ContentsIntroduction:..........................................................................................................................................2

History:..................................................................................................................................................2

Mission:.................................................................................................................................................2

Objectives:.............................................................................................................................................2

Membership:..........................................................................................................................................3

Organisation and Governance:...............................................................................................................3

Resources of IMF:...............................................................................................................................5

a) Quotas and Subscriptions:......................................................................................................5

SPECIAL DRAWING RIGHTS:..................................................................................................5

b) Borrowings:..............................................................................................................................6

c) Interests and Fees from Loans:...............................................................................................6

d) INVESTMENT ACCOUNT (2005):.......................................................................................6

IMF – Policies and Facilities.................................................................................................................7

Lending.............................................................................................................................................7

Main lending facilities.......................................................................................................................8

Lending to low-income countries.....................................................................................................9

Debt relief.........................................................................................................................................9

Technical Assistance.........................................................................................................................9

Surveillance.....................................................................................................................................10

IMF AND INDIA................................................................................................................................12

Benefits to India from IMF’s membership.......................................................................................12

The changing position ….................................................................................................................13

Future perspective as per IMF.........................................................................................................13

Critique..........................................................................................................................................14

Conclusion...........................................................................................................................................15

Reference:............................................................................................................................................16

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Introduction:International Monetary Fund is world’s central organisation for international monetary cooperation and for stability of international monetary system – the System of exchange rates and international payments. It works to foster global growth and economic stability. It provides policy advice and financing to its members in economic difficulties. Also it works with developing nation to help them achieve macroeconomic stability and reduce poverty. It oversees the global financing system by following macroeconomic of its member countries, in particular those policies which have an impact on exchange rates and Balance of payments. Besides it is and international forum to discuss the consequences of such policies.• Headquarters: Washington, D.C., United States.• Current Managing Director: Dominique Strauss Kahn

History:The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the north-eastern United States, agreed on a framework for international economic cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1 930s.During that decade, attempts by countries to shore up their failing economies—by limiting imports, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange—proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with overseeing the international monetary system to ensure exchange rate stability and encouraging member countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself as often as needed to keep up with the expansion of its membership—186 countries as on March 29, 2010 —and changes in the world economy.The IMF began its financial operations on March 1, 1947.

Mission:Stability of International monetary and financial system.

Objectives: To promote international monetary cooperation, To facilitate expansion and balance growth of international trade, To promote exchange stability and maintain orderly exchange arrangements

among members To assist in eliminating foreign exchange restrictions To make resources available to members

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To maintain equilibrium in the Balance of Payments of members To contribute towards increased employment opportunities and improved

economic conditions of member countries.

Membership:Membership of IMF is open to every country that controls its foreign relations and is able and prepared to fulfil the obligations of IMF. Membership of IMF is a prerequisite for the membership of Word Bank. As on March 29, 2010; IMF has 186 countries as its members.

Organisation and Governance:

i) The IMF is governed by, and is accountable to, its member countries through its Board of Governors. There is one Governor from each member country, typically the finance minister or central bank governor. The Governors usually meet once a year, in September or October, at the Annual Meetings of the IMF and the World Bank. It is the highest decision making body of IMF.

ii) Key policy issues related to the international monetary system are considered twice a year by a committee of Governors called the International Monetary and Financial Committee, the IMFC.

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iii) A joint committee of the Boards of Governors of the IMF and the World Bank—the Development Committee —advises and reports to the Governors on development policy and other matters of concern to developing countries.

iv) The day-to-day work of the IMF is carried out by the Executive Board , which receives its powers from the Board of Governors, and the IMF's internationally recruited staff. Of the 24 Executive Directors on the Board, 8 are appointed by single countries—the IMF's 5 largest quota-holders (the United States, Japan, Germany, France, and the United Kingdom) and China, Russia, and Saudi Arabia. The other 16 Executive Directors are elected for two-year terms by groups of countries known as "constituencies."

v) Executive Board selects the IMF's Managing Director, who is appointed for a renewable five-year term. The Managing Director reports to the Board and serves as its chair and the chief of the IMF's staff.

vi) IMF employees, who come from over 140 countries, are International Civil Servants. Their responsibility is to the IMF, not to the national authorities of the countries of which they are citizens. About one-half of the IMF's approximately 2,700 staff members are economists.

