An Attack on India's Sovereignty


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The Bank-India Relations


— Public Interest Research Group; 1995

India’s involvement with the World Bank dates back to its earliest days. India was one of the 17 countries that met in Atlantic City, USA in June 1944 to prepare the agenda for the Bretton Woods conference, and one of the 44 countries, which signed the final Agreement that established the Bank. In fact, the name "International Bank for Reconstruction and Development" [IBRI)] was first suggested by India to the drafting committee. The Indian delegation was led by Sir Jeremy Raisman, Finance Member of the Government of India and included Sir C. D. Deshmukh (Governor of the Reserve Bank of India, later to become India’s Finance Minister), Sir Theodore Gregory (the first Economic Advisor to the Government of India), Sir R.K. Shanmukhan Chetty (later independent India’s first Finance Minister), Mr. A.D. Shroff (one of the architects of the Bombay Plan) and Mr B.K. Madan (later India’s Executive Director in IMF).

The Bank lending to India started in 1949, when the first loan of $34 million was approved for the Indian Railways. The first decade of the Bank’s lending to India (1949 -1959) saw just about 20 loans for a total amount of $611 million. During the years 1960-69, overall lending to India from the Bank rose to $1.8 billion, about three times the level in the previous decade. Between 1970-79, there was a large increase in the absolute volume of IDA lending and the IDA share in total Bank assistance reached a high of 80% in this decade. However, in the 1980s, India’s share in total IDA lending declined to 25% and was updated by the more expensive WB lending. The volume of the WB lending rose to $14.7 billion during 1980-89, almost 10 times the level of $ 1.5 billion in the previous decade.

50 Years : An Assessment

The aggregate of the Bank’s lending in India in the last 45 years was approximately $42 billion. India is the single largest borrower of WB and IDA. India has claimed about 15% of total World Bank lending — 9% of WB and 28% of IDA commitments.

The 50 years (1944-94) of relationship between the Bank and India clearly shows certain trends. In the early years of realtionship, the Bank involvement was not direct and visible as compared to 1980s and 90s. In the initial years, the Bank closely collaborated with the more active USAID to force policy changes. In fact, an unholy alliance of USAID, the Bank, the IMF and Transnational Corporations (TNCs) worked hand in hand to pursue economic changes. However, after the 80s, the Bank along with the IMF has started a direct and visible role in India’s policy making.

IBRD-IDA Nexus in India (figures in %)





















Source: The World Bank [1994]

Nevertheless, there has been continuity in the basic philosophy and ideology of the Bank over the past 50 years. The philosophy of diluting the basis of economic planning, dismantling of public sector, encouragement to private sector (both national and foreign), and greater emphasis to market forces has been forcefully articulating by the Bank since 1950s. The Bank has been proceeding in a methodical manner to force India to accept its philosophy.

The Bank created conditions so that the Planning Commission was relegated to the background in the late 1960s. During the oil shocks of 1973 and 1980, the Bank was able to push forward its ideology of market forces with great impetus. By 1990, the entire economic environment was made conducive for foreign capital to play a leading role in tapping emerging markets of middle class consumers in India. And the foreign exchange crisis of 1991 provided the opportunities to the Bank to clinch this objective through structural adjustment programme. The past 50 years of Bank operations in India clearly reveal that the Bank has exploited the foreign exchange crisis periods. So far, India has faced five major foreign exchange crisis (1957, 1966, 1973, 1980, 1991). In each crisis period, the Bank did not miss the opportunity to force its ideology on the government of India. In the following paras, we will understand in details how did this happen.

The Bank was influential in India’s policy making right from the early years of Independence. In 1949, the Bank sent its first Mission to survey the potentialities of lndian economy. Following this, Prime Minister, Jawahar Lal Nehru submitted a special policy statement on foreign capital to Parliament on April 6, 1949. It remains the only document where the role and place of foreign capital in India is stated in explicit terms. It also marked a retreat from the Industrial Policy Statement of 1948. It included the following principles

* Existing foreign interests to be given ‘national treatment’.

