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Business News/ Opinion / India’s goals at the BRICS bank

India’s goals at the BRICS bank

India could benefit from a BRICS bank governance structure that is conducive to other developing countries

Photo: BloombergPremium
Photo: Bloomberg

Recent official discussions on the Brazil, Russia, India, China, South Africa or BRICS Development Bank (BDB) have revolved round the location of its headquarters and its voting and governance structure. In India, there has been very little public policy discussion around the strategic imperatives that should inform India’s position on these issues. At the political level, too, engagement on the issue of mandate has been very limited in all BRICS countries.

A new political mandate provides a window for fresh discussion on strategic issues. There are three key strategic objectives for the BDB, and its governance structure should reflect these objectives.

India, together with Brazil and South Africa, stands to benefit significantly if the BRICS bank governance structure is conducive and attractive to the participation of other developing countries. Currently, China and Russia are the only countries that are running a current account surplus. Hence, for these countries, the BRICS Bank provides an alternative avenue to invest these surpluses, other than US treasury bonds. This is not the case with others, including India. These countries are, in effect, investing borrowed resources in BDB. They are, at this stage, weak financial partners. Linking finance to governance is therefore not attractive.

China has a disproportionately powerful voice within BRICS due to its economic size and political aggressiveness. The Chinese have initiated several other moves to create alternative financial vehicles outside BRICS, including an Association of Southeast Asian Nations (ASEAN) infrastructure fund, and a strategy to bid for the presidency of the Asian Development Bank (ADB). For China, BDB, therefore, is an attractive opportunity to invest its surpluses while socializing the risk of its expanded financial interventions—when Myanmar pushes back against further Chinese investment, BDB can come in. This is an important context for China’s economic diplomacy in its approach to BDB. The only realistic way to temper Chinese dominance would be for India to argue for a broader core membership of the BRICS Development Bank.

A commonly believed lesson to learn from what’s happened at the World Trade Organization (WTO) meetings in Bali is that the impact of India’s economic diplomacy is considerably strengthened when our interests coincide with those of a large pool of developing countries. India is a large developing country, and the poorest member of the Group of Twenty (G-20) countries and BRICS. We share the same acuteness with respect to poverty, hunger and basic needs with other poor developing countries. We should leverage this positioning at the leaders level. An emphatic position that identifies India with the broader development imperative should therefore be reflected in our approach to the governance of BDB. This means advocating a governance structure that provides voice to poor developing countries in the governance of the bank.

It follows that the BRICS Bank should not admit developed countries and other multilateral developing banks controlled by developed countries as members. The main argument for opening membership to this constituency is the superior leveraging power provided by their attractive ratings profile. However, unless these entities were to have a significant and demonstrable controlling interest in BDB, the improvement in the ratings profile would not be significant. Further, this will dilute the branding of BDB as a bank for, of and by the developing world.

India’s room for diplomatic leadership within our neighbourhood is otherwise limited by asymmetries in size and bilateral challenges. Our neighbourhood has four least developed countries which are all significant recipients of Indian bilateral co-operation. They will be attractive borrower-clients for BDB. India should, therefore, advocate a governance structure that allows us to use BDB as an instrument to complement our efforts to provide economic leadership in our neighbourhood.

The above strategic objectives are best met by advocating that the BRICS Development Bank is founded on the principle of “one stakeholder one vote", in a complete break from existing practice in other development banks. Each BRICS country will hold equal equity in the bank. If China and Russia wish to invest more of their surpluses in BDB they can do so by lending to it. Delinking the issue of capital adequacy from the governance structure is of redline importance for India. This will also allow speedy incorporation of other emerging developing economies interested in joining BDB. India should oppose any attempts to define the governance structure on the basis of relative economic weight or economic power of the membership.

Participation of non-emerging economy developing countries in the governance of BDB can be facilitated by creating a category of developing country “stakeholder members" (SMs). SMs could rotationally or permanently elect members to the Board of BDB with full voting powers. The number of SMs to be appointed to the board could vary from one to five. One member will in essence be gestural in terms of voice. At the other extreme, five would imply that the equity holders and stakeholder members would have equal voice. The number of SMs is a function of the extent to which BDB is branded as a bank of the global south. The stronger the political preference for such a branding the greater the number of SMs. However, it is key that the principle of one member-one vote be maintained as this would clearly differentiate the BRICS Development Bank from entities such as the International Monetary Fund, the World Bank and regional development banks in which voting power is directly related to financial clout.

Rathin Roy is director of National Institute of Public Finance and Policy, and member of the Seventh Central Pay Commission.

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Published: 07 Apr 2014, 06:42 PM IST
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