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Quota IncreasesSDR allocationsMembership Admittance/ WithdrawalAmendments in articles of agreements

Conducts Business Operational & Administrative PoliciesDiscusses Economic Issues

Board of Governors

Executive Board

Delegates power to

Managing Director

Elects

IMFC

Staff of International Civil Servants

Informs/Advices

Advices / Reports

Guides

Appoints

Conducts Overall Business

Member Countries

Representatives

Finance Minister/ Governor o f Central Bank

24 Governors

24 Directors

Surveillance

SurveillanceTechnical Assistance & TrainingPolicy Advice

Resources of IMF:

a) Quotas and Subscriptions:

The IMF's resources come mainly from the quotas that countries deposit when they join the IMF. Quotas broadly reflect the size of each member's economy: the larger a country's economy in terms of output, and the larger and more variable its trade, the larger its quota tends to be. For example, the United States, the world's largest economy, has the largest quota in the IMF. Quotas are reviewed periodically and can be increased when deemed necessary by the Board of Governors.

Each member subscribes to the IMF fund an amount equal to quota. Countries deposit 25 percent of their quota subscriptions in Special Drawing Rights or major currencies, such as U.S. dollars or Japanese yen. The IMF can call on the remainder, payable in the member's own currency, to be made available for lending as needed.

Quotas, together with the equal number of basic votes each member has, determine countries' voting power. They also determine the member’s access to IMF’s resources.

Quota’s also help to determine the amount of financing countries can borrow from the IMF, and their share in SDR allocations. Under Stand By and Extended Arrangements which are types of loans a member can borrow up to 200% of its quota annually and 600% cumulatively. In extreme cases the access could be even higher.

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Sources of Income

Quotas Subscriptions

Borrowings

General Agreement to Borrow

New Agreements to borrow

Interest charges and Fees levied on Loans

SPECIAL DRAWING RIGHTS:

The SDR, or Special Drawing Right, is an international reserve asset that member countries can add to their foreign currency and gold reserves and use for payments requiring foreign exchange. Its value is set daily using a basket of four major currencies: the euro, Japanese yen, pound sterling, and U.S. dollar.

The IMF introduced the SDR in 1969 because of concern that the stock and prospective growth of international reserves might not be sufficient to support the expansion of world trade. (The main reserve assets at the time were gold and U.S. dollars.) The SDR was introduced as a supplementary reserve asset, which the IMF could "allocate" periodically to members when the need arose, and cancel, as necessary.

IMF member countries may use SDRs in transactions among themselves, with 16 "institutional" holders of SDRs, and with the IMF. The SDR is also the IMF's unit of account. A number of other international and regional organizations and international conventions use it as a unit of account or as the basis for a unit of account.

b) Borrowings: If necessary, the IMF may borrow from a number of its financially strongest member countries to supplement the resources available from its quotas. It has done so on several occasions when borrowing countries needed large amounts of financing and a failure to help them might have put the international monetary system at risk.

GAB (1962) and NAB (1998) are two sources of supplementary financing.

i) Under GAB (1962); General Arrangements to Borrow, IMF is able to borrow specific amount of currencies from 11 industrialised nations or their central banks at market related interest rates.

ii) NAB (1998); New Arrangements to Borrow is a credit arrangement between IMF and 25 members and institutions; prepared to provide IMF with supplementary funds. Participants in NAB commit accounts based primarily on their relevant economic strength measured by IMF quotas.

c) Interests and Fees from Loans: Like other financial institutions, the IMF also earns income from the interest charges and fees levied on its loans. It uses this income to meet funding costs, pay for administrative expenses, and maintain precautionary balances.

d) INVESTMENT ACCOUNT (2005): To diversify its income sources, the IMF established an investment account in 2005. The funds in the account are invested in eligible marketable obligations denominated in SDRs or in the securities of members whose currencies are included in the SDR basket. The Fund also began to explore other options for reducing its dependence on lending for its income.

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IMF – Policies and Facilities

The IMF's fundamental mission is to help ensure stability in the international system. It does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members.

LendingThe IMF provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms. This financial assistance is designed to help countries restore macroeconomic stability by rebuilding their international reserves, stabilizing their currencies, and paying for imports—all necessary conditions for relaunching growth. The IMF also provides concessional loans to low-income countries to help them develop their economies and reduce poverty.

IMF loans are meant to help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. The IMF is not a development bank and, unlike the World Bank and other development agencies, it does not finance projects.

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Today, IMF lending serves three main purposes.

First, it can smooth adjustment to various shocks, helping a member country avoid disruptive economic adjustment or sovereign default, something that would be extremely costly, both for the country itself and possibly for other countries through economic and financial ripple effects (known as contagion).

Second, IMF programs can help unlock other financing, acting as a catalyst for other lenders. This is because the program can serve as a signal that the country has adopted sound policies, reinforcing policy credibility and increasing investors' confidence.

Third, IMF lending can help prevent crisis. The experience is clear: capital account crises typically inflict substantial costs on countries themselves and on other countries through contagion. The best way to deal with capital account problems is to nip them in the bud before they develop into a full-blown crisis.

