Balance of Payments

ANAND AGARWAL 28101

SANJAY MEENA 28127
PRANESH SANCHETI 28193
ANJAN MUNDLUR
28189
VIVEK KEDIA 28180
 DIRECTION OF INDIA'S FOREIGN
TRADE

• Trade Turnover increased from $95 bn in FY02 to $245 bn in

FY06 (CAGR of 26%)
•India’s Exports increased from $44 bn in FY02 to $103 bn in FY06
(CAGR of 23%)
•India’s Imports increased from$51 bn to $142 bn (CAGR of 29%)
•Share in world merchandise exports in 2005 – 0.9%
 Approval vs. Actual

•Indian overseas direct investments (ODI) have shown a rising trend –both in
terms of approvals as also in terms of actual outflows.
• Approved ODI increased from US$ 557 mn in FY 1997 to US$ 2800 mn in FY
2005.
• Actual outflows shot up by more than seven times from US$ 205 mn to US$
1554 mn during the same period
• USA – India’s largest trading partner; but Asian
countries gaining significance
• China – increasingly becoming an important partner
(has become the largest source of imports)
• Direction of exports moving towards the Southern countries,
particularly Asia.
• Share of Asia & Oceania increased from 38% to 47%.
• Future trade flows to be geared towards the developing
nations (buttressed by GOI policies).
Source-RBI
 TRADE BALANCE
The trade deficit for April-June, 2006 is estimated at US $ -12609.35 million
(provisional) which is higher than the deficit of US $ -11459.82 million
(provisional) during April-June, 2005.

• DEPARTMENT OF COMMERCE IMPORTS & EXPORTS : (PROVISIONAL) (Unadjusted for late returns)
(US $ Million)
Source-RBI
THE HUMAN CAPITAL EDGE
• Over 3 million scientific & technical manpower
• Stock of over 0.8 million post graduates in science.
• Over 1 million graduate engineers
• 0.4 million doctors
• 0.3 million graduates in agriculture and veterinary
sciences.
• Today India turns out more than 50,000 computer
professionals and 360,000 engineering graduates
each year.
SIZE OF DOMESTIC MARKET

• 1.1 billion population

• Estimated Number of Households by
Income Groups (Based on 1999-2000
prices)
• Middle (Rs 80,000 – Rs 1,20,000):
– 27.3 Million
• Upper Middle (Rs 1,20,000 – Rs
1,60,000): 12.5 Million
• High (Above 1,60,000): 12.2 Million
• Size of the market at Purchasing
 ENTREPRENEURIAL TALENT

• 5000 years of entrepreneurship

• Indians’ business acumen now globally acknowledged

• From Africa to Silicon Valley to South East Asia – one can

witness the footprints of Indian entrepreneurship
 DEMOGRAPHIC PROFILE
• Total population below 25 years of age – 547 million

DEMOCRACY

• Amongst the most vibrant in the world with a well

established Judicial system and Free Press
 PHARMACEUTICALS

• India is world's 4th largest pharmaceuticals producer with

8% share of global production by volume
• 3 New Molecules discovered by Indian companies - 12
more in the final stages.
• Over 100 Indian formulations have received United
States FDA approval
 BIOTECH

• More than 900 companies involved in traditional biotech

products
• rDNA biopharma products – 35 new companies set up in
past 5 years
• R&D and commercialization of products on agricultural
biotechnology is the latest trend
• Opportunities for fresh investment in Indian biotech sector
in next 5-7 years - US$ 1.5 – 2 billion
 AGRI & FOOD
PROCESSING
• India - One of the largest food producers of the world
• Output of the organized segment - US$ 34,827 million
(2002-03)
• Marine and Spices together contribute more than 70% of
Export earnings
• India is looking for investment in infrastructure,
packaging and marketing, where ASEAN countries have
shown technological prowess.
• The Indian scientific and research talent - a knowledge
source that can be tapped by the ASEAN food industry to its
advantage
 AUTO & AUTO
COMPONENTS
• 2nd largest small car market in the world.
• Largest motorcycle manufacturer in the world
• 2nd largest scooter and tractor manufacturer in the world
• Many international auto majors are manufacturing in India
– Daimler Chrysler, General Motors, Toyota, Ford, Honda,
Hyundai, Volkswagen, Suzuki
• Most of them are also outsourcing their components from
India
 IT & IT ENABLED SERVICES

