With the United States abstaining, the International Monetary Fund last night approved a controversial loan of $5.8 million to India over the next three years, designed to help that country turn its balance of payments deficit into a surplus. It is the largest loan ever made by the IMF.
Although the loan is subject to economic "performance criteria" considered severe by political opposition parties within India, the Reagan administration feels that the conditions may not be tough enough. Moreover, at a long session of the IMF executive directors board yesterday before the final vote, the United States also indicated concern about the absolute size of the loan.
Officials said that the interest rate would float, depending on market conditions. But one informed estimate was that the average might work out to a range of 8 to 9 percent. Roughly half of the loan will come from the IMF's ordinary resources, and half from the money recently borrowed by the fund, mostly from Saudi Arabia.
In a deliberately low-key statement issued after yesterday's vote, the Treasury said the United States is not convinced that India's balance-of-payments problem "requires drawing on IMF resources to the extent envisaged. In addition, the United States has questions about some important aspects of the program, which do not seem to provide sufficient clarity as to permit us adequately to judge performance."
The basic rationale for the IMF loan--which has had strong support at the State Department and in the World Bank--is that it will transform India's balance-of-payments deficit from approximately $2 billion for fiscal 1981-82 into a surplus of about $1 billion by fiscal 1985-86.
Part of the American doubt about the loan relates to the basic free-market philosophy of the Reagan administration: Some officials feel that India tends to discourage private investment, and that the large IMF loan will do nothing to shake that trend. Others feel that allowing India such a large tap on the IMF's resources severely limits what is available for others, and in effect adds to the pressure on the United States and other rich countries to expand their contributions to the international lending agencies.
But the Indian executive director for the IMF, N. Narashimham told a press conference last night that "frankly, I do not share the perceptions that led the United States to abstain." He said that the conditions attached to the loan "are no more strict than normal, but they are not lax: They conform to normal IMF practice."
Narashimham also cited strong support by the staff and by Managing Director Jacques de Larosiere. IMF officials pointed out that the loan is equal to 29l percent of India's quota (deposits) in the fund, whereas, under the new and more liberal access provisions, the upper limit is 450 percent.
Under the agreement, India agrees to a program of economic restraint. It will curb expansion of credit within its domestic econmomy, and limit its borrowings in the commercial market in the first year of the loan period to about $1.6 billion, which is well over the amount India had been borrowing commercially. In addition, India agrees to IMF consultation on monetary and fiscal policy, and periodic reviews of the country's economic progress.
The IMF said that India will "enhance the role of exports" and take additional measures to liberalize imports in order to improve economic efficiency and stimulate growth. Among other commitments, India agreed to channel most of its new energy investment into generation of power.
But profiting from experience when it made a $3.9 billion loan to Great Britain in 1977--the largest until now--the IMF did not require that India devalue the rupee, a move that could have shaken the Indira Ghandi government. The then-Labor Government in Britain collapsed after agreeing to devalue the pound as a condition for its loan.
Technically, the loan to India is for 5 billion special drawing rights, the fund's special international currency as well as unit of account. The schedule calls for a maximum loan of 900 million SDRs up to June 30, 1982, an additional 1.8 billion SDRs in the next year to June 30, 1983, and 2.3 billion SDRs in the final year.
The Indian government, which has been lobbying hard to get the loan, has been anxious to assure its public at home that it did not knuckle under to excessively tough IMF conditions. Thus, it has taken pains to say that almost all of the major economic policy decisions that will be required by the loan--such as import liberalization, reduced government subsidies, and a boost in domestic oil prices--were taken beforehand.