Given that the Bretton Woods system has often resulted in misguidance and underinvestment in the developing world, it is perhaps not surprising that talk of a development bank financed by five giants of the emerging world has been welcomed. Despite the reservations of the Asian Development Bank and a few others, it seems reasonable to hope that the proposed BRICS bank will address the needs of developing countries, without the customary concern about what donors stand to gain. It could also allow small and medium enterprises easier access to financing and redress some of the wariness the private sector often displays towards financing infrastructural projects where the benefits are uncertain.
If the bank can live up to these expectations, India stands to gain considerably. That the institution could also reduce the upfront risk of investment should give New Delhi reason to smile, given its eagerness to attract capital inflows. Also, since recipient governments will be accountable to at least four other nations, fears of mismanagement – not an uncommon problem for investment in India – could be considerably mitigated. Additionally, the proposed $100 billion Contingency Reserve Arrangement (CRA) will address short-term liquidity pressures and strengthen financial stability.
This should make the BRICS bank an institution well worth New Delhi’s time and resources. Nonetheless, there are pitfalls, which if left unaddressed threaten to render India’s gains from such a bank meaningless.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Given New Delhi’s often wary relationship with Beijing, a potential downside is the BRICS bank becoming dominated by China. If voting rights are linked to capital contributions, then the unequal contributions to the CRA ($41 billion from China, $18 billion from Brazil, Russia and India and $5 billion from South Africa according to one proposal) will not bode very well for New Delhi. Moreover, China's willingness to sponsor some of Brazil and South Africa’s initial contributions to the CRA could make it easier for Beijing to use the bank to boost the renminbi’s international stature – a prospect New Delhi might not entirely relish.
Equal contributions from the BRICS could of course allay such fears. However, considering the constraints for some in the group, equal contributions would mean meager contributions, and the result will be a bank that lacks the capital to accomplish very much. Choosing between this and a significantly better funded institution that is far from equal won’t be easy.
Until there is reason to believe that irrespective of the breakdown of startup contributions, decision-making won’t become as skewed as it is at similar institutions – India should consider its interests in the BRICS bank with a good measure of caution.
Kailash K. Prasad is a Research Associate at the Indian Development Cooperation Research Program at the Centre for Policy Research, New Delhi. All views are his own. He tweets at @ridersonthestrm.