• Compounded annual growth rate (CAGR) exceeding 50 %

over the last five years
• IT enabled services key driver of growth. Engine for
outsourcing
• This segment poised to grow very rapidly, world-wide -
India has potential to tap 38 % of the world market.
• Revenues from ITeS (remote services) showed an annual
growth rate of 68.2 %.
The WTO
 What is the WTO?
The World Trade Organization (WTO) is
the only global international organization
dealing with the rules of trade between
nations. At its heart are the WTO
agreements, negotiated and signed by the
bulk of the world’s trading nations and
ratified in their parliaments. The goal is to
help producers of goods and services,
exporters, and importers conduct their
business.
 Fact File
• Location: Geneva, Switzerland
• Established: 1 January 1995
• Created by: Uruguay Round negotiations (1986-
94)
• Membership: 149 countries (on 11 December
2005)
• Budget: 175 million Swiss francs for 2006
• Secretariat staff: 635
• Head: Pascal Lamy (Director-General)
 WTO Agreements
• The Uruguay round of trade talks, resulted
in the singing of three major agreements:
– General Agreement on Trade & Tariffs
(GATT)
– General Agreement in Trade & Services
(GATS)
– Agreement of Trade Related Aspects of
Intellectual Property Rights (TRIPS)
 WTO Functions:

• Administering WTO trade agreements

• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing
countries
• Cooperation with other international
organizations
 10 benefits of the WTO for India

• The system helps promote peace

• Disputes are handled constructively
• Rules make life easier for all
• Freer trade cuts the cost of living
• It provides more choice of products and qualities
• Trade raises incomes
• Trade stimulates economic growth
• The basic principles make life more efficient
• Govt. are shielded from lobbying
• The system encourages good govt.
 The ten Indian misunderstandings
• The WTO dictates policy
• The WTO is for free trade at any cost
• Commercial interests take priority over
development …
• … and over the environment
• … and over health and safety
• The WTO destroys jobs, worsens poverty
• Small countries are powerless in the WTO
• The WTO is the tool of powerful lobbies
• Weaker countries are forced to join the WTO
• The WTO is undemocratic
 GATT
Objective of Impact on Indian Business Implication
Agreement Policy/Laws
Prohibit govt. •Peak Import duties •Increased
policy/actions that: down from 300% to Competition
•Distort normal trade 30%. Complies •SSI reservation has
•Discriminate b/w WTO binding on no meaning
most items because of free
member nation
•QRs abolished in import
•Discriminate b/w
domestic & lawfully April 2002 •Fast liberalization
imported foreign •Legislations taken
goods up for freeing up of
trade
 GATS
Objective of Impact on Indian Business Implication
Agreement Policy/Laws
•All services come •Exim Policy now •Services constitute
under GATS(12 incorporates 60% of GDP
Sectors) services chapter with •Competitive
•Req. countries to status same as advantage leading to
ensure MFN merchandise reduction in cost
principle, •Committed to open •Public sector
transparency, mutual most services service providers will
recognition of •Banking, telecom, have to be efficient
qualification etc. Insurance, Media, or close down
•Lists liberalization etc already opened •Huge potential for
commitments of up substantially export of services,
countries e.g. IT, ITES areas
•Further negotiation
to take place
 TRIPS
Objective of Impact on Indian Business Implication
Agreement Policy/Laws
•Provides protection •Changes already •Reverse
to Patents, make in Patents act, engineering
Copyrights, Trade copyright act etc.. practiced by SMEs
marks, Industrial •TRIPS agreement will have to stop
Designs, Layout will also trigger •Transfer of
designs for ICs, changes in certain Technology will
Geographical provisions of increase on
indications etc. Contract Act, IT Act, commercial terms
•National and MFN Companies Act etc. •India’s R&D
Treatment these amendments institutions will reap
are in process.. benefits from more
investments and
market acceptability
 Foreign Trade Policy
 Exim Policies
Streamlined trade procedures
Liberalised import regime
Thrust on export orientation
 Medium Term Export Strategy, 2002
1% share in global exports by 2007
 Foreign Trade Policy 2004-2009
To double India’s share in global merchandise trade by
2009
 Past EXIM Policy Strategies

• identified growth markets and products.

