A need arises to finance various projects in various countries to promote the development of economically backward regions. The United States and other countries have established a variety of development banks whose lending is directed to investments that would not otherwise be funded by private capital. The investments include dams, roads, communication systems, and other infrastructural projects whose economic benefits cannot be computed and/or captured by private investors, as well as projects, such as steel mills or chemical plants, whose value lies not only in the economic terms but also, significantly in the political and social advantages to the nation.
The loans generally are medium-term to long-term and carry concessional rates. Even though most lending is done directly to a government, this type of financing has two implications for the private sector. First, the projects require goods and services which corporations can produce. Secondly, by establishing an infrastructure, new investment opportunities become available for multinational corporations.
The World Bank or the International Bank for Reconstruction and Development (IBRD) was established in 1945 under the Bretton Woods Agreement of 1944. An International Monetary and Financial Conference was held at Bretton Woods, New Hampshire during July 1-22, 1944. The main purpose of the conference was finalisation of the Articles of Association of IMF and establishment of an institution for the reconstruction of the war shattered world economies. Thus, the conference has given birth to World Bank or International Bank for Reconstruction and Development (IBRD). World Bank was established to provide long-term assistance for the reconstruction and development of the economies of the member countries while IMF was established to provide short term assistance to correct the balance of payment disequilibrium.
There are the four basic objectives of the World Bank’s funding strategy:
a) To make sure availability of funds in the market.
b) To provide the funds at the lowest possible cost to the borrowers through appropriate currency mix of its borrowing and opting to borrow when interest rates are expected to rise.
c) To control volatility in net income and overall loan changes.
d) To provide an appropriate degree of maturity transformation between its lending and the borrowing. Maturity transformation depicts the Bank’s capacity to lend for longer period than it borrows.
Functions and objectives of World Bank
a) To assist in the reconstruction and development of the territories of its members by facilitating the investment of capital for productive purposes.
b) To promote private foreign investment by means of guarantee of participation in loans and other investments made by private investors and, when private capital is not available on reasonable terms, to make loans for productive purposes out of its own resources or from funds borrowed by it.
c) To promote the long term balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members.
d) To arrange loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent projects, large and small a like, will be dealt first.
India and the World Bank
India is the founder member of the Bank and held a permanent seat for number of years on its Board of Executive Directors. India is one of the largest receivers of assistance since 1949. Upto June 2002, cumulative lending’s of the World Bank to India amounted to $ 26.69 billion in 187 loans. The total amount borrowed by India from the World Bank and the IDA till June 2002 amounted to $ 58.54 billion in 434 loans. This amounted to 11.6 per cent of the total loans and credits approved by the World Bank groups. During 2001-02, India received $ 893 million from the World Bank accounting for 11.22 per cent of its total loans. India is helped by the World Bank in its planned economic development through granting loans, conducting field surveys, sending study terms and missions and through rendering expert advice. The Bank also provides training to Indian personnel at EDI. It also helped India to solve its river water dispute with Pakistan. The benefits desired by India from the World Bank are:
a) India has received a lot of assistance from the World Bank for its development projects.
b) Aid India Club was founded in 1950 by the efforts of the World Bank with a view to help India. This club is now called India Development Forum. This Forum had decided to give loans amounting to $ 600 crore to India for implementing its structural adjustment.
c) The bank’s role in solving the Indus water dispute between India and Pakistan has been invaluable.
d) General loans have also been granted by the World Bank to India, to be utilised as per its own discretion.
e) As a member of the World Bank, India has become the members of International Finance Corporation, International Development Association and Multilateral Investment Guarantee Agency also.
f) India has received technical assistance from time to time from the World Bank for its various projects. The Expert Team of the Bank has visited India and given valuable suggestions also.
g) The massive population of India has always created problems in the economic development of the country. World Bank has been helping India in the population control programmes and urban development. For this purpose loans amounting to $ 495 crore have also been given to India.
h) World Bank has been giving financial assistance to NGOs operating in India e.g. Leprosy Elimination, Education Projects, Child development service projects etc.
On the other hand, critics argue that the World Bank have endangered the economic freedom of India. The basic points of criticism are as follows:
a) The World Bank has laid a great deal of emphasis on measures of economic liberalisation and more free play of market forces.
b) A lot of stress has been laid on going very slow on the setting up of public sector enterprises including financial intermediaries and encouraging private sector.
c) India’s dependence on World Bank has been increasing which is adversely affecting its economic freedom.
d) The attitude of World Bank reflects the preference for free enterprise and a market oriented economy. It shows dissatisfaction with the general performance of economies which are based on planning and regulation. At different occasions the Bank has tried to undermine the Significance of our Planning Commission.
e) The devaluation of Indian rupee in 1966 and 1991 was done at the insistence of the World Bank only.
India’s main problem till now has been the government’s incapacity to act rightly, firmly and effectively in time, on account of being more emotional to set ideologies and compromising attitude to safeguard the political party’s interest more than the national interest.