The Relationship Between India and the International Monetary Fund

Topics: International Monetary Fund, Monetary policy, Inflation Pages: 8 (2697 words) Published: July 9, 2012
India & IMF Relations:
A Brief History

India joined International Monetary Fund (IMF) on 27 December, 1945. The relationship between India and the IMF dates back to the time when India needed economic reform packages to strengthen its international reputation and fiscal policy. It is among one of the developing economies that effectively employed the various Fund programmes to fortify its fiscal structure. Through productive engagement with the IMF, India formulated a consistent approach to expand domestic and global assistance for economic reforms. Whenever India underwent balance of payments crises, it sought the help of IMF and in turn the internationally recognized reserve willingly helped India to overcome the difficulties.

The relationship between India and IMF provides us a model by which we can observe the influence of emerging economy on the institutional evolution of the fund. In this section we have attempted to analyze the relationship of India with IMF in the 1960’s and the relationship shared in the mid 1980’s.

It has not always shared a cordial relationship with IMF. In the mid-1960s, India’s relations with the USA, IMF, and World Bank were strained after an attempt by these institutions to exert ‘leverage’ over Indian economic policies was exposed. By the late 1970s, the GOI charted a new course in its interaction with the IMF. In 1981, India was awarded the largest IMF loan to a developing country up to that time.

In the mid 1960’s when India was running short of food supply it had approached the United States of America for support. After 1965 the U.S. administration began its short tether policy whereby food aid was approved to India on month to month basis. Indira Gandhi elected Prime Minister of India in mid 1960’s had travelled to US for bargain of better terms with U.S. on food supply. U.S. administration then had bargained for economic reforms and currency devaluation based on its internal assessment. The US pressure for reforms came at a time when the Indian economy was approaching a serious crisis.

India’s economic condition was a concern as foreign exchange reserves had fallen below $500 million from a high of $1.87 billion a decade earlier. In March 1965, the Reserve Bank of India had only $29 million above the legally required currency cover for imports. In its desperation, the Government of India substantially increased duties on imports from 10 per cent in February 1965, to 13 per cent by August of the same year in an effort to manage consumer demand and increase revenue in order to pay for imports of food and military equipment. In order to stimulate exports, which had not shown any increase for two years, the import tariff regulations were riddled with exceptions to permit export oriented Indian firms to import raw materials at a lower cost. Major export firms in the tea and jute industries were given large tax credits to export their products. The tangled tariff regime thus created multiple effective exchange rates. Despite these efforts, the tariff regime had a constrictive effect on the economy and particularly the industrial sector, pushing the economy deeper into crisis. In terms of debt, India already owed the IMF roughly $200 million from stand-by arrangements taken in 1961 and 1962. In 1965, India borrowed another $200 million from the IMF. With prevailing economic conditions not being in favor of Indian economy, India had to accept an austere economic reform package endorsed by the IMF, World Bank, and the US wherein India agreed to devalue its currency, restrain fiscal expenditures, tighten credit. In addition, as a report prepared by the IMF stated, the Indian authorities seemed to be willing to shift towards an export oriented growth regime with import liberalization.

Even though the Government of India had not actually shifted their economic policies, the ‘reform’ arrangement collapsed soon after the policy arrangements became public in India in the...

Bibliography: a) The Evolution of ‘Homegrown Conditionality’ in India: IMF Relations Praveen k. Chaudhry, vijay l. Kelkar And vikash yadav b) c) d)
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