• The essential assumption - resources are
limited
• Increase share
 Past Policy Strategies

The Extreme Focus Product Strategy

• introduced - 1992
• objective - giving focused attention to
products that have high production
capacity and potential for export
competitiveness.
 Past Policy Strategies
The 15X15 Matrix Strategy
• launched - 1995.
• objective - identify market diversification and
commodity diversification.
• share of the total top 15 product groups exported
to the top 15 market destinations
• declined due to market diversification
• The top three items of India’s exports
• The top three destinations changed from US, UK
and Japan to US, Hong Kong and UAE.
 Past Policy Strategies
Focus LAC
• launched - 1997
• objective - boosting exports of select items
• like Textiles including RMG, Engineering goods
and Chemical products to Latin American
Region.
• there is scope for enhancing two-way trade
between India and the LAC region.
• It is obvious that the overall export strategy must
include regional focus wherever potentialities are
identified.
 Lessons learnt
• Composition and competitiveness are fast
changing
• a dynamic approach with a built in
institutional mechanism for constant
review is essential
• to achieve a higher share of global exports
on a sustainable basis.
 Lessons learnt

• The thrust was on the existing export

products of India
• need to review the import baskets of our
current and potential markets
• need to examine our export
competitiveness, both revealed and real
based on our potentialities (Product-
Market Opportunity Identification)
 Lessons learnt
• key strategic policy issues to be brought to
one place
• Sector-wise strategies to be fully
examined.
• Need to take into account the international
developments
• the complexities arising under the WTO.
 Product Opportunity Identification
• three major markets: EU, Japan, and USA
• These countries constitute a good representative sample of world
trade as they account for 53% of the world’s trade.
• A total of around 220 items were identified for special focus .
• The potential items identified are grouped into 7 main sectors:
– Engineering (including instruments and items of repairs),
– Textiles,
– Gems & Jewellery,
– Chemicals & allied,
– Agriculture and allied (including Marine and Plantations),
– Leather & Footwear items and
– other items.

• the three E’s- Electronics, Electrical and Engineering goods

• potential for exports to other than USA, EU and Japan.
 Market Opportunity Identification
Twenty five markets have been identified
• N.America • Asia
– USA – Hong Kong
– Canada – China
– Mexico – S. Korea
• S.America – Australia
– Brazil – Turkey
– Argentina – Chinese Taipei
• Europe – Singapore
– EU – Thailand
– Switzerland – Isreal
– Turkey – Indonesia
– Poland – Saudi Arabia
– Russia – UAE
– Norway • Africa
– Greece – South Africa

•For Markets of developing countries, region-specific policies

•For Markets of developed countries, FDI linked exports and special
preferential trading arrangements
 Policy Development
Main Issues
• Price competitiveness
• Trade defense Mechanism
• WTO compatible policies
• Foreign Direct Investment
• Tax Rebate
• Transaction Costs
• Export Infrastructure
 Policy Development
Main Issues

• Trade Agreements
• Flexibility in Labor Policy
• Export Credit
• State export participation
• Developing SSI export industry
• Special Economic Zones
• Market Development Programs &
Dissemination of Information
Foreign Trade Policy 2004-2009
• While increase in exports is of vital importance, we have to facilitate those
imports which are required to stimulate our economy.

• The primary purpose is not the earning of foreign exchange, but the stimulation
of economic activity.

