Is the Asian Infrastructure Investment Bank Good for India?

Coal power looks to get a boost, but New Delhi might not be thrilled signing on to the China-dominated lender.

Indian labourers pile coal at a coal field on the outskirts of Hyderabad on September 5, 2012. Indian police on September 4 opened a probe into five coal companies after raiding premises across the country over the alleged misallocation of lucrative mining rights. AFP PHOTO / Noah SEELAM (Photo credit should read NOAH SEELAM/AFP/Getty Images)

A symbolically important deadline passed on March 31, 2015, and with it a new world order might just be taking shape. It was the date that the Chinese had set as a deadline for those countries wishing to sign up as founding members of the new Asian Infrastructure Investment Bank (AIIB). The AIIB aims to supplant or at least challenge the hegemony of the Bretton Woods institutions, in particular the World Bank and the International Monetary Fund (IMF). For India, in particular, AIIB may have a significant impact on the energy choices available, by lifting Western-imposed constraints on how the World Bank lends.

The AIIB also represents an important symbolic defeat for the United States, which had made no secret of its opposition to the new body. Bucking pressure from Washington, some of America’s major allies including Britain, India, and several other European and Asian countries have signed on or signaled they wish to join. India was one of those countries present when the initial Memorandum of Understanding was unveiled by Chinese President Xi Jinping. In fact, Japan is the only major country besides the United States that thus far has opted out, and that has far more to do with Japan’s apprehensions about the rise of China in a region it has long dominated than any pressure that might have emanated from Washington.

Along with the New Development Bank (NDB) — also spearheaded by China — that brings together the five BRICS countries of Brazil, Russia, India, China, and South Africa, as well as the ambitious Silk Road Fund (SRF), the creation of AIIB signals nothing less than China’s intention to remake the global economic order. The NDB, if successful, could become a rival to the U.S.-dominated World Bank and the Japan-dominated Asian Development Bank (ADB).

Likewise, the AIIB, if it takes off, could power billions of dollars of much needed infrastructure development throughout the region without, presumably, all of the red tape and environmental and other regulatory hurdles that monies coming from the World Bank and western donors carry.

While the success in signing up members is undoubtedly a diplomatic triumph for China and a foreign relations debacle for the lame-duck President Barack Obama, the creation of AIIB has as much to do with the recalcitrance of the United States and other advanced economies in reforming the Bretton Woods institutions as it does with China’s desire to create new institutions in its own image.

These institutions, created in 1944 in the dying days of World War II, capture the geopolitical realities of a time when the world was dominated by the United States and a few other Western economies. A 2010 reform that would have increased the voting shares of emerging economies has been stalled because of the refusal of the U.S. Congress to ratify it. Nor has there been any serious effort to reform the mechanism by which the leaders of these institutions are chosen, such that an American always heads the World Bank and a European the IMF.

While China may have won this round in its geopolitical game of chess with the United States, it’s much less clear whether other big emerging economies that have also signed up to the new institutions, including India, can be expected to gain or lose as a result of the shifting balance of power. It’s true that India has been stifled under a Bretton Woods system dominated by Washington, but it’s not obvious at all that an alternative system with China as its boss will be in India’s long-term strategic interests. While the economic relationship between the two gigantic neighbors has taken off in recent years, there are still unresolved border disputes and an intense rivalry over who will dominate the Indian Ocean region.

However, in a medium-term economic sense, the creation of AIIB and NDB may well be beneficial for India. The crux is coal.

Back in 2013, President Obama announced that the U.S. government would place severe restrictions on financing coal-fired electricity generation abroad, for reasons having to do with the administration’s concern with climate change. To no one’s surprise, the World Bank followed suit less than a month later. The World Bank’s policy, in keeping with that of the United States, is only to lend for coal-fired electricity projects in “rare circumstances.”

The Obama administration’s and World Bank’s environmental rationale for their ban on supporting coal-fired plants overseas rings hollow, when you consider that both the U.S. government and the World Bank heavily fund fossil fuel projects abroad that directly benefit U.S. industry.

Be that as it may, their lack of support for coal poses a major challenge for India, which has the world’s fifth-largest coal reserves and needs to massively ramp up its energy-generation capacity in a country where 300 million people have no access to electricity. It’s a major part of the manufacturing and development agenda of Prime Minister Narendra Modi.

The shift in policy by the United States and the World Bank cut off an important source of development finance for such projects in India. With government finances stretched thin and the reluctance of private players to invest heavily — given regulatory delays and other uncertainties which make doing business in India difficult — a new source of finance would be welcome indeed.

One of the reasons India has embraced the AIIB is almost surely the fact that the country hopes to receive development finance for its coal-powered electricity generation. The Indian government has indicated it would like to increase renewable energy capacity, but it has reiterated that, to meet the country’s development needs, coal-fired power generation will have to be significantly stepped up.

It’s in India’s interests to use the AIIB to help spur this growth. But it would be shortsighted for India to give up on the Bretton Woods institutions, which everyone agrees are in dire need of reform. As it happens, there might a unique opportunity for India to play a key role in beginning IMF reform by helping to break the unwritten rule that its head must be a European.

Recent reports in India suggest that Raghuram Rajan, India’s central bank chief, a former IMF chief economist and University of Chicago finance professor, may be in the running to replace Christine Lagarde, the IMF’s managing director, when her term expires in 2016. Coincidentally, that’s also when Rajan’s term ends. While Rajan publicly denies being interested, it’s widely believed among those who’ve followed his career that he would welcome the challenge.

Modi, whose professed aim is to project a rising India on the world stage, should likewise jump at the opportunity to nominate and lobby assiduously on behalf of Rajan. And if the Obama administration wants a foreign policy success in its last year in office, it could do no better than supporting India and persuading the Europeans to give up their cherished control over the IMF’s top job. They’re unlikely to find a candidate who better fits Washington’s own ideological stance than Rajan, an economist who shares and has helped to shape orthodox IMF positions on monetary and exchange rate policies.

In the bargain, a revitalized IMF headed by an Indian would not only give the institution renewed legitimacy in the developing world but would help counter the rise of China which has thrown down the gauntlet with AIIB. That would be a win for India, too.


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