* New foreign capital would be encouraged. "government would frame policies to enable foreign capital investment on terms and conditions that are mutually advantegeous".

* Profits and remittances abroad to be allowed.

* Although majority ownership by Indians was preferred, "Government will not object to foreign capital having control of a concern for a limited period, if it is found to be in the national interest".

The above liberal principles towards foreign capital were fully implemented in the following year’s (1949-50) budget. It provided depreciation allowances and income-tax exemption to a wide range of foreign companies. As a follow-up, in 1949-50, the Government fully abolished capital Gains Tax, while the Business Profits Tax, Personal Income-Tax and Super Tax were reduced in 1950-51 budget. All these concessions and commitments to foreign capital were incorporated into the Industrial Development Regulation Act, 1951.

Meanwhile, the World Bank began to intervene in Indian economic affairs in a significant manner. A second World Bank mission visited India in mid-50s. On the basis of its instructions to facilitate the close integration of private capital with foreign capital, the Nehru Government established the Industrial Credit and Investment Corporation of India (ICICI) in January 1955.

However, the Government announced the industrial Policy in 1956. This policy was a major departure from the early industrial policy of 1948. While the 1948 statement had given private sector ten years to operate before being nationalised. The 1956 policy marked out the areas in which private sector could expand in an uninhibited manner.

Shortly thereafter, the Nehru government earnestly began to flout its own industrial policy. For instance, of the 17 industries listed in Schedule A of the Industrial Policy Resolution, "industries the future development of which will be the exclusive responsibility of the state (and in which) all new units will be set up only by the state", at least seven were opened to MNCs through joint ventures. Although the private sector also benefitted from changes in the official policy the real beneficiaries were foreign companies. Foreign private capital flowed in larger volumes.

The form in which the World Bank wanted foreign capital to participate in the Indian economy was made clear when the Government had sought the Bank’s assistance for financing the Rourkela Steel Plant in 1956. The Bank insisted that the German collaborators supplying technology should have more leverage than had been offered. The negotiations fell through and evidence suggests that the reason for the Indian government to adopt a strong position at that juncture was due to availability of adequate foreign exchange.

Is This Development Forum?

Nearly 36 years ago, the World Bank set up the Aid India Consortium (AIC) because of the red scare. The Bank was convinced that if India was not assisted quickly and substantially, communism would sweep the land, which the western donors could ill afford after the Chinese revolution just a decade ago.

With the collapse of the socialist world, the World Bank has now little reason to be worried. In the changed national and international scenario, the Aid India Consortium will be now called as India Development Forum (IDF). Earlier, the participants in the AIC were donor countries led by the World Bank. For the first time, the transnational corporations and Indian private sector representatives were invited by the Bank to the IDF meeting at Paris during June 29-July 1, 1994. In this meeting, over 90 representatives of big corporations and banks from US, Britain, Japan, Canada, Hong Kong, Germany and Switzerland were joined by another 15 from India.

For three days, these representatives discussed the economic reforms and pledged a $6 billion package to support the structural adjustment programme. As the name of Development Forum suggests that development issues will be discussed in such a forum, one is surprised to know that only aid and financial issues were discussed in this meeting of the Forum. This clearly shows the reductionist approach of the Bank and donor agencies who see development only in terms of aid and finance. Basic issues, like removal of hunger and poverty were not, at all, discussed in Paris meeting. "Poverty is not something businessmen like to talk about" said Mr. M.S. Ahluwalia, the leader of Indian delegation at Paris. He is absolutely right. Why should TNCs talk about the poverty? The TNCs are only interested in profits. When asked by journalists, he even could not remember the percentage of the Indian population living below the poverty line.

While many of the donors especially Japan expressed their fears about the growing opposition and "political challenges" ahead for the adjustment programme, the Indian delegation assured them that there is a political ‘consensus’ in India.


