WASHINGTON: India has been joined by China and Brazil in prepaying loans totalling $7bn from the World Bank, putting it in the embarrassing position of having a huge net inflow of funds from developing countries.
To counter this, the World Bank has agreed in principle to greatly increase lending for infrastructure, a sector that can disburse billions fairly rapidly. This may put India in a position to negotiate large loans for railways, roads, water supply and urban infrastructure. For many years, the World Bank had reduced lending for infrastructure on the ground that the private sector can handle most of it. Experience in India and elsewhere has proved that notion to be vastly exaggerated.
The Indian delegation to the annual meeting of the World Bank and IMF on April 12 and 13 may get a formal commitment on increasing lending for infrastructure. At a recent strategy meeting to discuss next year’s budget, Bank President Wolfensohn gave an assurance to developing country representatives that lending for infrastructure would rise at least 25% next year.
India and China have got together to jointly press for such a shift in bank lending, and they represent half the developing world. So the Bank is willing to change. This is facilitated, no doubt, by the embarrassment of loan prepayment.
India badly needs to modernise its railways, which lack capacity and safety. The Golden Quadrilateral road project is nearing completion, and the next big step in this sector will be to build the north-south and east-west highways. Drinking water is becoming a serious problem, and many river barrages may be needed for that. Urban infrastructure is in a shambles, and sewerage is badly required to improve sanitation and reduce pollution.
In recent years a high proportion of the Bank’s lending has taken the form of adjustment lending. Often, this has represented emergency assistance for countries in balance of payments trouble. Adjustment lending in ‘01-02 was a record 64% total lending, against 38%, 42% and 63% in the preceding years.
Even in ‘01-02, repayment of principal and interest by borrowers exceeded fresh Bank disbursement. The reverse flow this year will be much higher. This is forcing the Bank to rethink its lending strategy.