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Thursday, 13 April 2017 05:39

India and NDB Featured

Written by Vikram Nagvanshi
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                                                      NDB and India

 

In Pic: NDB 2nd Annual Board of Governors Meeting held on 1st April, 2017 in New Delhi. 

 

New Development Bank (NDB) is the first Multi-lateral Development Bank established by developing countries and emerging economies – Brazil, Russia, India, China and South Africa (BRICS) –in accordance with the agreement on New Development Bank signed on 15th July, 2014 in Fortaleza, Brazil. The NDB members represent 42 percent of world population, 27 percent of the global surface area and accounting for over 20% of the Global GDP.

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In 2001, in a research paper on global economics titled ‘Building Better Global Economic BRICs’ which was published by Goldman Sachs, British economist Jim O’ Neill coined and used the acronym ‘BRICs’ for the first time for four rapidly developing economies-Brazil, Russia, India and China.

 

In 2006, Brazil, Russia, India and China began a regular informal diplomatic coordination initiative, with annual meetings of Foreign Ministers at the margins of the General Debate of the UN General Assembly (UNGA). This successful interaction led to the decision that the dialogue was to be carried out at the level of Heads of State and Government in annual Summits.

The NDB was established aiming to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multilateral and regional fi­nancial institutions for global growth and development. The five member nations – Brazil, Russia, India, China and South Africa – have an equal shareholding in the NDB(each holds 20%equally).

The NDB intends to be fast, flexible and efficient, without sacrificing quality. The Bank strives for having a short loan-processing time, aiming to design, negotiate, review and approve loans within a period of 6 months. In so far as procurement policies and environmental and social standards are concerned, the NDB will, whenever possible, rely on country systems.

 

The NDB received an “AAA” institutional rating from China Chengxin Credit Rating and China Lianhe Credit Rating and commenced engagement with international rating agencies. In July 2016, the NDB issued its debut a green financial bond in the China onshore interbank bond market. The size of the issue is RMB 3 billion (USD 449 million). The bond has a five-year term and nominal interest rate of 3.07%.

The NDB is building-up partnerships with multilateral and national development banks, which will allow it to tap into the expertise of established development institutions, strengthen its capacity to assess and implement projects as well as assist the Bank in increasing capillarity of its operations. The NDB has signed Memorandum  of Understanding with World Bank and Asian Development Bank as well as leading commercial banks from the NDB member states.

BRICS New Development Bank (NDB), focusing on the potential benefits the NDB may provide India as well as a possible focuses the NDB can use to compete with historical institutions such as the World Bank and the IMF. The 2008 global recession affected most parts of the world, and India was no exception. Apart from challenging economic conditions, there was a widespread criticism of the previous government’s policies which took a toll on the Indian economy. India’s newly elected Modi government,  has promised to revive the economy and improve the ease of doing business in the country. As pointed out earlier in this series, it was India that proposed the establishment of a BRICS bank as a way of aligning the growing economies of the five emerging powers with those of the developed nations. India hopes to benefit greatly from the formation of the NDB and play a more prominent role in the global order in the 21st century.

The NDB is already providing impetus for the BRICS to increase intra-member trade and investment. For instance, the tense relations between India and China have been an open secret despite the fact that they are strategic trade partners in Asia. Recently, trade volumes have lessened; however, after the creation of the NDB, the two countries have vowed to correct the decline. Since BRICS economies can trade in their local currencies instead of dollars, the Indian government has allowed domestic infrastructure companies to borrow Yuan-denominated loans from the Chinese government to pay for imports from China, Continued improving relations between these two most populous countries could result in profound, short-term economic benefits.
The NDB is also influencing India’s relationship with Russia. India is the third largest importer of energy, and it may become the largest energy consumer. With instability in Middle East and West Asia, India is reaching out to traditional partners, like Russia, for help. Since 2005, India and Russia have been negotiating a gas project. After the announcement of NDB in July, both countries are actively working toward concluding the agreement. Analysts feel the countries’ increasing common interests could help finalize this much-needed energy deal.