The Bank and 1957 Forex Crisis

Until the foreign exchange crisis of 1957, after the sterling balances accumulated by the country in the post-Korean war boom had plummetted, there was no conservation of foreign exchange. There was no foreign exchange budgeting as the country embarked on the Second Five Year Plan. Nevertheless the heavy import requirements of the private sector and government’s liberal licensing policy resulted in a huge trade deficit. Therefore, the government was forced to recognise the foreign exchange shortage. The Government had to approach the IMF for a standby arrangement in February 1957 but even this was exhausted by June 1957. Thereafter, the Government approached the United States and the Bank for loans. In September 1957, Prime Minister, Nehru said that India would welcome a US loan of $500 to 600 million. He sent his finance minister, Mr T.T. Krishnamachari to the US to explore the prospects for such a loan.

Ten days later, a policy directive signed by the Director, USAID announced that no economic aid would be available for the state-owned industrial and mining enterprises except in rare cases.

The World Bank echoed American criticism that the Plan was ‘over-ambitious’. The Bank President Eugene Black addressed a letter to the Indian Finance Minister urging the Indian planners to give more scope to private enterprise and more incentives to foreign private investment.

Mr Eugene Black commented

"The Bank welcomes the arrangements that have been made to associate foreign firms with the construction and operation of a large number of major undertakings, both in the public and private sectors, but hopes that more positive measures will be taken to facilitate foreign investment and that consideration will be given to the suggestions made by the Mission in its Memorandum".

In response to this criticism by the World Bank President, the Government sent a high-powered team to USA. The team led by Finance Minister Krishnamachari, and which included the RBI governor R.V.R. Iyengar stated in New York:

"The ‘socialism’ contemplated in India does not, by any stretch of imagination mean communism; it does not mean state capitalism. It is a system under which private competitive enterprise has and will continue to have a vital role to play; it is a system, which respects private property and provides for the payment of compensation if such property is acquired by the State. I submit there is nothing in the system which should be repugnant to the social conscience of the USA"

The process of diluting the Industrial Policy Resolution continued unabated. Violating the ‘51 percent rule’ (the regulation that majority ownership should be in Indian hands as far as possible) licence was given to Ceat Tyres of India Ltd, in 1958 on a 60 : 40 Italian-Indian basis. In the meanwhile, as desired by the US MNCs, the Indo-US convertibility Agreement was signed on September 19, 1957, and the first of a series of tax concession to MNCs were made affecting salaries (May 1957) wealth tax (July 1957) and super tax (September 1957).

It is noteworthy that the Bank established its Resident Mission in Delhi to monitor the latest developments in 1957. All these steps were culminated in the formation of Aid India Consortium in 1958 with World Bank as Chairman.

Satisfied with these policy changes, the AIC provided the first large injection of credit to India, more than $600 million from the US, Germany, Britain, Japan, the World Bank and the IMF. And thereafter, the influence of western capital steadily increased.

As a consequence of this, the shares of several companies were sold to MNCs in lieu of machinery, raw materials, patents, knowhow, etc., supplied by them and made partners in several existing firms. In addition collaboration agreements both financial and technical proliferated. The total number of foreign collaborations approved in 1948-58 was 550 (i.e., an average of 50 collaborations per annum), it rose to 150 in 1959, 380 in 1960 and 403 in 1961. The MNCs were invited to take up the more profitable state/reserved (based on 1956 Policy Resolution) industries, in heavy electrical equipment, fertilisers, pharmaceuticals and rubber. In August 1958, the largest pharmaceutical firm in India — the Hindustan Antibiotics collaborated with Merck & Co. Inc. of the US.

