China's Brics bank proposal bamboozles deficit-ridden India

Brics bank may be a good concept to catalyze development within Brics member countries and some least developed countries of the Third World; but it is an idea that has come a bit too soon.

Brics leaders will have to ensure that they work more on the concept and take more time to deliver a healthy David to survive the seven-decade-old global dominance by the Bretton Woods Goliaths of World Bank and International Monetary Fund. It is important that the grouping first fastens the nuts and bolts of what exactly the proposed Brics development bank will do and also prepares the blueprint of the hows, the whys, the wheres and come up with a thorough feasibility study.

The Brics leaders should avoid the bravado and be alive to the politico-economic compulsions and priorities of the member states rather than rushing to catch global eyeballs. Brics will do well to carefully put together the brick and mortar of the bank first and then take a decision.[caption id=“attachment_676367” align=“alignleft” width=“380”] Prime Minister Manmohan Singh. PTI[/caption]

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It is imperative that the proposed bank has an equitable seed capital sharing, something that India is strongly batting for. Except China, all other members of the grouping will find it very difficult to shell out $10 billion. China is in a position to loosen its purse strings not only for itself but also for countries like Brazil and South Africa and even pay much more – as indeed the Chinese have told the grouping; but it would negate the principle of equal partnership that is so important for an international grouping.

China, which alone accounts for more than 40 percent of the Brics collective GDP, has gone to the extent of proposing a Brics bank with $ 100 billion total seed capital and even expressed its willingness to pay hefty part of the Brazilian and South African share. India is uncomfortable with the Chinese move as if this were to happen China will become “more equal” than other members in the grouping. India would be grudging its initiative with regard to the Brics bank which it proposed during the 4th Brics summit in New Delhi in March 2012!

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Such a scenario would inevitably mean that China would acquire a veto power over the proposed bank’s decisions and operations. This would defeat the very rationale of trying to come up with an alternate financial mechanism which, unlike the Bretton Woods twins IMF and WB, is not dominated by any single country.

Then there are economic difficulties that Brics cannot be oblivious to when the Eurozone crisis is persisting and the developed world’s economic outlook continues to be bleak.

It is indeed true that Brics countries together command 25 percent of global GDP in terms of purchasing power parity and almost one-fifth of global nominal GDP, 17 percent of global trade and the grouping is recipient of 11 percent of global FDI. Moreover Brics countries have 25.9 percent of world’s geographic area and 43 percent of global population. These statistics are indeed compelling but institutions like Brics development bank cannot be built on the strength of statistics alone.

The Brics growth rates, though higher than the developed world’s, have fallen considerably. Brics economies cannot regain the pre-global economic recession growth rates till the developed world, particularly Europe, comes out of the current financial morass.

Brazil’s is the worst affected economy in Brics. From a GDP growth rate of 7.5 percent in 2010, Brazil slid down to an appalling 0.9 percent growth rate in 2012. The year 2013 promises to be better but the Brazilian government itself is giving projections of not more than four percent growth rate in the year 2013 which is being considered rather ambitious by experts.

Russian economy too has slowed down considerably since mid-2011. Prime Minister Dmitry Medvedev expressed his wish in January 2013 that he would like Russia to achieve 5 percent growth rate this year. But the prospects don’t look all too promising considering that the Russian economy, heavily dependent on revenue generated from oil and gas exports, can look up only if international oil prices go well above $ 120 per barrel. This is not so and oil prices experts don’t see the international prices zooming up in foreseeable future because of the global economic slowdown.

India’s case is no different and the current GDP growth rate is hovering between five and six per cent, much below the growth rate of eight to nine percent in the pre-recession years.

Though China continues to have long and deep pockets, its economy has slowed down considerably. For a country that has clocked a double digit growth on an average for the past three decades, its GDP touched a 13-year-low in 2012 with a growth rate of just 7.8 percent.

South Africa has been battling the global recession woes for past over four years and its recent growth projections for the current year are pegged at a measly 2.7 percent only. For a country with a total GDP of just about $ 400 billion, this is bad news.

The above-mentioned economic considerations alone are enough for Brics leadership to have a deep breath and rethink their plans for a development bank. Then there are political considerations as well which will keep all member countries, perhaps with the sole exception of China, in taking the plunge on a project for which they will have to pay through their nose.

India, for example, is in an election year. The Manmohan Singh government, which is already cash-strapped, has to set aside billions of dollars for its numerous public welfare programmes, including the upcoming food-for-all scheme. Where will he get the ten billion dollars of India’s share of the Brics bank corpus fund from?

The writer is a FirstPost columnist and a strategic affairs analyst who can be reached at bhootnath004@yahoo.com