India and the World Bank: The Politics of Aid and Influence

India and the World Bank: The Politics of Aid and Influence

by Jason A. Kirk

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'The World Bank needs India more than India needs it.' So goes an emerging consensus on both sides of the relationship between the Bank and its largest borrower. This book analyzes the politics of aid and influence. The Bank, struggling to remain relevant amid India’s recent rapid growth and expanding access to private capital, has been caught up in a complex federal politics of reform and development. India’s central government - far from being in retreat - has been the main driver of dramatic changes in the Bank’s assistance strategy, leading toward a focus at the sub-national state level.

Product Details

ISBN-13: 9780857284129
Publisher: Anthem Press
Publication date: 10/01/2011
Series: India and Asia in the Global Economy
Edition description: New Edition
Pages: 304
Product dimensions: 6.00(w) x 8.90(h) x 0.90(d)

About the Author

Jason A. Kirk completed his PhD with major fields in Comparative Politics and International Relations from the University of Pennsylvania in 2005. He currently works as Assistant Professor of Political Science at Elon University, North Carolina. His recent publications include 'Indian-Americans and the U.S.-India Nuclear Agreement: Consolidation of an Ethnic Lobby?', printed in the journal 'Foreign Policy Analysis'.

Read an Excerpt

India and the World Bank

The Politics of Aid and Influence

By Jason A. Kirk

Wimbledon Publishing Company

Copyright © 2011 Jason A. Kirk
All rights reserved.
ISBN: 978-0-85728-832-5



Policy was not "formulated." It was formed. It evolved. It resulted from events.

Leonard Rist, head of the World Bank's Economic Department, 1961

India was the Jewel in the Crown of the World Bank [...] The reputation of the Bank tended to be measured in terms of what it could do for India.

A senior World Bank official, ca. 1995 (Caufield 1996: 23)

The India Department has one job - to lend money to India. Of course, every country department pushes its own country, but for years, during the Cold War, India held a special position as the largest nonaligned democracy. The donor community treated it with kid gloves for years - and the India department still thinks that way.

A World Bank staff member, ca. 1995 (ibid., 23)

India has always been a reluctant partner.

Edwin Lim, World Bank Country Director for India, 1996-2002 (2005: 108)

India and the Bank have grown up together. Edward Mason and Robert Asher, in a history of the Bank's first three decades, say simply, "It is no exaggeration to say that India has influenced the Bank as much as the Bank has influenced India" (1973: 675). Catherine Caufield, writing in the mid-1990s, remarked of the then half-century that the Bank and India had traveled together, "As greater and greater sums of money passed between them, the Bank succeeded in putting its imprint on India, but India's imprint on the Bank is just as deep" (1996: 23). A more recent report by the Bank's own semi-independent Operations Evaluation Department (OED) puts it succinctly and incisively: "India was one of the Bank's founding members, is still one of the Bank's main borrowers, and has had a major influence on the Bank's understanding of development" (Zanini 2001: 9).

This chapter will discuss the evolution of the Bank-India relationship, from the Bank's origins and India's independence in the mid-1940s, until India's early-1990s embarkation on a course of economic liberalization. It is not a comprehensive history of the lender-client connection; the range of Bank activities relating to its largest cumulative borrower would provide enough material to fill many volumes. Rather, the approach here is thematic and episodic, focusing on key issues in Bank-India relations during different historical phases, and on critical junctures that pushed their association in new directions.

India's influence on the World Bank – on both its understanding of development, and on its organization and operations – comes through clearly in comprehensive histories of the institution (see for example Kapur et al. 1997; Mason and Asher 1973). Similarly, the general literature on India's political economy and development policies also makes clear both the importance and the limits of the Bank's role in the country (see for example Frankel 2005 [1978]; Panagariya 2008; Nayar 2001). Recently, Bank-sponsored studies, such as the OED report noted above, have focused directly on understanding the relationship with India (Zanini 2001).

But whereas the existing scholarly literature has emphasized either the Bank perspective or the Indian perspective on their exchanges, and the Bank's own analyses are meant to offer direct policy lessons for its operations, the purpose of this chapter is to show more generally what both Bank and borrower bring to the table, and how their partially overlapping but also divergent incentives have interacted to shape their relations over the years.