By the end of 1950s foreign control in plantation and agro-industries was near total. The most concentrated MNC interest was in the tea industry, 80% of the acreage under tea was foreign (British) controlled, the bulk of this in North-East India. According to an estimate, 13 leading British firms controlled three quarters of North-East Indian tea production. All processing factories were foreign controlled as late as 1960. Two British firms Lipton (Unilever Concern), and Brooke Bond (Finlay) handled 85% of retail distribution of tea within India and the export trade remained very much a British monopoly. In the 50s one-third of the acreage under coffee and three-fifth of the area under rubber was foreign controlled. Regarding agricultural machinery, the entire field was a foreign preserve. Davidson of India (Private Ltd.) subsidiary of Belfast firm controlled tea machinery. In 1960, it was envisaged to produce 10,000 tractors in the public sector. But the task of producing 7000 was entrusted with Tractors and Farm Equipment Ltd., Madras controlled by Massey Fergusson. International Harvestor Co. of Chicago and Danish controlled East Asiatic Co. (India) Private Ltd., controlled other agricultural machineries like tillers. Mining was controlled by several MNCs like Andrew Yule, Macneill and Barry, Jardine Henderson (Coal), British controlled Copper Corporation (Copper and Krebs and Pennoria of France (Lead), etc.

Total outstanding foreign investment in India more than doubled from December 1956 (the first crisis) to March 1965 (the second), from $1,007 million to $2.014 billion. As a result, the priorities set by the Second Plan were systematically reoriented in favour of industries in which foreign companies were willing to finance.

The Indian Government had become increasingly dependent on large amounts of external assistance from the Aid India consortium to finance its import-surplus strategy. No bones were made about this in the formation of the Third Five Year Plan (1961-66), which was explicitly dependent on huge inflows of fresh aid.

According to a report in Economic & Political Weekly, January 7, 1961 the US Government made available its Development Fund to India in the context of Government of India’s announced intention to enlist the co-operation of MNCs in the manufacture of fertilizers. In 1962, the Government of India allowed the Ford Foundation to conduct a campaign for bringing US MNCs and Indian businessmen together to establish fertilizer plants in the private sector. Consequently, over one quarter of target capacity was allocated to MNCs in the Third Plan.

At the request of the Nehru government, in 1960 the World Bank sent a Mission composed of three bankers from US multi-national banks. On the basis of the Mission’s report, under instructions of the World Bank, in February 1961 the government of India inaugurated the Indian Investment Centre. It was an autonomous high-powered body with branches in World capital markets such as New York, Dusseldorf, London and Tokyo to advise collaboration ventures between MNCs and their junior Indian partners.

The Bank and 1966 Forex Crisis

Due to heavy dependence on external aid, imports and the growing burden of outward remittance of profits of foreign companies, the next great foreign exchange crisis came. This crisis coincided with the succession crisis caused by Nehru’s death. At this time, the World Bank became more critical of the direction of Indian economic policy. A World Bank mission headed by Bernard Bell visited India in 1964 and issued a report calling for the devaluation of the rupee and abolition of many of the foreign trade controls then in effect. It said, "There is no particular evidence that the licensing system has in fact served any positive economic purposes. It has, like the Import control system, protected and preserved inefficiency by, in effect, allocating market shares and restraining the growth of more efficient enterprises." India’s first answer to Bell’s recommendation was defiance. T.T. Krishnamachari, who had sparred with Eugene Black in 1956, was again the Minister of Finance who picked up the gauntlet thrown down by the Bank by insisting that devaluation was not the answer. However, the Indo-Pakistan war in 1965 led to an abrupt suspension of American aid to India. In early 1965 Nehru’s successor, Lal Bahadur Shastri died abruptly in Tashkent, USSR.

World Bank Tentacles Right Down to Backward Villages

(Based on a Report by P.Sainath, printed in the Sept.15, 2002 issue of The Hindu)

It is the backward remote village of Nuagon in Angul village of rural Orissa. As the team of journalists enters the village, a majestic building stands out amongst the dilapidated huts. Journalists ask a passing marginal farmer "what is this building"? Reply: "it is the World Bank office". Journalists ask, "isn’t it really a sarkari (government) building"? Reply: "Our sarkar has left and there is another there now".

