Updated on: Wednesday, September 16, 2020, 06:15 PM IST

Did the Modi government borrow from China-backed AIIB amid standoff?

PM Modi and Chinese Premier Xi Jinping  | AFP

PM Modi and Chinese Premier Xi Jinping | AFP


The answer is simply yes. On one hand, the Narendra Modi-led government discouraged businesses from depending on China. On the other hand, the Indian government went out and borrowed USD 1,250 million from the Beijing-headquartered Asian Infrastructure Investment Bank (AIIB), during the India-China faceoff. But does this statement really make sense?

There is nothing wrong with borrowing from the bank in which India (7.6 per cent) is the second-largest shareholder. The first largest is China (26.5 per cent) but that does not make it a Chinese agency. In simple words, in one company there is a Chinese founder and Indian partner. But there is no denying that there can be a Chinese influence just like IMF and World Bank which is influenced by western countries.

But the question is why India borrowed from AIIB when the standoff was at its peak. Or rather why should not it borrow from AIIB?

First, understand what is the role of this bank and why India looks at AIIB for financial support:

- Beijing-headquartered Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank that supports countries to meet their social and economic obligations. It started its operations in January 2016. AIIB now has 103 approved countries as its members, 93 approved projects, and has invested up to USD 20.02 billion.

- India continues to be the largest borrower of AIIB. India has borrowed around USD 3.6 billion which is around 25 per cent of the AIIB’s overall lending to date.

- While India borrows from other multilateral agencies like the World Bank and Asia Development Bank, India borrows from AIIB as the cost of borrowing or say interest plays an important role.

- AIIB was started by China to get some control or a say in financial institutions that were otherwise governed by western countries. Also, the Chinese authorities were upset with the slow pace of reforms and governance and wanted greater input in global established institutions like the IMF, World Bank, and Asian Development Bank.

- China initiated the bank but was soon to approach India among other Asian countries to recognise the agency.

- India saw this as an opportunity too and joined AIIB in 2014.

- India had even hosted an annual AIIB event in 2018.

Details of USD 1,250 million loan taken in 2020:

- There were two loans proposed during the COVID-19 period — USD 500 million and USD 250 million.

- The review for USD 500 million worth of loan under AIIB’s COVID-19 Crisis Recovery Facility started in April as per the AIIB website. But the agreement was signed on May 8, 2020.

- While the second loan discussion started in May 2020 (which day is unclear) as per the AIIB website, the Galwan Valley killing where Chinese Troops killed Indian soldiers took place on June 15. In this case, the loan agreement was signed on June 19 when the country was mourning the loss of its soldiers.

Now let us understand the rationale of the loan:

First loan: The loan was to improve India’s ability to prevent, detect, and respond to the threat posed by COVID-19 and strengthening of India’s national health systems for preparedness. This was basically to tackle COVID-19.

Second loan: The objective of this loan was to provide the Government of India with budgetary support to mitigate COVID-19-induced economic losses. The loan was to provide social assistance to vulnerable groups. If the second loan was not taken, then the government might have not been able to provide the cash incentives offered to the vulnerable in the country.

At the time when government spending is rising, every government should be open for sources of borrowing which is favourable for the country.

In short, the government had to borrow these loans to support its people one way or another.

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Published on: Wednesday, September 16, 2020, 04:11 PM IST