The Bank faces strong internal incentives – both ideational and material – to conduct itself with a special deference toward India. As one of the giants of the developing world, as the first major decolonization case, as a paradigmatic model of import substitution industrialization (ISI) and central planning when many development economists held a favorable regard for these approaches, and as a country that has remained democratic for almost its entire post-Independence history, India has occupied an incomparable position in the Bank's understanding of development and poverty reduction. At times, especially early on in their shared history and more recently during India's liberalization era, Bank and Indian views on economic policies have been fairly closely aligned. During other periods, especially from the mid-1960s through the 1980s, their perspectives diverged. What is remarkable about the divergent phase, however, is the Bank's reluctance to confront the Indian leadership, and its willingness to subordinate policy disagreements to the ongoing task of project lending in India, given the significant role of the country portfolio in sustaining the Bank's overall operations and subjective understanding of its own global relevance.

For its part, India has engaged the Bank from a complex and shifting combination of motivations, which have ranged from an idealistic view of the Bank as a servant and advocate for the developing countries, to an indifferent or even hostile reaction to the Bank's advice (especially when such counsel is seen as reflecting rich country pressures), to the instrumental utilization of the Bank's resources and technical authority to tip the balance in domestic political competition over the direction of India's economic policy. Only a few other large borrowers – China perhaps, or Brazil – are so consistently in command of their interactions with the Bank, and no other country has experienced the same depth of continual engagement with the Bank as India has.

The first part of the chapter examines the early years of the Bank-India relationship, when the Indian leadership became fixed in its view of an active role in the Bank's management and determined not to be a passive recipient of aid. In the 1950s, Bank assistance to India played a significant role in helping to underwrite the country's capital-intensive ISI strategy. During that decade, as the US Cold War doctrine of Containment expanded to focus increasingly on Asia, India came to be seen as strategically important and Western aid sustained it through repeated food and foreign exchange shortages. Rich countries supported the innovation of new institutions to meet India's needs, in particular the Aid-India Consortium and the International Development Association (IDA) under the World Bank's aegis.

But as India's food and foreign exchange problems persisted, and as its foreign policy of nonalignment sometimes shaded into criticisms of US policy and closer relations with Moscow, the donors took an increasingly critical view of India's Plan approach and sought to condition aid on significant agricultural, industrial, and trade policy reforms. In 1966, on the understanding that the Bank would arrange for continued balance of payments support and other assistance through the Consortium, India undertook the first devaluation of the rupee since 1949 amid considerable internal debate. When the devaluation proved politically explosive, India backtracked from other reforms – with the notable exception of agriculture – and embarked on a path of intensified state control over industry and trade through the 1970s.

In the wake of India's aborted liberalization, the World Bank found itself in a struggle it has been fighting, with only fleeting respites, ever since: a struggle to remain relevant to an Indian leadership determined to minimize the country's dependence on external assistance, and vigilant of its sovereignty in economic statecraft. The specific tactics employed by the Bank to curry favor with the Indian leadership have evolved over the subsequent decades; through the 1970s and 1980s, the Bank's operative principle was to lend India as much as possible, and to avoid any policy discussion that might turn contentious - even as the Bank's guiding philosophy and lending elsewhere evolved toward neoliberalism and structural adjustment.

In the early 1990s, the Bank engaged a more pro-market Indian leadership in a genuine reform dialogue while experimenting with new ways of targeting its lending portfolio. India's 1990 – 1 balance of payments crisis was even more serious than the situation a quarter century earlier had been, and this time the Indian government embarked on a much more comprehensive and elite-consensus-driven liberalization program. For a time, it looked as though the Bank would be closely involved in India's reforms, but after an initial run of three quick-disbursing Structural Adjustment Loans (SALs) in the early 1990s, the Indian leadership became more sensitive to the need to maintain a broad political consensus in favor of liberalization, India's politics became increasingly fragmented, and the government made it clear that it would follow its own pace on policy change.

