Let us make an in-depth study of the Role of International Monetary Fund (IMF) in the Indian Economy.

India is one of the founder members of the Bretton Woods institutions.

The IMF provides short-term financial assistance to the members so as to enable them tide over critical balance of payments situation.

To ease the problem of international liquidity, Special Drawing Rights (SDRs) were created in 1969. The SDRs are allocated to the members in proportion to their quotas. India borrowed both financial and other assistance from the IMF quite a number of times under several lending provisions of the Fund.


Although India borrowed from the Fund immediately after independence, her dependence on it for financial assistance became critical during the Second Five Year Plan (1955-56 to 1960-61) when she witnessed a sharp fall in foreign exchange reserves. She borrowed $200 million to meet the crisis. As the BOP crisis remained precarious she again borrowed $250 million in 1961. As there was no sign of improvement in BOP position, India devalued her currency in 1966 to the extent of 36.5 p.c., allegedly on the advice of the IMF.

India again made a huge borrowing from the IMF in 1981 to tide over the BOP difficulties following the second oil price rise made by the OPEC and the large volume of trade deficit. Under the borrowing arrangement with the IMF, India agreed to draw SDR 5 billion, over a three- year period. As BOP situation as well as economic conditions improved, actual drawing from the Fund was only SDR 3.9 billion, rather than SDR 5 billion.

The situation deteriorated in the late 1980s and early 1990s when foreign exchange reserves position were satisfactory for two weeks’ imports as against the generally accepted ‘safe minimum reserves’ of three months’ equivalent. Several face- saving measures were taken by the Government, but with little or no achievements. The Government headed by Narasimha Rao entered an agreement with the IMF to borrow from it.

In August 1991, the Government applied for stand­by loan of $2.3 million for a 20-month period. For this, a letter of intent was issued. In this letter, India promised to launch several structural reforms in the coming years. In other words, conditionality clause was incorporated by the IMF against loans. The recent economic reforms of 1990s in India are said to have been introduced at the instance of the IMF-World Bank.


India has been receiving benefits from the Fund from time to time. Quite a large number of times, India got financial accommodation from the Fund to cover deficits in BOP. As the IMF and the World Bank are inseparable twins, membership in the former is a prerequisite for membership in the latter. That is why; India receives various kinds of help for various development projects from the World Bank.

The Fund provides technical expertise and support to India in various broad areas particularly fiscal and monetary policy. Its staff frequently exchange views on India’s balance of payments situation, fiscal situation, exchange rate problems, etc., and suggest appropriate remedies to the problems. Thus, India gains from the Fund.

However, conditionality clause of the IMF loan in recent years is subject to serious debate. Measures suggested by the Fund in the early years of 1990s involved serious stress and strains. The IMF medicine devaluation of Indian currency, reduction in budgetary and fiscal deficit, cut in government expenditure and subsidy, import liberalisation, industrial policy reforms, trade policy reforms, banking reforms, etc., involves some costs that are mostly unwarranted. Instead, higher economic growth rate following structural adjustment policies, India has been facing recession in industries.

Unemployment problem is on the rise. Public sector enterprises are facing extinct. Number of people living below the poverty line is on the rise. It is true that the BOP problem is not so serious today than what it was 10 years ago, but debt burden is not showing any sign of abatement. Deb-service payment rose from $ 8.2 billion in 1992 to $ 11.9 billion in 2007. However debt-service during the period 1992- 2007 declined from 30.1 p.c. to 4.8 p.c.


Anyway, the IMF prescriptions on India as well as on other countries present a mixed picture of failures and successes. Some of the measures adopted were urgently called for. One such measure is the creation of a free, competitive economy. The IMF has to be created for the creation of competitive economy. Still more has to be done. But in the process, it has generated enough problems. We must not brush aside these as transitional problems. These problems are to be tackled promptly.