toward India. Even though, as the decade progressed, India's dirigiste economic policies were increasingly at odds with those espoused by the WB, India's standing as a valued customer of the IBRD grew. The outset of the debt crisis meant there were few large creditworthy borrowers in the IBRD's portfolio. Indeed, the WB even increased its overall lending volume for the industrial sector, with some of its largest loans to public sector manufacturing enterprises (e.g., $545 million in two loans to Indian Petrochemicals Limited), science and technology development, and sectoral and subsectoral industrial restructuring. The WB also continued to pour money into sectors with unsound policies and corrupt institutions, especially irrigation and power.

Near the end of the decade, India's bargaining position weakened as the strains in India's political and economic fabric became more pronounced. The absence of alternative sources to service India's external debt, coupled with the emergence of Eastern Europe as a region deserving of the WB's resources, altered the relationship. The WB pressed India to take more loans in social sectors, especially education and health, as well as to implement policy reforms, but was rebuffed.

The lending portfolio changed sharply after the 1991 macroeconomic crisis. In the immediate aftermath, India became one of the last important WB borrowers to partake of structural adjustment lending, which supported policy reforms in finance, taxation, and the investment and trade regime. With the abatement of the crisis, lending shifted away from public enterprises in electricity and irrigation to a focus on health and education. By the late 1980s, the WB had begun to warn India that its level of IDA lending would depend on its receptivity to loans in the social sectors. In the second half of the 1980s, the social sectors accounted for barely 7 percent of total WB lending. A decade later, between 1996 and 2000, they accounted for nearly a third of all lending. Communicable diseases (particularly HIV/AIDS and tuberculosis) emerged as a new focus of lending.

A second shift occurred in sharply reduced lending for "hard" infrastructure projects. In part, this was due to the decidedly lackluster outcomes in infrastructure sectors where the WB long had involvement, such as irrigation, railways, and power. The precipitating factor was the protracted controversy surrounding the WB's support of the massive Narmada irrigation project, which involved the construction of dams and irrigation canals and concomitant large-scale resettlement of displaced people. The project became a cause célèbre for international nongovernmental organizations (NGOs), thus forcing the WB to have its first ever external review of an ongoing project. The resulting report was strongly critical of the project's implications for displaced populations and the environment. The WB ceased disbursements in 1993, and eventually the Indian government simply canceled the loan in 1995. An important consequence was that the WB became much more risk averse with regard to infrastructure projects. Although infrastructure-related lending revived by the end of the 1990s (especially for roads), its attempts to implement innumerable safeguards multiplied transaction costs, dampening demand for such loans.

Another change occurred in the level of lending, with a greater focus on subnational lending through state-level adjustment loans. These loans sought to improve the fiscal health of states, by improving expenditure priorities and taxation. This shift was facilitated in part by the decision of the central government to give the states a greater share in external loans, unlike the past, when the money went into a central pool, and concerned states received only a marginal increase in additional resources. The WB's increasing poverty focus and its recognition that the locus of poverty-related policies and implementation was situated at the state level were additional factors.

The World Bank's Impact on India

As with any borrower, it is not easy to get a simple bottom line on the WB's effects on India. At the most fundamental level, it has contributed to augmenting India's foreign exchange resources and level of investment. Although most attention is placed on the transfer of resources (especially long-term concessional resources), these are just one element of a multifaceted relationship. Much of the WB's lending to India has been for investment projects, and it was through these projects that it played an active technical assistance role, improving the quality of engineering and training, propagating new technical doctrines (such as the Training and Visit system in agricultural extension), developing strategies to reduce the incidence of corruption, setting up organizational competencies, and so on. The WB nurtured and supported organizations that have emerged as some of India's strongest, be it in finance (Industrial Credit and Investment Corporation of India) or power (National Thermal Power Corporation, or NTPC). In other cases, as with the Indian railways, despite an extensive long-term commitment that spanned over four decades and loans totaling $1.5 billion (the most made by the WB to a single entity), the WB's influence on policies was limited, and it finally gave up. Similarly, although its lending to NTPC and Indian Farmers Fertilizers Cooperative built excellent organizational capabilities in the power and fertilizer sectors respectively, these were undermined by the inability to change the policy environment. While its protracted involvement in agriculture did produce some good results (such as in agriculture extension and the dairy sector), the substantial lending for irrigation and agricultural credit through National Bank for Agricultural and Rural Development produced few results.