For the Bank, the alternative to a major programmatic role in Indian policy-making historically has been a steady stream of investment projects (though the line between "project lending" and "program lending" often blurs). However, as India's liberalization has expanded its borrowing options, the Bank has had to work harder to retain its appeal to the Indian government, particularly with respect to large-scale infrastructure investment. The chapter will conclude with an examination of a critical case, the Sardar Sarovar scheme on India's Narmada River, which became one of the most controversial projects in the Bank's history after Indian and Western non governmental organizations (NGOs) called attention to significant social and environmental problems associated with it. The activists lobbied donor governments to pressure the Bank to commission an in-depth independent investigation, which resulted in a recommendation that the Bank reconsider its lending for the project. Ultimately, rather than submit to Bank pressure to address the resettlement and ecological problems, India withdrew its loan request and pressed ahead without the Bank's assistance.

In sum, this selective survey of the history shows how the basic problem of "relevance" – a word heard repeatedly in conversations with dozens of Bank staff in 2003 – 8 – has been a defining challenge in the Bank's relationship with its largest borrower. All of this experience would lead up to a profound sense of frustration and lack of direction on the Bank's part by the mid-1990s. The next chapters will show how the Bank has attempted to break out of this pattern through significant changes to its assistance strategy since that time.

The Early Years: An Era of Good Feelings

Though India was still three years away from Independence, it was an active participant at the 1944 Bretton Woods Conference, consistent with the internationalist goals of Jawaharlal Nehru and other leaders of the Indian independence movement. The Indian delegation sought to shape the Articles of Agreement of the IBRD and its sister institution, the IMF, in ways that would favor the interests of developing countries.

While its influence on the Fund was more limited, India did succeed in pressing for a specific reference to the needs of the "less developed countries" in the Bank's charter (Kapur et al. 1997: 60). New Delhi's delegates pushed to give "due regard" to the "fair representation to the nationals of member countries" in the organization's staff. This wording was rejected by the Anglo-American sponsors of the conference; in its place, the Bank's Articles of Agreement promised to give "due regard to the importance of recruiting personnel on as wide a geographical basis as possible," with the caveat that staffing would be "subject to the paramount importance of securing the highest standards of efficiency and technical competence." By 1971, India's contribution of 59 nationals to the Bank's professional staff was surpassed by only four countries - the US (370), Britain (198), France (88), and West Germany (77) (Mason and Asher 1973: 69).

India did not achieve all of its goals for the IBRD. At the inaugural meeting of the Board of Governors in Savannah, Georgia in early 1946, India backed Britain's John Maynard Keynes in the view that the Bank (and the Fund) should be located in New York, like the new UN General Assembly, so as not to be too closely associated with the capital of one nation. The American preference for locating the Bretton Woods institutions in Washington, DC - just blocks from the White House and US Treasury - prevailed (ibid., 37).

India scored a serendipitous victory at Bretton Woods by virtue of the smoldering tension between the Soviet Union and the West, as the United States and Britain took the lead in steering the conference agenda. Originally, the five member countries entitled to appoint an Executive Director (ED) were to have been the US, Britain, the Soviet Union, China, and France. When the Soviets declined to ratify the Bank's Articles, however, India moved into fifth place (ibid., 29). While the Executive Board has since expanded, and India's share power has declined, it retains effective control of an ED (who also represents several of its South Asian neighbors). Most importantly, its membership on the very first Board reinforced its leaders' belief that they had an important role to play in shaping the emerging international financial architecture. India has always seen itself as an active and important governing member of the World Bank, and not merely a "client."

For the first two decades (the mid-1940s to mid-1960s), the Bank's relationship with India was quite amiable. India's economic policies – import substitution industrialization, or ISI, with a heavy emphasis on state-owned enterprises in key "commanding heights" sectors such as heavy industry, railways, and energy – were generally supported by prevailing intellectual currents in the new field of development economics. India, the thinking went, needed external assistance as a supplement to domestic savings, to finance capital-intensive projects such as roads, power plants, and dams. This fit well with the Bank's own need to establish a strong credit rating for the bonds it offered on private capital markets, and to retain the confidence of the wealthy member countries that provided the guarantees behind its paper.