• Objectives
– (i) Double percentage share of global merchandise trade within the next 5
years
– (ii) give thrust to employment generation

• Exoprts, Imports are free unless regulated

• Special focus initiatives have been identified for the following sectors
– agriculture
– handlooms
– handicraft
– gems & jewellery
– leather
– Marine
– Objective : employment in semi urban and rural areas
 Exports Promotion Schemes
• Target plus scheme to accelerate growth of
exports.
• Vishesh krishi upaj yojna for agro-exports.
• Additional flexibility under EPCG
• EOUs shall be exempted from Service Tax in
proportion to their exported goods and
services.
• A scheme to establish Free Trade and
Warehousing Zone is introduced to create
trade-related infrastructure to facilitate
import and export with freedom to carry out
trade transactions in free currency.
FOREIGN EXCHANGE RESERVES
• $5.8 Billion in March End –1991
• Gradually increased to $25.2 Billion dollars by march end 1995 to $
141.5 Billion Us dollars in march end 2005

Table 1: Movement in Reserves

(US $ million)

Date FCA SDR GOLD RTP Forex Reserves

1,311
31-Mar-04 107,448 2 (1.6) 4,198 112,959
1,303
30-Sep-04 114,083 1 (1.0) 4,192 119,579
1,438
31-Mar-05 135,571 5 (3.0) 4,500 141,514
1,423
30-Sep-05 136,920 4 (3.0) 4,712 143,058
756
31-Mar-06 145,108 3 (2.0) 5,755 151,622
FOREIGN EXCHANGE RESERVES
FOREIGN EXCHANGE RESERVES
• Source of accretion of foreign reserves
(US $ billion)
Items April-March April-March
2005-06 2004-05
I. Current Account Balance -10.6 -5.4

II. Capital Account (net) 25.7 31.6

(a to f)
a. Foreign Investment 18.2 12.2
b. Banking Capital 1.4 3.9
Of which: NRI Deposits 2.8 -1
c. Short-term Credit 1.7 3.8
d. External Assistance 1.4 1.9
e. External Commercial Borrowings 1.6 5

f. Other items in Capital Account 1.4 4.8

III. Valuation Change -5 2.4
Total (I+II+III) 10.1 28.6
FOREIGN EXCHANGE RESERVES
• Prepayment/Repayment of external debt
– Paid $ 3.03 Billion to World Bank and ADB in feb 2003
– During 2004-05, prepayment of bilateral loan was to the
tune of US$ 30.3 million was made.
– During 2005-06, no prepayment of high-cost
multilateral/bilateral loan was carried out.
FOREIGN EXCHANGE RESERVES
• Deployment Pattern of Foreign Exchange Reserves

(US $ Million)

As on March As on March 31,

31, 2006 2005

(1) Foreign Currency Assets 145,108 135,571

(a)Securities 35,172 36,819
(b) Deposits with other central banks, BIS & IMF 65,399 65,127
(c) Deposits with foreign commercial banks 44,537 33,625
(2) Special Drawing Rights 3 5
(3) Gold (including gold deposits) 5,755 4,500
(4) Reserve Tranche Position 756 1,438
(5) Total Foreign Exchange Reserves 151,622 141,514
FOREIGN EXCHANGE RESERVES
• Management of FOREX
– Similar to other emerging economies
• Demands on FOREX depends on
– the exchange rate regime adopted by the country,
– the extent of openness of the country's economy,
– the size of the external sector in a country's GDP
and the nature of markets operating in the
country
• Most countries have adopted the primary objective
of reserve management as preservation of the long-
term value of the reserves in terms of purchasing
power and the need to minimize risk and volatility in
returns
FOREIGN EXCHANGE RESERVES
• Reserve Bank of India Act, 1934 define the scope of
investment of external assets. In brief, the law broadly
permits the following investment categories:
– (i) Deposits with other central banks and Bank for International
Settlements(BIS).
– (ii) Deposits with foreign commercial banks.
– (iii) Debt instruments representing sovereign/sovereign-
guaranteed liability
– (iv) Residual maturity for debt papers should not exceed 10
years.
– (v) Other instruments / institutions as approved by the Central
Board of the Reserve Bank.
 CURRENT ACCOUNT
• The current account of the balance of
payments is the sum of the balance of
trade (exports less imports of goods and
services), net factor income (such as
interest and dividends) and net transfer
payments (such as foreign aid). A current
account surplus will increase a country's
net foreign assets by the corresponding
amount, and vice versa.
 CURRENT ACCOUNT
• The current account deficit during 2005-06 was almost
double of that in the previous year, in line with the growth
in investment demand in the economy.
• Reason being the increase in investment demand in the
country.
• Net inflows under major components of capital flows
– foreign direct investment,
– portfolio investment,
– NRI deposits and commercial borrowings
– Were higher than a year ago
 TREND IN CAD
20000