This is the villager’s conception of the much publicized Anuli Pani panchayat (Water Users Association) set up by the World Bank in collaboration with a local NGO — the Youth Service Centre (YSC) based at the district headquarters. The NGO laid the basis of the Pani Panchayat and the entry of the WB in 1996. By 1998 the WB took over fully, with their officials regularly visiting the village — 10 officials, many Americans, have paid over 15 visits to the village during the past few years. The people’s concept that the new sarkar is the WB has been strengthened on seeing the cringing servility of the local bureaucracy towards the visiting Bank officials. They come in style, throw their weight around, and arrogantly dictate orders. The petty officials go scurrying around, trying to please them, and catering to all their fancies. Their majesty, in true colonial style, lords it over all who cross their path.

Portrayed as the ‘Pride of Orissa’, the all-woman Pani Panchayat services eight villages linked to the Aunli Irrigation Project, with its network of seven canals. In effect, what was earlier a government job is now a World Bank one. Propagated as having created much wealth in the locality, they even stated that bank deposits grew by over Rs 40 lakhs during the past few years. But, as the journalists were to discover, the ground-level facts were quite the contrary.

The landlord’s son, Manas Pradhan, is the chairperson of the Apex body of Aunli’s four pani panchayats. The family owns 140 acres. The vast sections of the population were in such a state of distress, that they have been selling their cattle for anything between Rs 50 and Rs 400. In just the two days before the journalists arrived, 150 cattle were sold in Nuagaon alone — that too, at a time considered auspicious, when villagers tie rakhi to their cattle! But, as reported by the journalists, prosperity there has been, almost all of which has been cornered by the big landlords and the contractors of the region. Yet, the bank manager said that the bulk of the increase in deposits came from the service class and not from agriculture. Obviously the gains by the landlords and contractors would have gone in money lending, etc., where returns are incomparable to bank interest. The journalists were swamped with complaints from the ordinary villagers.

This is an example of how deep is the penetration of the WB today into our country. It goes far deeper in areas of intense class conflict, only in such areas the Americans do not come in person, they send their local stooges — either govt. employees or NGOs. While adding to the class of rich in the rural areas, with little or no impact on the poverty-stricken people, the WB, through such schemes, is able to enhance their pernicious base in the countryside. Such schemes, taken up in relatively fertile tracts, also add to the commodity market, with little impact on the semi-feudal social-relations.



The Bank and Devaluation

Mrs. Indira Gandhi was choosen the new Prime Minister of India. The new government immediately softened the hard line towards the Bank and its western creditors. Mr Krishnamachari was removed from the Finance Ministry for his opposition to the Bank’s insistence on devaluation. The Planning Minister, Ashok Mehta, with some ‘socialist’ leanings, paradoxically, became an active supporter of the Bank. The following year, the Prime Minister, Planning Minister and the new Finance Minister visited Washington. When Mrs. Gandhi went to Washington she was informed that resumption of Aid — which was cut off as a result of war with Pakistan — was dependent on India coming to terms with the World Bank. The United States made the bank its intermediary and arbiter with respect to aid to both India and Pakistan. From its past role as fund raising organiser and chairman of AIC, the Bank moved into a more active role in evaluating Indian and Pakistani economic plans and advocating, economic reforms a al the United States.

The Bank’s recommendations, echoing the Bell Mission report, were for a devaluation of the rupee accompanied by dismantling of the plethora of import controls and export subsidies. The government announced devaluation of rupee by 37.5% (from Rs 4.75 to Rs 7.50 to a dollar) and the associated import liberalisation measures in June 1966. When the Finance Minister was asked why the government had not waited another six months to see whether a good monsoon might make the devaluation unnecessary. He replied, "If we had waited another six months, we would have had absence of imports in India" The implication was that aid was made conditional on the devaluation. According to him "action could not be postponed because all further aid negotiation hinged on it."

