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‘World Bank To Commit $5 Bn A Year To India’

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With a $5.2-billion commitment through its two arms — International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) — the World Bank Group hopes to widen its engagement with India in FY2014.  In an interview with BW | Businessworld, Onno Ruhl, country director, World Bank, talks about the bank’s priorities and why the formation of the New Development Bank by the BRICS countries (Brazil, Russia, India, China and South Africa) is a welcome move. Excerpts:

The World Bank’s commitments to India have shown a huge spike this year after a declining trend over the past three years. Why is it so?
It’s a combination of factors. The tapering of commitments happened through two windows of the World Bank — IBRD (which is normal financing from the bank, not concessional, though very cheap) and IDA (meant for poor countries). Due to India’s longstanding engagement with IBRD, and also due to a hike in lending after the global financial crisis in 2008, India was reaching the single-borrowing limit (which is the maximum exposure that the bank can take for one country for portfolio reasons). And, in the case of IDA, India was reaching the per capita income level where countries graduate out of IDA. So, there was a view that the World Bank would run out of money, if it was to engage with India.

That explains the decline. How did it increase?

The first thing we did was, in the context of IDA negotiations, make a special case for India receiving transitional support for three years. This arrangement was made based on the fact that one of the World Bank’s global goals is to eliminate extreme poverty, and one-third of the world’s poor live in India. It was a lengthy process, but it was successful and now the transitional support is available. As for the IBRD, two things happened. First, we made an arrangement with India on the possibility of extending a $4.3 billion additional facility. And, second, the bank increased the single-borrowing limit (for India) from $17.5 billion to $20 billion. Further, we went through a vigorous exercise of looking at the existing portfolio in India and made agreements to cancel some non-performing projects to free up capital for new commitments. So now, with capital freed up on all sides, commitments have increased. Going ahead, we will commit at least $4-5 billion every year.

Did the disbursement of funds also follow the same pattern?
The disbursement of funds follows a different set of dynamics. I found, when I came here two years ago, that things moved more slowly than in the past. India was always seen as one of the better performing clients of the World Bank, and it suddenly looked like one of the worst. We looked at what happened and found that in the response to the financial crisis, there was a lot of lending to showcase confidence and to signal that money was available. We analysed these projects and concluded that some of them were not well designed, as they were done in a hurry. For example, there was a line of credit to the Industrial Finance Corporation of India (IFCI), where we had committed $1.1 billion, but ended up cancelling $1 billion. The project wasn’t properly designed. So, we had a lot of discussions and the Department of Economic Affairs said it won’t negotiate any project if 30 per cent of contracts are not awarded at the time of negotiation. So today, when we negotiate and approve a project, money starts flowing; results will be seen on the ground (in terms of increased disbursement of funds).

You mentioned a review and reallocation of funds. What are the sectors that have been given more thrust now?
We have an agreement with the Department of Economic Affairs for focused work with low-income states (Bihar, Rajasthan, Jharkhand, Chhattisgarh, Orissa, the North-east, etc.) because that’s where the poor will benefit more from capacity-building. In terms of sectors, we have a wide range. We will continue our focus on education, healthcare, agriculture and rural development, and will continue to engage in core infrastructure, the flagship being the Eastern Dedicated Freight Corridor. We are trying to be active on the urban front, in renewable energy sectors and in the distribution of energy. 

Your thoughts on the New Development Bank announced by BRICS nations?
Infrastructure financing needs of the developing world are huge. Far bigger than what any multilateral development bank can ever hope to finance. So I think there are two drivers behind the BRICS bank. One, the realisation that more financing for infrastructure is needed and, therefore, the need for a new bank. That is welcome. There is no competition as far as I am concerned. None of us can finance all those needs. So, more players are welcome. Second,BRICS is emerging as a new superpower. This, I think, is good because countries that were once powerful are now less powerful, and the emerging ones are taking their place. Of course, the mechanisms behind existing multilateral financial institutions were built in a very different era. We are adjusting those mechanisms to the new reality. But it is a slow process. The BRICS bank want things done differently. I think that is absolutely fine. The World Bank will continue to exist even as the BRICS bank takes shape. Besides, I don’t see any reason why we should not work together.
The World Bank’s India development update is projecting a GDP growth of 6.7 per cent in 2014-15.  Why are you so bullish?

In a technical sense, there was no slowdown in India because growth never went below 4.5 per cent. I think there is an upside to that scenario for two simple reasons. One, the elections happened, and two, there is a government with a clear mandate. Everybody in India will agree that before the elections, one real issue was the perception that it is difficult for the government to be decisive because of the political situation. That problem is not there now. It has allowed the government to take some key decisions. My personal favourite will be GST (goods and services tax), which the government has indicated it will implement, as the measure will make India into a single market that will have tremendous impact. With a few more key policy decisions, the government can influence the overall level of confidence in the economy and its functioning. So, it’s not difficult to add a percentage point (to the government estimate of 5.7 per cent growth).

The World Bank’s Country Partnership Strategy 2013-17 supports poverty alleviation in low-income states. What more needs to be done?

We have a partnership strategy with every country because we need a framework which helps us decide which projects we should support. In that sense, a framework is needed. In India’s case, it is needed because the country is now in the middle-income segment and it needs 30 years of fast growth, 8 per cent or thereabouts, to lift it to a completely different level. And growth has to be inclusive enough to lift everybody above the Tendulkar line (poverty line). Here, there are two issues that we need to talk about. First, India has to keep re-inventing the sustainability of its growth. Two, if you want to pull people out of poverty, it is important to acknowledge that there are significant issues of exclusion (social, gender, etc.) in Indian society. 

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(This story was published in BW | Businessworld Issue Dated 06-10-2014)