15000

10000

5000
US $ in millions

Series1
0
1990-91 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-
-5000
06(apr-
-10000 sep)

-15000
YEARS
 CURRENT ACCOUNT DEFICIT-
REASONS
• Large inflows of FII which were 11 times
larger than the similar period i.e. April –
September 2004
• an increase in inflows of commercial
borrowings and short term credits on
account of lower interest rate spreads on
external borrowings and higher import
financing requirements.
 CURRENT ACCOUNT
FACTS AND FIGURES
• In 2004-05, earnings from invisibles crossed US$ 30
billion. In the first half of 2005-06, invisibles grew by 31
per cent.
• Traditionally, private transfers, comprising mainly
remittances from Indians working abroad, have been the
main source of invisible earnings
• Services exports – captured by net non-factor services,
and including software and IT-enabled services – have
emerged as another key component of invisibles. Such
exports, after growing by 71.3 per cent in 2004-05,
increased further by 75.3 per cent in the first half of
2005-06
 Investment in India
• Investment in Indian market

• Success in India

• Market potential

• Lack of enthusiasm among investors

 Foreign Direct Investment (FDI) is
permitted as under the following
forms of investments

• Through financial collaborations.

• Through joint ventures and technical

collaborations.

• Through capital markets via Euro issues.

• Through private placements or preferential

allotments
 Forbidden Territories

FDI is not permitted in the following

industrial sectors:
• Arms and ammunition.
• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome,
gypsum, sulphur, gold, diamonds,
copper, zinc
 Foreign Investment
through GDRs (Euro Issues)
• Foreign Investment through GDRs is treated as
Foreign Direct Investment
• Indian companies are allowed to raise equity
capital in the international market through the
issue of Global Depository Receipt (GDRs).
• GDRs are designated in dollars and are not
subject to any ceilings on investment.
• An applicant company seeking Government's
approval in this regard should have consistent
track record for good performance (financial or
otherwise) for a minimum period of 3 years.
• This condition would be relaxed for infrastructure
projects such as power generation,
telecommunication, petroleum exploration and
 Clearance from FIPB

• No restriction on the number of Euro-issue

to be floated by a company or a group of
companies in the financial year .
• A company engaged in the manufacture
of items covered under Annex-III of the
New Industrial Policy whose direct foreign
investment after a proposed Euro issue is
likely to exceed 51% or which is
implementing a project not contained in
Annex-III, would need to obtain prior FIPB
clearance before seeking final approval
from Ministry of Finance.
 Use of GDRs

• The proceeds of the GDRs can be used for:

• Financing capital goods imports,

• Capital expenditure including domestic

purchase/installation of plant, equipment and
building and investment in software
development,

• Prepayment or scheduled repayment of

earlier external borrowings, and

•
 Restrictions
However
• Investment in stock markets and real
estate will not be permitted.
• Companies may retain the proceeds
abroad or may remit funds into India
in anticipation of the use of funds for
approved end uses.
• Any investment from a foreign firm
into India requires the prior approval
of the Government of India
 Investment in India - Foreign
Direct Investment - Approval
• Foreign direct investments in India are
approved through two routes:
1. Automatic approval by RBI:

• The Reserve Bank of India accords automatic approval

within a period of two weeks (provided certain
parameters are met) to all proposals involving:
• foreign equity up to 50% in 3 categories relating to
mining activities (List 2).
• foreign equity up to 51% in 48 specified industries
(List 3).
• foreign equity up to 74% in 9 categories (List 4).
• where List 4 includes items also listed in List 3, 74%
participation shall apply.
• The lists are comprehensive and cover most industries
of interest to foreign companies. Investments in high-
priority industries or for trading companies primarily
engaged in exporting are given almost automatic
 Investment in India - Foreign
Direct Investment - Approval