Main lending facilities

The Stand-By Arrangement is a key lending facility established in 1952. Although its use has been declining in recent years, it has remained the most popular facility for middle-income countries that seek financial assistance. Under its structure, financing is provided in support of adjustment to a balance of payments need and disbursed in tranches based on conditions spelled out in the program. The IMF's largest loans have traditionally been provided under SBAs.

The IMF has introduced a new Flexible Credit Line (FCL) for countries with very strong fundamentals, policies, and track record of policy implementation. Once approved according to pre-set qualification criteria, countries can tap all resources available under the credit line at any time, as disbursements would not be phased and conditioned on compliance with a traditional Fund-supported program. This is justified by the very strong track records of countries that qualify to the FCL, which give confidence that their economic policies will remain strong or that corrective measures will be taken in the face of shocks.

The establishment of the FCL represents a significant shift in delivering Fund financial assistance. The FCL's flexibility includes:

Assuring qualified countries of automatic and upfront access to Fund resources with no ongoing (ex post) conditions;

Lack of restrictions in renewing the credit line, which at the country’s discretion could be for either a six-month period, or a 12-month period with a review of eligibility after six months;

Longer repayment period (3¼ to 5 years).

The Extended Fund Facility is used to help countries address balance of payments difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalances. A program supported by an extended arrangement usually includes measures to improve the way markets and institutions function, such as tax and financial sector reforms, privatization of public enterprises, and steps to make labor markets more flexible.

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The IMF also provides Emergency Assistance to countries coping with balance of payments problems caused by natural disasters or military conflicts. The interest rates are subsidized for low-income countries.

The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to a developing country whose balance of payments is suffering because of multilateral trade liberalization, either because its export earnings decline when it loses preferential access to certain markets or because prices for food imports go up when agricultural subsidies are eliminated.

Lending to low-income countries

Low-income countries can borrow from the IMF at a very low, or concessional, interest rate. They can use the Poverty Reduction and Growth Facility, which is the main vehicle by which the IMF provides financial support to countries' poverty-reduction strategies. The facility's core objectives are to promote sustainable balance of payments positions and to foster sustainable growth, leading to higher living standards and a reduction in poverty. In recent years, the largest number of IMF loans has been made through the PRGF.

Member countries can also access the Exogenous Shocks Facility, which helps deal with economic shocks, such as food and fuel price hikes or a natural disaster, that are beyond the control of a government but have a significant negative impacts on the economies.

The interest rate levied on PRGF and ESF loans is only 0.5 percent, and loans are to be repaid over a period of 5½-10 years.

Several low-income countries have made significant progress in recent years toward economic stability and no longer require IMF financial assistance. But many of these countries still seek the IMF's advice, and the monitoring and endorsement of their economic policies that comes with it. To help these countries, the IMF has created a program for policy support and signaling, called the Policy Support Instrument .

Debt relief

In addition to concessional loans, some low-income countries are also eligible for debts to be written off under two key initiatives.

The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in 1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring debt sustainability; and

The Multilateral Debt Relief Initiative (MDRI), under which the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF) canceled 100 percent of their debt claims on certain countries to help them advance toward the Millennium Development Goals.

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Technical AssistanceThe IMF shares its expertise with member countries by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries, central banks, and statistical agencies. The IMF has also given advice to countries that have had to re-establish government institutions following severe civil unrest or war.

The IMF provides technical assistance and training mainly in four areas:

monetary and financial policies (monetary policy instruments, banking system supervision and restructuring, foreign management and operations, clearing settlement systems for payments, and structure development of central banks);

fiscal policy and management (tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and management of domestic and foreign debt);

compilation, management, dissemination, and improvement of statistical data; economic and financial legislation.

SurveillanceWhen a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance.

Country surveillance

Country surveillance is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed.

An IMF team of economists visits a country to assess economic and financial developments and discuss the country's economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labor unions, and civil society.

The team reports its findings to IMF management and then presents them for discussion to the Executive Board, which represents all of the IMF's member countries. A summary of the

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Board's views is subsequently transmitted to the country's government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. Summaries of most discussions are released in Public Information Notices and are posted on the IMF's web site, as are most of the country reports prepared by the staff.

Regional surveillance

Regional surveillance involves examination by the IMF of policies pursued under currency unions—including the euro area, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union. Regional economic outlook reports are also prepared to discuss economic developments and key policy issues in Asia Pacific, Europe, Middle East and Central Asia, Sub-Saharan Africa, and the Western Hemisphere.

Global surveillance

Global surveillance entails reviews by the IMF's Executive Board of global economic trends and developments. The main reviews are based on the World Economic Outlook reports and the Global Financial Stability Report, which covers developments, prospects, and policy issues in international financial markets. Both reports are published twice a year, with updates being provided on a quarterly basis. In addition, the Executive Board holds more frequent informal discussions on world economic and market developments.

