Indian Economy, 5th edition (77 page)

The EPB functions under the Chairmanship of the Cabinet Secretary to provide policy and infrastructural support through greater coordination amongst concerned Ministries for boosting the growth of exports.

All Ministries directly connected with facilitating foreign trade are represented on the Board by their Secretaries. This includes Secretaries of Department of Commerce; Ministry of Finance; Department of Revenue; Department of Industrial Policy and Promotion; Ministry of Textiles; Department of Agriculture and Cooperation; Ministry of Civil Aviation; Ministry of Surface Transport.

Directorate General of Anti-Dumping
and Allied Duties (DGAD)

The formal set up of DGAD was established in April 1998 for carrying out investigations and to recommend, where required, under Customs Tariff Act, the amount of anti-dumping duty/countervailing duty on the identified articles which would be adequate to remove injury to the domestic industry. The Directorate General of Anti-Dumping and Allied Duties is headed by a designated authority of the level of Additional Secretary to the Government of India.

International Monetary
System

The international monetary system (IMS) refers to the customs, rules, instruments, facilities, and organisations facilitating international (external) payments. Sometimes the IMS is also referred to as an international monetary
order
or
regime.
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IMS can be classified according to the way in which exchange rates are determined (i.e., fixed currency regime, floating currency regime or managed exchange regime) and the form foreign reserves take (i.e., gold standard, a pure judiciary standard or a gold-exchange standard).

An IMS is considred good if it fulfills the following
two objectives
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in an impartial manner:

(i)
maximises the flow of foreign trade and foreign investments, and

(ii)
leads to an
equitable
distribution of the gains from trade among the nations of the world.

The evaluation of an IMS is done in terms of
adjustment, liquidity,
and
confidence
which it manages to weild.

Adjustment

It refers to the process by which the balance-of-payment (BoP) crises of the nations of the world (or the member nations) are corrected. A good IMS tries to minimise the cost of BoP and time for adjustment for the nations.

Liquidity

It refers to the amount of foreign currency reserves available to settle the BoP crises of the nations. A good IMS maintains as much foreign reserves to mitigate such crises of the nations without any inflationary pressures on the nations.

Confidence

It refers to the faith the nations of the world should show that the adjustment mechanism of the IMS is working adequately and that foreign reserves will retain their absolute and relative values. This confidence is based on the transparent knowledge information about the IMS.

Bretton Woods Development

As the powerful nations of the world were hopeful of a new and more stable world order with the emergence of the UNO, on the contrary, they were also anxious for a more homogenous world financial order, after the Second World War. The representatives of the USA, the UK and 42 other (total 44 countries) nations met at Bretton Woods, New Hampshire, USA in July 1944 to decide a new international monetary system (IMS). The International Monetary Fund (IMF) and the World Bank (with its first group-institution IBRD) were set up together—popularly called as the
Bretton Woods’ twins
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—both having their headquarters in Washington, DC, USA.

International Monetary Fund

The International Monetary Fund (IMF) came up in 1944 whose Articles came into force on the December 27, 1945 with the main functions as exchange rate regulation, purchasing short-term foreign currency liabilities of the member nations from around the world, allotting special drawing rights (SDRs) to the member nations and the most important one as the bailor to the member economies in the situation of any BoP crisis.

The
main functions
4
of the IMF are as given below:

(i)
to facilitate international monetary cooperation;

(ii)
to promote exchange rate stability and orderly exchange arrangements;

(iii)
to assist in the establishment of a multilateral system of payments and the elimination of foreign exchange restrictions; and

(iv)
to assist member countries by temporarily providing financial resources to correct maladjustment in their balance of payments (BoPs).

The Board of Governors of the IMF consists of one Governor and one Alternate Governor from each member country. For India, Finance Minister is the Ex-officio Governor while the RBI Governor is the Alternate Governor on the Board.

The day-to-day management of the IMF is carried out by the Managing Director who is Chairman
(currently, Ms Christine Lagarde)
of the Board of Executive Directors. Board of Executive Directors consists of 24 directors appointed/elected by member countries/group of countries – is the executive body of the IMF. India is represented at the IMF by an Executive Director (
currently Arvind Virmani
)
,
who also represents three other countries in India’s constituency – Bangladesh, Sri Lanks and Bhutan.

India’s Quota & Ranking

IMF reviews members’ quotas once in five years – last done in December 2010 – here, India consented for its quota increase. After this India’s quota (together with its 3 constituency countries) has increased to
2.75
per cent (from 2.44 per cent) and it has become the
8th
(from 11th) largest quota holding country among the
24
constituencies. In absolute terms, India’s quota has increased to SDR 13,114.4 million (from SDR 5,821.5 million) which is an increase of app. US $ 11.5 billion or Rs. 56,000 crore).While 25 per cent of the quota is to be paid in
cash
(i.e. in ‘Reserve’ currency), the balance 75 per cent can be paid in
securities
5
.

Once a member nation has signed the
EFF
(Extended Fund Facility) agreement with the IMF, borrowing
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can be done by the member nation – India signed this agreement in the fiscal 1981-82.
India has been borrowing
from the IMF due to critical balance of payment (BoP) situations – once between 1981-84 (SDR 3.9 billion) and next during 1991 (SDR 3.56 billion). All the loans taken from the IMF have been repaid. India is now a
contributor
to the IMF as it participates in the Financial Transactions Plan
(FTP)
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of the IMF since September 2002 – at this time India was in strong balance of payment situation and in a comfortable forex reserves position.

