Government of India & AIIB sign agreement 

#AIIB #InternationalOrganisations #Economy 

The Government of India, the Government of West Bengal and the Asian Infrastructure Investment Bank(AIIB)today signed a loan agreement for a US$145 million project to improve irrigation services and flood management in the Damodar Valley Command Area (DVCA) in West Bengal. 

  • The West Bengal Major Irrigation and Flood Management Project will benefit about 2.7 million farmers from five districts of West Bengal across 393,964 ha area with better irrigation services and improved protection against annual flooding to mitigate the impact of climate change. 

About DVCA 

  • The DVCA is over 60 years old, and in need of modernization. Key challenges include degradation of infrastructure and inadequate irrigation management, including poor quality of service delivery, inefficient irrigation and the failure to serve the middle and tail parts of the canal network with surface water.  
  • Tail end farmers are compelled to extract groundwater, which increases the costs of cultivation and undermines the sustainability of the scheme.  
  • Between 2005 and 2017, the number of semi-critical blocks increased from five to 19 (out of a total of 41 blocks). 
  • The Lower Damodar basin area is historically flood-prone. On average, 33,500 hectares of the cropped area and 461,000 people have affected annually.  
  • This downstream part of the project area lacks the infrastructure to protect against recurrent flooding. The project will invest in measures to reduce flooding, including strengthening of embankments and desilting. 
  • To deal with these challenges, several institutional reforms are planned under the project. These include introduction of a modern Management Information System (MIS), benchmarking and evidence-based decision making, promotion of conjunctive use of surface and groundwater, introduction of rational asset management and improving transparency through citizen engagement. Irrigation Service Providers will be recruited on a performance basis to improve the quality of irrigation services. 

About AIIB 

  • The Asian Infrastructure Investment Bank (AIIB) is an international financial institution proposed by China.  
  • The purpose of the multilateral development bank is to provide finance to infrastructure projects in the Asia-Pacific region. 

Members 

  • The China-led Asian Infrastructure Investment Bank (AIIB) has officially approved 57 nations as prospective founding members, with Sweden, Israel, South Africa, Azerbaijan, Iceland, Portugal and Poland the latest to be included.  
  • Countries accepted as AIIB founding members include China, India, Malaysia, Indonesia, Singapore, Saudi Arabia, Brunei, Myanmar, the Philippines, Pakistan, Britain, Australia, Brazil, France, Germany and Spain. 
  • Founding members have priority over nations that sign up later because they will have the right to set the rules for the bank. 
  • In March 2015, United Kingdom became the first of G7 nations to join the bank.4 members of UNSC  

Voting pattern:  

  • The voting shares are based on the size of each member country’s economy (GDP in PPP terms) and not on the basis of contribution to the bank’s authorized capital. China, India and Russia are the three largest shareholders. 
  • Beijing holds a 30.34 per cent stake in the bank as it contributed US$29.78 billion of the institution's initial capital. It will also have 26.06 per cent of the voting rights, giving it effective veto power, as the bank's major decisions will require the support of at least 75 per cent of the votes. 

Why the need for new multilateral organization aroused? The reasons are: 

Western dominance: 

  • The presence of western dominance in the IMF, the World Bank and the Asian Development Bank (ADB) has been considered as the major factor behind formation of AIIB.  
  • It is a set norm that the president of WB will be a person chosen by the US, where as the IMF chief would be an European.  

Lack of reform in IMF & World Bank: 

  • This means that there is no reflection of current economic situation in the quota politics dominates economics.  
  • The World Bank violated its Articles of Agreement in denying India fresh loans after India tested nuclear weapons in May 1998. As per its Articles, political issues should not influence. 

Huge demand of infrastructure fund in Asia: 

  • According to report by ADB, till 2020 Asia needs $800bn per annum for infrastructure projects (ADB can provide only $10 bn). 

Why China is interested? 

  • With forex reserve $3.8 tn it gives immense financial muscle to China to take the leadership of the group. 
  • It will contribute to the internationalization of the Yuan.  
  • It will help secure contracts for Chinese firms and thus boost employment opportunities at home. 
  • China also wants to move away from export led growth towards  domestic consumption led growth. It wants to strategically  deploy it's  huge forex *BRICS  new development  bank, silk route initiative. 
  • According to some analysts ,AIIB is the economic wing of China’s “one belt one road initiative”, where money will be strategically invested towards China’s geopolitical objective. 

Global impact of the initiative 

  • It will catalyze the reforms in global financial institutions as more competition among these banks will catalyze the long awaited  reform in Bretton wood twins. 
  • According to ADB, Asia needs $800 bn of investment every year. AIIB can play a significant role in providing funding for it. 
  • Economic and political power may shift to Asia as key European members and allies of USA  has joined the Bank.  

Relevance for India 

  • India is a founding member of the AIIB and is expected to have the second-largest shareholding after China.  
  • Establishment of the AIIB will help India and other signatory countries to raise and avail resources for their infrastructure and sustainable development projects.  
  • It is expected that with membership in AIIB, India would be able to raise and obtain more resources for much needed infrastructure development. As per 12th FYP ,India needs $1 trn for infrastructure funding thus India can leverage its membership in AIIB to avail cheap loan  

Conclusion 

  • This long-planned initiative mirrors the growing influence China intends to play on world economic and financial affairs hence care must be taken to prevent it to become the sole driving factor for the bank.  
  • Recently Former Chief Secretary of Gujarat D.J Pandian has been appointed as Vice-President and Chief Investment Officer of newly created AIIB.  
  • This along with the positive engagement of AIIB President Jin Liqun with PM Modi has created a positive sentiment among the political and business sphere regarding the future engagement and role of India with AIIB.  
  • As India plays significant role in providing credibility to the bank it must leverage its position to ensure transparency and democracy in the management of affairs. 
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