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Why India Pledged $10 Billion to IMF

Earlier this week, when India announced that it would pledge $10 billion to IMF, there was a lot of hue and cry about it. All armchair activists took to Facebook and vented their anger and doubted the wisdom of India’s PM. None of these people even bothered to check what the pledge actually meant. There was the usual vitriolic statements that, India being a poor country should not indulge in such foolhardy.I too was startled by this news, but I thought that it would be prudent on my part to check for the facts first, and then harp about it. So, here’s my understanding of the issue. Sometime in April ‘2009, our PM Dr.Manmohan Singh had stated that India would consider contributing to IMF based on its quota. Every country has a quota which is based on their relative size to global economy. Also, this IMF quota decides their voting power in crucial issues. In 2009, India had a quota of 1.89% which approximated to $6.23 billion. And in 2012 that has moved up to $8.74 billion.

Here’s a quick quote from IMF statement on ths issue:
“We warmly welcome pledges by our members to increase IMF resources by over $430 billion, almost doubling our lending capacity. This signals the strong resolve of the international community to secure global financial stability and put the world economic recovery on a sounder footing. These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed, and if drawn, will be refunded with interest”.

So, this makes it amply clear that its an interest bearing loan, and not an aid/donation/charity that has been thoughtlessly doled out. If it were an aid/donation, we wouldn’t be discussing about the amount being refunded with interest.

There is another statement which sounds the purpose of the pledged amount:
“These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed as a second line of defense after resources already available from quota and the existing New Arrangements to Borrow are substantially used. If drawn, they will be repaid with interest. The IMF is committed to assuring our members’ interests and resources are safeguarded”.

Another important point to note is that, India is not the only country that has pledged money to IMF. Japan tops the list with a pledge of $60 billion, while India, Brazil, Russia, Mexioc have each pledged $10 billion; while UK, Saudi Arabia and Korea have pledged $15 billion.

India has been a beneficiary of the IMF donations when they needed it the most during 1991 crisis. Now that we are sitting on forex reserves of $250 billion which is acting as a cushion against the downturn in current global economy, its time we support IMF’s cause.

 
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Posted by on July 4, 2012 in business, general

 

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