DELHI – Even before PM Modi arrived in Brazil for the BRICS (Brazil, Russia, India, China, South Africa) Summit on Monday, the highly anticipated launch of the BRICS “New Development Bank” was making headlines across the developing world.
Intended to facilitate greater financial cooperation between emerging markets, the BRICS bank will seek to check the influence of the IMF, Asian Development Bank (ADB) and World Bank by offering lower cost loans with fewer conditions to developing countries as soon as 2016.
Signing off on the new financial institution yesterday, each BRICS country will contribute US$10 billion in initial capital to the bank (US$50 billion which will ultimately grow to a value of US$100 billion) and work towards the creation of a US$100 billion emergency reserve fund coined the “Contingency Reserve Arrangement” to be used in case of a currency crisis. While initial capital contributions for the bank were split equally among the five BRICS countries, the reserve fund will be comprised of mostly Chinese capital (US$41 billion) followed by US$18 billion each from India, Russia and Brazil and US$5 billion from South Africa.
Although disagreement over the administrative control and location of the new bank ended in compromise (a Brazilian chair of the board of directors, Russian chair of the board of governors, Indian director, headquarters in China and first regional center in South Africa), India’s lobbying for future non-BRICS members to be granted equal voting power resulted in the BRICS countries agreeing to retain a collective share capital of at least 55 percent – and thus ultimate political control – of the institution.
For India especially, the BRICS bank may become a key component of Modi’s short- and long-term economic agenda after lending commences in 2016.
Promising to reinvigorate India’s economy by transforming it into the world’s next manufacturing powerhouse, Modi’s majority BJP government still lacks the liquidity it needs to initiate much-needed infrastructure improvements alongside structural and regulatory reforms.
As China emerges as one of the world’s new dominant lenders, a BRICS development bank would (in theory) ease access to the RMB-based financing that India and other developing nations need to upgrade their infrastructure and augment their manufacturing competitiveness without the caveats that often accompany IMF and World Bank loans.
With the BRICS together accounting for more than 40 percent of the world’s population and nearly a quarter of its GDP, the new bank is also in some sense a sign that BRICS countries’ patience with the slow pace of IMF reform has finally run out. Despite IMF members endorsing a number of organizational reforms in 2010—chief among these being a new framework for voting power that isn’t based solely on capital share—the U.S. Congress’ has thus far failed to approve IMF restructuring.
From a political perspective, some suggest the BRICS-controlled bank may go beyond easing India’s ability to secure funding for its development needs and also signal the beginning of a new era of trilateral cooperation between India, China and Russia.
While the strengthening of economic and financial bonds often inevitably result in a convergence of political and security interests over time, an enhanced framework for cooperation between these three countries has already begun emerging in Afghanistan and elsewhere as Russia realigns itself with China in light of the Crimea crisis and India turns to China and Russia to fulfill its investment and energy needs.
While the three may not see eye to eye on everything (most notably, territorial disputes) it is still unclear whether the Modi administration views another decade of deep-seated Western political and economic involvement in Asia as in its best economic and geopolitical interests, or if closer relationships with China and Russia is more likely to be in the cards.
Some commentators are keen to note, however, that India’s support of the New Development Bank does not come without some degree of risk. Whether or not China would be willing to share equal decision-making power in the long-term or even use the bank as a “Trojan horse” to project its economic power across the developing world are among outstanding questions that the Modi administration must consider before throwing India’s weight firmly behind the endeavor.
Looking ahead, the New Development Bank will still require approval from each BRICS countries’ lawmakers, which may turn out to be the initiative’s greatest challenge yet.
Speaking after the agreement was signed, PM Modi characterized the bank as a significant step towards opening up growth and development opportunities to emerging markets, adding, “I am happy the initiative announced at the BRICS Summit in New Delhi in 2012 has become a reality.”
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