• Opening an office in India

Opening an office in India for the aforesaid

incorporates assessing the commercial
opportunity for self, planning business, obtaining
legal, financial, official, environmental, and tax
advice as needed, choosing legal and capital
structure, selecting a location, obtaining
personnel, developing a product marketing
strategy and more
 Investment in India - Foreign
Direct Investment - Approval
2. The FIPB Route:

• Processing of non-automatic approval cases

FIPB stands for Foreign Investment Promotion

Board which approves all other cases where the
parameters of automatic approval are not met.
Normal processing time is 4 to 6 weeks. Its
approach is liberal for all sectors and all types of
proposals, and rejections are few. It is not
necessary for foreign investors to have a local
partner, even when the foreign investor wishes to
hold less than the entire equity of the company.
The portion of the equity not proposed to be held
by the foreign investor can be offered to the
public.
 WHY INDIA???
• INDIA is the 'best destination' for foreign direct
investment (FDI) and joint ventures, claims country's
Commerce and Industry minister Kamal Nath .
Addressing an audience of US investors at the Focus
India Show in Chicago recently

• India had emerged as an across the board low cost base,

attractive enough to multinationals to relocate in the
country. 

• More than one hundred of the Fortune 500 companies

have a presence in India, as compared to only 33 in
China.

• Reiterating that India promises high return on

investments

• Repatriation of profits was freely permitted (while

according to a survey conducted by the Federation of
Indian Chambers of Commerce and Industry (FICCI) a
few months ago, 70 percent of foreign investors were
 MAJOR DEBATE
• FDI IN RETAIL

• Allow massive, multinational corporations, to buy

Indian retail businesses and open new ones,
forcing thousands of local businesses and kiranas
to close
• Push down wages across the economy
• Destroy our indigenous and unique cultures
• Take money out of local economies and send it to
multinational corporations.
• Reinforce caste and regional economic disparities
• Do tremendous damage to our natural
environment
 IMF
• The International Monetary Fund (IMF) is an
international organization that oversees the global financial
system by monitoring exchange rates and balance of
payments, as well as offering technical and financial
assistance when asked.

• Its headquarters are in Washington, D.C.

• Agreement for the creation of the International Monetary

Fund came at the United Nations Monetary and Financial
Conference in Bretton Woods, New Hampshire, United
States, on July 22, 1944.

• The principal architects of the IMF at the conference were

British economist John Maynard Keynes and the chief
international economist at the US Treasury Department,
Harry Dexter White. The Articles of Agreement came into
force on December 27, 1945, the organization came into
existence on May 1, 1946, as part of a post-WWII
reconstruction plan, and it began financial operations on
March 1, 1947.
 IMF
• The IMF is the referee and, when the need arises,
rescuer of the world’s financial system.
• It was set up to supervise the newly established
fixed exchange rate system.
• After this fell apart in 1971–73, the IMF became
more involved with its member countries’
economic policies, doling out advice on fiscal
policy and monetary policy as well as
microeconomic changes such as privatisation, of
which it became a forceful advocate.
• In the 1980s, it played a leading part in sorting
out the problems of developing countries’
mounting debt.
• More recently, it has several times co-ordinated
and helped to finance assistance to countries with
 What does IMF do???
• The work of the IMF is of three main types

• Surveillance involves the monitoring of

economic and financial developments, and the
provision of policy advice, aimed especially at
crisis-prevention.

• lends to countries with balance of payments

difficulties, to provide temporary financing and to
support policies aimed at correcting the
underlying problems; loans to low-income
countries are also aimed especially at poverty
reduction.

