In 2002, when Jaswant Singh became Finance Minister, swapping places with Yashwant Sinha, the latter, at a farewell meeting in North Block, told his officers that there would now be more of foreign policy in the Finance Ministry and perhaps more economic content in India’s foreign office. He was bang on. Soon afterward, Singh decided to stop accepting assistance from most countries barring the US, UK, Japan, Germany and the Russian Federation, besides the EU. The government announced it would repay bilateral credit to 15 countries aggregating $ 1.6 billion. The strategic shift was prompted by the government’s experience after the nuclear tests of 1998 and the Gujarat riots of 2002. Many donors stopped fresh aid, and indicated they would not support any Indian proposal to borrow from lenders such as the International Monetary Fund and World Bank.
As External Affairs Minister, Singh had met representatives of many of these countries, who had protested on both these occasions. Singh told senior officials in the Finance Ministry that he did not want to be lectured by relatively small countries offering assistance that wasn’t substantial. Thus representatives of 15 countries, including Norway and Australia, were informed that India was no longer accepting bilateral assistance. NGOs and autonomous institutions could instead be assisted directly. One European minister who protested was told that India could take care of its interests — Minister Singh had obviously been emboldened by the fact that by 2003, India’s foreign exchange reserves had topped $ 100 billion.
There was more signalling. India decided to prepay loans adding up to $ 3 billion to the World Bank and IMF in 2002-03, and then became a creditor to the IMF by providing funds — sending out the message that it was aspiring to be a player on the global stage. The government also insisted for a while that negotiations for loans be held in New Delhi rather than in Washington.
By that time, the economy was in much better shape than in 1979-80 and 1990-91, when India negotiated with the World Bank and IMF for assistance. In 1979, when the price of petroleum products almost doubled and Brazil, Mexico and South Africa ran into a balance of payments crisis, M Narasimham, India’s executive director on the board of the World Bank, suggested to Finance Minister R Venkataraman and Economic Affairs Secretary R N Malhotra that India should go to the IMF when it could still negotiate from a position of some strength. Prime Minister Indira Gandhi was worried about possible terms or conditions — and politically, there was fierce resistance from the Left, articulated by West Bengal Finance Minister Ashok Mitra.
Narasimham has recalled that India deliberately put a higher figure when it came to making a commitment on domestic credit creation — while settling, on foreign exchange rate management, for a statement that the government would follow a policy in consonance with its overall balance of payments objectives. The proposed $ 5 billion loan finally came through in 1982, when Pranab Mukherjee was Finance Minister — but the government didn’t go for the final tranche of over $ 1 billion as economic prospects improved. Narasimham called it self-imposed conditionalities.
In 1990, when India’s BoP situation started deteriorating, Deepak Nayyar, then Chief Economic Advisor, and C Rangarajan, an RBI Deputy Governor, were stranded midway through negotiations with multilateral agencies in Washington after the V P Singh government collapsed. Talks started again after the Chandra Shekhar government took over. The early tranches came in without stiff conditionalities, but stiffer terms had to be negotiated in 1991 when the crisis worsened.
In 2008, India had to drop a proposal to borrow after China objected to a Rs 11,000 crore loan to strengthen electricity distribution and transmission in Arunachal Pradesh and Sikkim.
India recently opposed conditions on environmental and social standards sought to be imposed by the Bank for lending. In the reckoning of the Ministry of Finance, such provisions would end up increasing the cost of doing business with the Bank. The transformation over the decades has been huge.