However, the devaluation package did not yield results. The expected boost to exports did not materialise, instead they declined. The reasons were obivous. The previous structure of import tariffs and export subsidies had amounted to a de facto devaluation by raising the prices of imports and lowering the prices of exports. A Postmortem declining exports decline confirmed suspicion that exports suffered due to abolition of subsidies and gained little from the devaluation.

Two days after the devaluation was announced, the World Bank called an urgent meeting of the AIC in order to raise $900 million in non-project aid, which was promised. But failed, as the consortium members failed to pledge the necessary amounts. Even five months after devaluation, India had received only $465 million of the promised amount. The project and non-project aid fell from $1.6 billion in 1966-67 to $0.64 billion in 1967-68 and $0.76 billion in 1968-69, as against $1.7 billion per year promised by the World Bank. This led to sharp criticism of Government’s policies by many political groups in India. "You sold the country and have not even got the price" a parliamentarian accused the government. Thus, the devaluation became very unpopular in India. The unpopularity of the devaluation was believed to be a reason of defeat of the Congress Party in 1967 general election. In response to public criticism and on aid disappointment, Mrs Gandhi took a sharp swing to the ‘left’ by abolishing Privy Purse and nationalisation of banking and insurance sectors. She also signed Indo-USSR treaty to show her displeasure with the western world. This created a very popular image of Mrs Gandhi. (She moved the country into the camp of Soviet Social imperialism ......Arvind)

Subsequently, she fought and won a battle for control of the Indian National Congress in 1969 and opted for hardline against the World Bank and US pressures.

The Post-1966 Period

India’s dependence on the Bank and other creditors reached a high in 1966 when the Fourth Five Year Plan, supposed to begin in 1966, had to be postponed for 3 years for obivous reasons. The plan was dependent on uncertain external aid to allow the execution. As a result of this dependency, the Bank sent a second Bell Mission in 1967. Its recommendations were supportive of the Green Revolution, which was already underway in India. This strategy aimed at the creation of a stratum of prosperous capitalist farmers and use of expensive commercial inputs such as chemical fertilisers. The Bank exerted direct pressure during the 1966 exchange crisis for obtaining favourable conditions for foreign investment in India’s fertiliser industry.

With the nationalisation of coal and oil industry in the 1970s, this option for private foreign capital was foreclosed. But this move did not affect the area of influence of foreign capital. In the post-independence period, foreign companies were moving away from their traditional sectors of investment, i.e., extractive and trading activities. The manufacturing sector gained prominence during this period and adopted priorities set by developed countries. Thus foreign private capital was taken as inescapable by the policy makers.

The Table shows that over the last 45 years, certain sectors have been the focus of the Bank’s abiding concern. Progressively over the years, it has therefore been pumping aid into these sectors which are power, mining and exploration, irrigation, agriculture and, to some extent, telecommunications and railways. The Table not only shows a secular increase in World Bank funding to these sectors, but also during 1980s-the beginning of India’s "dance to freedom"

It is evident that the increase of Bank loans is phenomenal by any count ranging from 200% to over 2500%. More so in the case of agriculture, irrigation and power where even the preceding period shows a phenomenal increase.

In Irrigation and Agriculture, a closer look at the disaggregated project list shows minimal Bank loans till 1960s, with the solitary exception of one IBRD loan of $10 million in 1949 towards agricultural machinery.

It is not too far fetched to see the post-1980 period of the Bank’s loans and aid was one of preparation for the grand and royal entry of foreign capital. By building up infrastructure power generation, mining and exploration of new reserves, proper roads and rail facilities, trained technical manpower, etc. In fact, the Bank and the IMF inspired policies have facilitated a new phase of the operation of foreign capital in India. This phase of economic liberalisation began in 1980 with the SDR 5 billion loan from the IMF. It weakened the real economy, created the preconditions for export orientation and facilitated the recomposition of the industrial sector in subordination to world capital. This was followed up by another wave of liberalisation, which included devaluation, lifting of trade barriers and greater impetus to foreign capital and market forces in India.



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