For most of its history, the WB's project performance in India outperformed its global portfolio. However, and somewhat paradoxically, in recent years, even as India's growth rate accelerated, the performance of the WB's India portfolio fell below its global average. The mediocre project performance was particularly apparent in sectors like water supply, power, and environment, while social sectors and industry did better. There has also been a substantial opportunity cost of nonlending (especially in infrastructure), the result of increasing transaction costs in borrowing from the WB as a result of the "Christmas tree"–like profusion of lending criteria over the 1990s.

There are four areas in which the WB made important but less heralded contributions. First, externally it played an important role as an advocate for India and a coordinator of aid flows. It organized, and has since coordinated, the Aid India Consortium since 1958, the sole institutional mechanism coordinating official flows to India. The Aid India Consortium was renamed the India Development Forum in 1993, signaling that official flows had become less important for India, and thus the importance of this institution waned. The WB played a critical diplomatic role in settling a major dispute between India and Pakistan regarding the sharing of the waters of the Indus River, and the resulting Indus Water Treaty of 1960 has stood the test of time despite the fractious relationship between the two countries. In recent years, the WB (along with the Asian Development Bank) has attempted to build epistemic communities of policy makers in South Asia through conferences and workshops, which might also help build bridges across the region.

Second, the WB also frequently played an important coordinating role within India, both among central government agencies as well as between central government agencies and state governments. The lack of strong central coordinating mechanisms in India and the inevitable interagency rivalries of bureaucracies have meant that as an outsider with seemingly deep pockets, the WB has often been a constructive informal peacemaker, while advancing its own interests. Third, the WB has also acted as an "agency of restraint." The covenants and conditionalities in many of its loans—at times at the urging of its Indian counterparts—often helped limit welfare-reducing political discretion in areas such as procurement to tariffs and expenditure priorities. Of course, in some cases, these restraints also served to advance the interests of the institution's major shareholders.

Finally, the WB also provided India with a range of public goods, both directly from its own substantial research, as well as indirectly for agricultural research through the Consultative Group on International Agricultural Research system. Moreover, it played a socialization role as an ideas intermediary, helping push advances in knowledge from the mundane (bidding procedures) to the ideological, reflecting its intrinsic ethos and governance. It has been an important contributor to applied economics research in India, although for many years the government of India did not allow its reports to be publicly circulated. By not investing more in vernacular languages, the WB severely circumscribed the dissemination (and influence) of its intellectual products. On the other hand, an important mechanism that enhanced the diffusion of the WB's ideas was the number of Indian economic reformers who worked in the WB and then returned home. In fact, there have always been steady numbers of Indian civil servants working with or in the WB for short to medium periods, who collectively serve as a mechanism of influence.

Evaluating the Relationship

While many in India (especially on the left) have always been suspicious about the WB and its ideological baggage, the overall relationship between the WB and India has been characterized by symmetry and equality (despite some notable exceptions). The relationship was particularly symbiotic in the first quarter century. As the first history of the WB put it in 1971, "No country has been studied more by the World Bank than India, and it is no exaggeration to say that India has influenced the Bank as much as the Bank has influenced India." The reality has been that the WB has treated India more favorably than most other borrowers. The perceived sophistication of Indian policy makers, their ability to articulate programs (as distinct from their ability or willingness to implement them), and the caution that inevitably comes in dealing with a large country all played a role. India's democracy, the exigencies of the cold war, extreme poverty, and eloquent political and economic interlocutors long made India the best argument for foreign aid for many years. On the flip side, criticisms of India would have weakened the general case for development aid. India's assigned role as an aid showcase added to the constraints the WB felt in pressing India for policy change.

