India, China and 19 Asian countries have signed an agreement to set up the Asian Infrastructure Investment Bank (AIIB). With an initial capital base of $50 billion, it is to be subscribed by the member countries in proportion to their GDP. By this formula, China will be the largest shareholder while India will be next on the list. Though the US treasury has expressed reservations about the move, for India it was a logical next-step after joining the BRICS Development Bank (BDB) launched by India, China and other emerging global economies in July. The move is also in furtherance of India’s Look East policy.
The US has criticised AIIB as a deliberate effort to undercut the World Bank and the International Monetary Fund, international financial institutions established after World War II that are dominated by it and the West. For quite some time, the emergent economies have been pressing for reforms in the governing structure of these institutions but their demand for a larger role has been stonewalled. As a result, New York and London have remained the centres for mediating savings built up by Asian economies. While the savers did not get much return, the financial intermediaries splurged huge funds made available from the pool of savings by Asian economies.
It had, therefore, become necessary that new mechanisms for mediating Asian savings into investment opportunities in Asia should be created without depending on traditional multilateral financial institutions (MFIs) dominated by the West. While it remains to be seen if either the BDB or AIIB can provide an alternative to the established MFIs, these banks should be seen as the first steps in creating a new financial architecture based exclusively on development objectives and funded exclusively by emerging economies. These experiments may have to go through testing times and many contentious issues may have to be resolved, but the process has to be set in motion. India’s need for infrastructure finance is so large that it should not shut any door.