New Delhi: Union Cabinet Wednesday cleared the creation of the proposed 5-nation BRICS bank that will mobilise resources for infrastructure projects and provide short-term liquidity to emerging economies in case of payment crisis.
The proposal was approved at the Cabinet meeting, chaired by Prime Minister Narendra Modi.
The setting up of the New Development Bank (NDB) and BRICS Contingent Reserve Arrangement (CRA) is for mobilising resources for infrastructure projects and providing short-term liquidity support to emerging economies in case of Balance of Payment crisis, said an official statement.
India will hold the Presidency of the USD 100-billion NDB for the first six years. The Bank will be based in Shanghai, China's financial hub.
"The establishment of the Bank will help India and other signatory countries to raise and avail resources for their infrastructure and sustainable development projects," said the statement released after the Cabinet meeting.
The BRICS CRA will help India and other signatory nations to forestall short-term liquidity pressures, provide mutual support and further strengthen financial stability.
"It would also contribute to strengthening the global financial safety net and complement existing international arrangements (from IMF) as an additional line of defence," the statement said.
The governance structure and decision making in the Bank will be equitable unlike the existing multilateral development banks, it added.
The NDB would reflect the close relations among BRICS countries - Brazil, Russia, India, China and South Africa, while providing a powerful instrument for increasing their economic cooperation, it said.
The Bank will begin operations only after all the member countries deposit their instruments of ratification with Brazil.
BRICS CRA, the statement said, will ensure a backup safety net which will allow India to go ahead with its necessary and bold policy decisions without being concerned about the international economic development.
The NDB to be established by BRICS countries will make available additional resources thereby recycling the savings accumulated in emerging countries which are presently being locked up in Treasury bonds having much lower returns, it added.
The BRICS CRA is expected to serve the needs of India's emerging economy in boosting access to additional foreign exchange reserves, should such situation arise, the statement said.
So far, IMF support is the primary safety net that is available to India in case any BOP crisis situation arises. Pending the IMF governance reforms, India does not have much say in the IMF decisions.
It is expected that the government will make a provision for BRICS Bank plan in the upcoming Budget 2015-16, to be presented on February 28.
Heads of the 5-nation BRICS group decided last year to create a development bank as well as a reserve fund to finance infrastructure projects and to head off future economic crises.
Infrastructure financing in India has been done from two public sources: government and multilateral development banks. These have been supplemented by private sector contributions through Public-Private Partnership projects.
However, in the context of fiscal consolidation, declining resources of existing MDBs and risk-averse private sector, the NDB to be established by BRICS countries will make available additional resources, the statement said.