Another energy-related event may also affect India. In a major shift in the policy, the World Bank has announced that it would restrict funding to new coal projects in developing countries and only fund the poorer nations on a case-by-case basis. As a result, developed countries such as US, United Kingdom and Netherlands have decided to stop funding coal projects. Many new coal plants are being built around the world, and the majority is or will be located in India and China.

The new policy obviously impacts India: China can fund its own projects; India cannot. India’s extreme dependence on coal plants for its electricity generation and alternative source of income to fund coal projects must be addressed as quickly as possible. 

The NDB could play a crucial role by urging India and other developing countries to adopt solar panels and clean energy methods and offer cheaper loans for such power projects, while providing financing for existing coal projects.

Besides improving trade among the member states, the NDB needs to have broad policy framework to make the bank robust. For instance, climate change could have a profound impact on the BRICS. Global warming will have severe effect on developing countries affecting agriculture and tourism.

 The bank could focus on utilizing its funds on climate projects and educate poorer countries on climate change policy. In fact, BRICS leaders have advised their finance ministers to work out modalities for the bank to include environmental safeguards. This could help the NDB emerge as a bigger player in the future, thereby increasing the BRICS global economic influence.

During the first year of work, the Board of Directors of the NDB approved a wide range of operational, financial and HR policies that took into account good practices adopted by other multilateral and national development institutions.

In 2016, the NDB Board of Directors has approved seven projects, of which two are in India, for a total of over USD 1.5 billion, in the areas of renewable and green energy, and transportation. All projects are coherent with the Bank’s mandate of supporting infrastructure projects, with more than 75% of projects dedicated to sustainable infrastructure, mainly renewable energy generation.

The seven approved projects will support the creation of about 1500 MW of Renewable Energy capacity and are estimated to result in the reduction of greenhouse gas emissions by over 4 million tons per year. The two projects in India target up-gradation of major district roads in Madhya Pradesh and Renewable Energy generation.

The Madhya Pradesh Roads project will provide US$ 350 million sovereign loan to the Government of India for upgrading approximately 1500 km of major District roads in the State.
“The objective of the project is the upgradation of major district roads in the state of Madhya Pradesh to improve connectivity of the interior areas of the state with the national and state highway networks,” the government said in a statement. “The project would include upgradation, rehabilitation or reconstruction of approximately 1,500 km of district roads to intermediate lane, all-weather standards, with road safety features and improved road asset maintenance and management.” The project is to be implemented over five years with the Government of Madhya Pradesh and the Madhya Pradesh Road Development Corporation acting as the implementing agencies.

The loan agreement was signed by Raj Kumar, Joint Secretary, Department of Economic Affairs and Xian Zhu, Vice President & Chief Operating Officer of the New Development Bank. The project agreement was signed by Pramod Agrawal, Principal Secretary, Public Works Department and Manish Rastogi, Managing Director, Madhya Pradesh Road Development Corporation.
The project would result in reconstruction and rehabilitation of 1,500 km of roads with focus on all-weather road availability and improved road maintenance and asset management. The project fosters inclusive economic growth through increased incomes as a result of improved connectivity and access to markets for interior regions of the state. The signing of the loan agreement for this project is likely to happen soon. The loan will be provided for 20 years with a grace period of 5 years.

The Second Project financed by the New Development Bank (NDB) in India will lead to generation of about 500 MW Renewable Energy thereby preventing generation of 815,000 tonneCO2 per annum. USD 250 million sovereign guaranteed loans will be given to Canara Bank in three tranches under this project.

The challenges ahead, especially one posed by China’s dominance in the region, however, have to be tackled first. To ensure that it has an equal say in the Development Bank’s activities and China does not get an upper-hand, India will have to ensure that all BRICS members contribute equally to it.

 

But China’s weight also makes the group stronger. “Chinese support to BRICS will make sure that group remains a force to reckon with in the future. Therefore, BRICS is likely to remain an effective multilateral forum in a multi-polar international order,” a report by the Institute for Defence Studies and Analysis said.

compiled by: Vikram Nagvanshi.

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