Current US/EU Financial Crises: Challenges regarding International Payments

The recent financial crises of the US and the EU nations have raised the questions of the challenges of international payments once again. At this crucial juncture, the world seems tossing the idea of a reserved currency for all international payments – as if the famous Keynesian idea of such a currency (Bancor) is going for a kind of revival. The
Bancor
was a supranational currency that John Maynard Keynes and E. F. Schumacher
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conceptualised in the years 1940-42 which the United Kingdom proposed to introduce after the Second World War. The proposed currency was, viz., be used in international trade as a unit of account within a multilateral barter clearing system, the
International Clearing Union
, which would also have to be founded. The Bancor was to be backed by barter and its value expressed in weight of gold. However, this British proposal could not prevail against the interests of the United States, which at the Bretton Woods conference established the U.S. dollar as world key currency. Milton Friedman
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the famous US economist insisted that Keynes’ theories were incorrect who believed that, ‘Inflation was highly destructive and that only monetary policy could control it and that monetary policy is a heavyweight instrument and cannot be used for short-term economic management.’

Since the outbreak of the financial crisis in 2008
Keynes’s proposal
has been revived – in a speech delivered in March 2009 entitled
Reform the International Monetary System,
Zhou Xiaochuan, the Governor of the People’s Bank of China called Keynes’s bancor approach
farsighted
and proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency as a response to the financial crisis of 2007–2010. He argued that a national currency was unsuitable as a global reserve currency because of the
Triffin dilemma
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- the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries’ demand for reserve currency
11
. A similar analysis was articulated in the Report of the United Nation’s
Experts on Reforms of the International Monetary and Financial System
12
as well as in a recent IMF’s study
13
.

World Bank

The
w
orld Bank (WB) Group today consists of
five
closely associated institutions propitiating the role of development in the member nations in different areas. A brief account is as follows
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:

1. IBRD

The International Bank for Reconstruction and Development is the oldest of the World Bank institutions which started functioning (1945) in the area of reconstruction of the war-ravaged regions (World War II) and later for the development of the middle-income and creditworthy poorer economies of the world. Human development
was the main focus of the developmental lending with a very low interest rate (1.55 per cent per annum)—the areas of focus being agriculture, irrigation, urban development, healthcare, family welfare, dairy development, etc. It commenced lending for India in 1949.

2. IDA

The International Development Agency (IDA) which is also known as the
soft window
of the WB was set up in 1960 with the basic aim of developing infrastructural support among the member nations, long-term lending for the development of economic services. Its loans, known as
credits
are extended mainly to economies with less than $895 per capita income. The credits are for a period of 35–40 years,
interest
-free, except for a small charge to cover administrative costs. Repayment begins after a 10-year grace period. There was no human angle to its lending. But now there remain no hard and fast differences between the purposes for the IBRD and IDA lending.

Every year developing nations make enough diplomatic attempts to carve out maximum loan disbursal for themselves. India had been the
biggest beneficiary
of the IDA support. The total support (IBRD + IDA) for India had been $ 91.81 billion till date
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.

3. IFC

The International
f
inance Corporation (IFC) was set up in 1956 which is also known as the
private arm
of the WB. It lends money to the private sector companies of its member nations. The interest rate charged is commercial but comparatively low. There are many attractive features of IFC’s lending. It finances and provides advice for private public ventures and projects in partnership with private investors and, through its advisory work, helps governments of the member nations to create conditions that stimulate the flow of both domestic and foreign private savings and investment.

It focuses on promoting economic development by encouraging the growth of productive enterprises and efficient capital markets in its member countries. It participates in an investment only when it can make a special contribution that complements the role of market investors (as a
f
oreign
f
inancial Investor (FFI). It also plays a catalytic role, stimulating and mobilising private investment in the developing world by demonstrating that investments there too can be profitable.

We have seen a great upsurge in the IFC investments in India which has undoubtedly strengthened the foreign investors’ confidence in the Indian economy.

4. MIGA

The Multilateral Investment Guarantee Agency (MIGA), set up in 1988 encourages foreign investment in developing economies by offering insurance (guarantees) to foreign private investors against loss caused by
non-commercial (i.e. political) risks
,
such as currency transfer, expropriation, war and civil disturbance. It also provides technical assistance to help countries disseminate information on investment opportunities.

5. ICSID

The International Centre for Settlement of Investment Disputes (ICSID), set up in 1966 is an investment dispute settlement body whose decisions are binding on the parties. It was established under the 1966
Convention on the Settlement of Investment Disputes between States and Nationals of Other States.
Though recourse to the centre is voluntary, but once the parties have agreed to arbitration, they cannot withdraw their consent unilaterally. It settles the investment disputes arising between the investing foreign companies and the host countries where the investments have been done.

India is not its member (that is why the Enron issue was out of its preview). It is believed that being signatory to it encourages the foreign investment flows into an economy but risks independent sovereign decisions, too.

BIPA

As part of the Economic Reforms Programme initiated in 1991, the foreign investment policy of the Government of India was liberalised and negotiations undertaken with a number of countries to enter into
Bilateral Investment Promotion & Protection Agreement (BIPAs)
in order to
promote and protect on reciprocal basis investment of the investors
. Government of India have, so far,
(as by July 2012)
signed BIPAs with 82 countries out of which 72 BIPAs have already come into force and the remaining agreements are in the process of being enforced.
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In addition, agreements have also been finalised and/or being negotiated with a number of other countries.

The
objective
of the BIPA is to promote and protect the interests of investors of either country in the territory of other country. Such agreements increase the comfort level of the investors by assuring a minimum standard of treatment in all matters and provides for justifiability of disputes with the host country
(it should be noted here that India is not a member of the World Bank group’s body, the ICSID, serving the same purpose. BIPA is India’s version. While the former is a multilateral body, the latter is a bilateral one).