The WB's limited leverage were also due to the reality that its resources were quite modest relative to the size of Indian economy, whether that money was seen in per capita terms or as a percent of both total government expenditures and gross domestic investment. This insignificance was due to both demand and supply. On the demand side, India's economic policies always relied primarily on domestic resources. The rare episodes when this was not the case (such as the mid-1960s and 1990–1991) simply reaffirmed these policies subsequently. As for the supply side, the IBRD side of WB lending was limited by concerns over India's credit-worthiness. At the same time, IDA lending was both constrained by the IDA's own limited resources and by politically imposed limits on India's share of those same resources.

However, even within the confines of these limited resources, there were reasons internal to the WB that may have limited the institution's leverage. In particular, until well into the 1980s, the WB's anxiousness to commit the annual tranches of IDA availabilities by the end of each fiscal year frequently limited its leverage on Indian policy. A view that the foreign exchange gap and aid shortages contributed to India's growth also played into this. When it came to balancing lending against policy insistence the WB acted as if foreign exchange was critical and therefore untouchable. During the 1980s, while the WB shifted its emphasis to stress policy reforms and greater economic liberalization, it continued to lend to poorly governed public sector institutions in India and was muted in its criticism of India's closed economy. The WB itself admitted that throughout the 1980s its management did not address "India's disappointing policy record for fear of jeopardizing a strong lending relationship with a sensitive client." Internally, however, the WB's senior management had been concerned about India's policies and launched a series of collaborative reports with the Indian government on trade and industrial reform. These reports laid the groundwork for India's later policy reform agenda and were an important factor in the relatively smooth implementation of trade and industrial reforms in the early 1990s.

The WB's relationship with India has also been affected by India's federal system. As with other international organizations, its dealings were principally with the central government. Of course many of its projects were at the state level. However, selection of state projects was done largely on project and sector grounds, rather than on the basis of the overall policy stance of the state itself. WB loans were part of overall plan resources; hence a state with a WB project received only a small fraction of additional resources. And the central government's preoccupations—getting more foreign exchange—mattered little to state governments. Cash-strapped states therefore did not put a priority on their contributions of counterpart resources to WB projects, leading to projects delays and poor disbursement rates.

Changes in the 1990s led the WB to focus on state-level adjustment loans. This led to a paradox: even as the WB's overall resources became much less important for India, they became much more important for cash-strapped states, leading to an increase in the WB's influence. However, by 2004, outcomes in the three states where the WB focused its efforts—Andhra Pradesh, Karnataka, and Uttar Pradesh—were modest. Indeed, the WB's showcase, the Chandrababu Naidu–led government in Andhra Pradesh, performed poorly on the very fiscal criteria that had been the raison d'être of these loans, and its electoral defeat in 2004 dealt a blow to the WB's reform strategies.

Ultimately, the sheer size and complexity of India and its democratic polity means that there are limits to what any outside actor can do—for better or for worse. Both its critics and the WB itself give the institution too much importance. The dilemma faced by the WB is exemplified by its involvement with the notorious Narmada project or its cessation of lending to the Indian railways, or nonlending to states like Bihar. In the first case, although the WB earned the opprobrium of NGOs, much of the problems lay with the borrowers, especially the concerned state governments. The fact that WB financing was barely a fifth of overall cost reduced its leverage. As NGOs, who had been severely critical of the WB, realized after India canceled the loan in 1995, their actual targets were more vulnerable to pressure when there was external funding through the WB than when there was not. In the case of Indian railways or Bihar, the WB has struggled with two competing pressures—lend to sectors and regions where the need is greatest and potential economic and social rates are highest or lend to where implementation outcomes are likely to be most successful. In the past, well-intentioned efforts to stay engaged and try for incremental change have often simply exacerbated the problem. Perhaps the single biggest error the WB has made in India has been its failure to realize that nonlending might serve the country better.

Devesh Kapur

See alsoAsian Development Bank (ADB), Relations with ; International Monetary Fund (IMF), Relations with

BIBLIOGRAPHY

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Kapur, Devesh, John Lewis, and Richard Webb, eds. The World Bank: Its First Half Century, vol. 1: History. Washington, D.C.: Brookings Institution, 1997.

Lewis, John P. India's Political Economy: Governance and Reform. Delhi: Oxford University Press, 1995.

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World Bank. India: Country Assistance Evaluation. Washington, D.C., 2001.