The early Bank was particularly interested in lending for specific projects, which, it sought to convince investors, would be sound investments. In 1949, the Bank's first loan to India – for a railways project – was preceded by a lengthy discussion in the Executive Board over whether it was "safe" to lend US$100 million to a developing country (ibid., 181). Still, the Bank's rich country members perceived loans for "brick-and-mortar" infrastructure projects as carrying lesser risks than lending to support a borrower's general development "program" or balance of payments. As Devesh Kapur, John P. Lewis, and Richard Webb explain, "Visibility, verifiability, and apparent productivity were the touchstones for projecting an image of supervised, controlled, safe 'quality' lending" (1997: 122). Roads, power plants, and dams were "tangible." But Lewis also suggests, "Some of the rationale for the bias in favor of projects was illusory: it was not, in fact, possible to insulate project performance from the national policy environment" (1993: 17).

India could generate plenty of projects. But India also desired the Bank's dollar-denominated loans as a source of precious foreign exchange for the import of capital goods – factory equipment and machine tools, for example – needed to establish self-sufficient industries. The Bank's "project focus," Indian officials felt, was "too rigid" and would not give India sufficient flexibility with respect to imports. B.K. Nehru, India's Commissioner General for Economic Affairs (and the nephew of Prime Minister Jawaharlal Nehru), complained to the Bank's Davidson Sommers at the time of the 1949 railways loan, "We're going to have to pick so many projects ... it will just take too damn long to get the total [lending volume] that we need." Sommers replied that so long as the Bank could formally dress up its loans as for particular projects, then for practical purposes India could consider the assistance as being "just as flexible as a balance of payments loan" (Kapur et al. 1997: 123).

Thus, from the very beginning, the Bank has sought to accommodate Indian needs and preferences, even as it has pursued its own agenda in order to shore up its finances and institutional viability. Reflecting on the Bank's early lending to developing countries, Kapur, Lewis, and Webb observe,

India was to become the Bank's steadiest and largest borrower. Impressed by the moral and intellectual qualities of India's leaders and civil service, the Bank developed an unusually respectful and constructive relationship with that country. Though most lending to India has taken the form of project loans, the Bank's supportive and respective attitude to the Indian government meant that, in effect, lending to India took on the characteristics of program lending (1997: 101).

Sub rosa, the possibility of sharper differences of opinion lurked. For example, when World Bank President Eugene Black (1949 – 63) first visited India in 1952, he was "vexed by what he considered India's doctrinaire and unrealistic discrimination against private capital and its unjustifiable preference for industrializing through investment in the public sector" (Mason and Asher 1973: 372). In 1956, he wrote to Indian finance minister T.T. Krishnamachari, "I have the distinct impression that the potentialities of private enterprise are commonly underestimated in India and that its operations are subjected to unnecessary restriction" (ibid., 372).


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Table of Contents

List of Illustrations; Acknowledgements; Understanding the Bond between the World Bank and its Largest Borrower; The First Half-Century: From Bretton Woods to India's Liberalization Era; Remaining Relevant: The World Bank's Strategy for an India of States; Reasserting Central Government Control, Reorienting Aid toward "Lagging States"; A Bittersweet "Graduation" from Aid: can IDA Hold on to India, and Will India Let It? Commencement: India's Changing Relationship to Global Development Assistance; Notes; Bibliography; Index

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From the Publisher

'This timely and empathetic but not uncritical policy analysis forcefully argues for an urgent debate within India over the continued need for concessional IDA funding - even as India graduates to middle-income status -  to serve the interests of India, particularly of its poor in the lagging states.' —Baldev Raj Nayar, Professor Emeritus, Department of Political Science, McGill University, and author of 'The Myth of the Shrinking State: Globalization and the State in India'

'This is an extraordinarily fine-grained, novel and careful study of India's fraught relationship with the World Bank. Without resorting to polemical claims and assertions, Jason Kirk has produced a measured, incisive and cogent assessment of the World Bank's role in India's development.' —Sumit Ganguly, Professor of Political Science, Director, India Studies Program and Rabindranath Tagore Chair in Indian Cultures and Civilizations, Indiana University, Bloomington

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