New Development Bank formally inaugurated its business yesterday as

6thBRICS summit was held in Ufa, Russia which was also attended by

Finance Minister. Initial collective investment in bank is $50 billion and a

Contingency Reserve Fund is formed with $ 100 Billion. While investment

in bank is equal by all member countries, China is major contributor to

CRF. Banks Headquarters are at Shanghai and its first president (for 6

years) will be ex-ICICI Bank chief K.V. Kamath.

It is significant development for world economy in the face of Greek crisis.

Banks main focus will be on member countries, yet it will be accessible to

other countries as well. Summit also offered some help to Greece.

Bank seeks to cater to economic needs of its participants. Chinas economy

is in middle of transformation. With plummeting of global demand it is

seeking access to new economies. China is exports led economy while India

is domestic demand driven economy. Main reason behind is that in China,

savings are substantially more than consumption, in India it is vice versa.

In simple terms, money earned by people competes for savings or

consumption. If a country (its people+ corporates & government) consumes

more, than demand will be more, while if it saves more, than there will be

more investment and hence more production of goods and services. As

Chinese save/invest/produce more they are in desperate search of

customers abroad. Indians, on the other hand, consumes more than they

save/invest/produce, as a result they have to Import the excess, hence a

market for the world.

This scenario fits perfect for New Development Bank. India is starving for

investments in Infrastructure and China is having surplus investible

FOREX reserves, which are more than $ 3500 Billion. India is a credible

and reputed borrower and NDB will get reasonable returns. Borrowing this

money directly from china, might have subverted some security

considerations. But now it is channeled through a multilateral Institution,

of which India is an important member and also with an Indian president.

However, Infrastructure in India is not marred just because of lack of

investment. Lack of land availability is bigger problem. Recent

development model relies excessively on Public Private Partnership, which

needs to fulfil stringent conditions mandated by new land acquisition act.

Passage of ordinance in Lok Sabha is crucial for removal of this hurdle.

Because of lack of infra there is significant inter regional disparity in India.

For instance, exports from Punjab costs at least 6% more than those from

coastal states. Apart from Infra, bureaucratic red tape and environment

licence raj are equally responsible. In case of non-addressing of these issues

investment will not help, rather it will put additional interest cost burden

without any returns. However, there are some indications of improvements

across the sectors.

In some international circles, particularly western, BRICs bank is being

seen as a challenge to Bretton wood Institutions. So far, these concerns

appear to be misplaced. This bank seeks to just supplement what they are

already doing, albeit with more transparency and participation. Its strange

that champions of free market are scoffing at competition. Nevertheless,

formation and performance of NDB will compel them to think about

reforms in these institutions.

Contingency Reserve Fund which holds $ 100 b will act as buffer for

member economies in times of international or domestic distress. Chinas

contribution is $ 41b, South Africas is $3 b, other three countries

contribute balance $ 54 equally. Violent instability in international

economy since 2008 crisis has made developing economies much

vulnerable. International funds are moving back and forth in economies on

short term basis. As a result almost all currencies have touched new highs

and lows during this short time. Programs like US quantitative easing and

contraction are responsible for this, equally responsible are the fluctuation

in policy/bank rates in the west. If in a short time India suffers huge

outflow from its FOREX reserve (though we have more than sufficient

now), so that it is not able to fulfil its payment obligation under current

account (excess imports over exports), she will have to approach IMF. This

outflow if any will also result in crash of rupee, making things worse. So,

CRF hedges member countries against such risks.

Besides this, many in India are wary of relying excessively on China,

because of its opaqueness. But there seems to be more complementarity

than threat as has already been explained. Threat, if any, is to China on long

term basis. India is just taking initial steps to improve its manufacturing

sector. In case things go well, in few decades Indian products will start

giving stiff competition to Chinas. It may be a repeat of US- China story.

However, this is a natural transition. As Chinas per capita income moves to

higher trajectory many businesses will be shut there and move to low cost

economies. Also, more economic engagement results into entangled

strategic and security interests, which results in global stability and

prosperity.