• Third, the IMF provides countries with technical

 FACTS
Fast Facts on the IMF
• Current membership: 184 countries
• Staff: approximately 2,716 from 165
countries
• Total Quotas: $317 billion (as of 7/31/06)
• Loans outstanding: $28 billion to 74
countries, of which $6 billion to 56 on
concessional terms (as of 7/31/06)
• Technical Assistance provided: 429.2
person years during FY2006
• Surveillance consultations concluded: 128
countries during FY2006, of which 122
voluntarily published information on their
 Main Responsibilities
• Article I of the Articles of Agreement
sets out the IMF's main
responsibilities:
• promoting international monetary
cooperation;
• facilitating the expansion and balanced
growth of international trade;
• promoting exchange stability;
• assisting in the establishment of a
multilateral system of payments; and
• making its resources available (under
adequate safeguards) to members
experiencing balance of payments
difficulties.
Member and Rights
 Membership
Membership qualifications
• Any country may apply for membership of the IMF.
• The application will be considered, first, by the IMF's
Executive Board. After its consideration, the Executive
Board will submit a report to the Board of Governors of the
IMF with recommendations in the form of a "Membership
Resolution.“
• These recommendations cover the amount of quota in the
IMF, the form of payment of the subscription, and other
customary terms and conditions of membership.
• After the Board of Governors has adopted the "Membership
Resolution," the applicant state needs to take the legal
steps required under its own law to enable it to sign the
IMF's Articles of Agreement and to fulfill the obligations of
IMF membership.
• A member's quota in the IMF determines the amount of its
subscription, its voting weight, its access to IMF financing,
and its allocation of SDRs.
• As of 2006, participating nations were discussing changes
to the voting formula, to increase equity
 Criticism
• The role of the two Bretton Woods institutions has
been controversial to many since the late Cold
War period.

• Critics claim that IMF policy makers deliberately

supported capitalistic military dictatorships
friendly to American and European corporations.

• Critics also claim that the IMF is generally

apathetic or hostile to their views of democracy,
human rights, and labor rights.

• These criticisms generated a controversy that

helped spark the anti-globalization movement.
Others claim the IMF has little power to
democratize sovereign states, nor is that its
 Criticism
• Two criticisms from economists have been that
financial aid is always bound to so-called
"Conditionalities", including Structural Adjustment
Programs. Conditionalities, it is claimed, retard
social stability and hence inhibit the stated goals of
the IMF.

• Typically the IMF and its supporters advocate a

Keynesian approach. As such, adherents of supply-
side economics generally find themselves in open
disagreement with the IMF. The IMF frequently
advocates currency devaluation, criticized by
proponents of supply-side economics as
inflationary. Secondly they link higher taxes under
"austerity programmes" with economic contraction.

• Currency devaluation is recommended by the IMF

 Criticism
• Argentina, which had been considered by the IMF to be a
model country in its compliance to policy proposals by
the Bretton Woods institutions, experienced a
catastrophic economic crisis in 2001, generally believed
to have been caused by IMF-induced budget restrictions
— which undercut the government's ability to sustain
national infrastructure even in crucial areas such as
health, education, and security — and privatization of
strategically vital national resources. The crisis added to
widespread hatred of this institution in Argentina and
other South American countries, with many blaming the
IMF for the region's economic problems

• Another example of where IMF Structural Adjustment

Programmes aggravated the problem was in Kenya.
Before IMF got involved in the country, the Kenya central
bank oversaw all currency movement in and out of the
country. IMF mandated that Kenya central bank had to
allow easier currency movement. However, the
adjustment resulted in very little foreign investment, but
 IMF on India
• Question:  Can you give us an update on India's
economy?

• Answer:  Growth in India in 2006 and 2007 should

moderate to about 8 percent against a backdrop of
higher oil prices and rising global interest rates. A
further rise in oil prices and a slowdown in global
growth constitute risks to this outlook. IMF staff
strongly supports the resumption of fiscal
consolidation in 2006 and 2007 budgets. This should
help counter growing demand pressures while
enhancing the credibility of the Fiscal Responsibility
Law. Over the medium term, tax base broadening and
subsidy reform will be key to improving the fiscal
situation. With inflationary pressures building and
credit growing rapidly, the Reserve Bank of India
needs to remain vigilant. Further rate increases may
be needed to anchor inflation expectations and curb
demand pressures, particularly in light of need for