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IMF AND INDIAIndia is one of the founder members of IMF. It joined on 12/27/45. It has a close relationship with IMF. It is giving its contribution in the execution of its functioning and policy making. India ranked 5th till 1970 among the countries which had the largest quota in IMF. At present India has lost her permanent membership because her quota in IMF ranks 11th which is less than the first five countries.

Finance minister is the ex-officio governor in the board of governors of IMF. RBI is the alternate governor. India is represented at the IMF by an executive director who represents three other countries, viz. Sri Lanka, Bangladesh and Bhutan.

Resident Representative: A resident representative’s office was opened in November 1991. Mr. Sanjaya Panth has been Senior Resident Representative since August 2008.

Benefits to India from IMF’s membership It is good that India joined IMF .There is no doubt that this membership has been greatly beneficial to India.

1) International regulation by IMF in the field of money has certainly contributed towards expansion of international trade and thus prosperity .India has, to that extent, benefited from these results.

2) Large financial assistance: The most important contribution of IMF has been the availability of financial help provided by IMF at the most crucial timings i.e.

Post partition period: at this time India had serious balance of payments deficits, particularly with the dollar and other hard currency countries. Moreover to counter all this it could not reduce her imports since these consisted of essential foodstuff, capital equipment, industrial raw materials etc. on the other hands exports could not be expanded immediately under the conditions of limited production in the country. Under such conditions it was the IMF that came to help.

During 1991: India had serious foreign exchange crisis. at that time also IMF helped India.

So it can be said that India has been the most frequent borrowers. in November 1981, India was given a massive loan of about Rs. 5000 crores to overcome foreign exchange crisis resulting from persistent deficit in balance of payments on current account.

3) Aid from World Bank and other international financial agencies:

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The membership of IMF has benefited India in a way that Membership of IMF is necessary condition precedent to membership of world bank and its affiliates i.e. IFC (international Financial Corporation) and IDA (International Development Association).

So it has been able to borrow money for various developmental projects etc. IFC has made substantial investment in Indian companies engaged in the production of fertilizers, caustic soda, ball and bearings, pumps etc. The loans from IDA are payable over 50 years , are interest free and bear a service charge of 0.75 percent per annum.

Since 1975-76 , the World Bank has been extending the ‘third window’ facility , for countries having per capita income of less than

$ 375. India got a substantial share out of it.

4) Services of specialists: India has availed the service of specialists of IMF for the purpose of assessing the state of the Indian economy. teams of experts have been coming to India and submitting reports so India had the benefit of independent scrutiny and advice.

5) Contribution to International Monetary Concord: India has been contributing to international monetary concord apart from her own gains.

6) Provision of oil facility: The balance of payments position had gone utterly out of gear on account of oil price escalation since 1973. Since then IMF has started making available oil facility by setting up a special fund for the purpose.

The changing position …..

India has become a lender from borrower RBI has done its bit to help economies struggling from the global financial

crisis, by lending $10 billion to the International Monetary war fund chest The central bank i.e. RBI will buy notes worth the amount as a part of the

international efforts to support IMF’s lending capacity to member nations. Till now the EU and US are the largest donors to the fund with sums at around $178 billion and $100 billion,

RBI said the purchase of notes is a temporary bilateral arrangement for an initial period of one year, which may be extended by a period of up to two years.

India and IMF established a joint training programme in national banking management Institute at Pune. First training programme was started in July 2006. India also donates money in Subsidy Account of IMF. India has paid 10 lakh dollars as 13th annual instalment in the Subsidy Account of Poverty Reduction Growth Facility (PRGF) during July 2006. India provided 205 million (dollar in two separate instalments of IMF as loan under Financial Transaction Plan in May 2003.

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Future perspective as per IMF

As discussed that India has the benefit of independent scrutiny and advice. This section discusses that what the IMF thinks of India’s future.

Growth expected to be back at potential in 2010/11 Conditions ripe for withdrawing monetary and fiscal stimulus Financial sector reform key to strengthening infrastructure

India was one of the first countries to emerge from the global crisis, but Asia’s third largest economy is now facing policy trade-offs earlier than other countries and should return to its longer-term reform agenda, according to the IMF.

1) Growth : In its annual review of the Indian economy, the Fund projects the country’s growth will rise from 6 ¾ percent in 2009/10 to 8 percent the following year, off the back of an expected pick-up in private consumption and investment

2) Exiting from stimulus : But alongside recovery, India’s policymakers are facing new challenges. Inflation is rising, partly due to increased food prices, but also because of demand pressures. In recent years, food production has failed to keep up with increased demand and this trend has been intensified by the poor monsoon and the cyclical recovery from the crisis. With signs of the recovery becoming well entrenched, the IMF said that conditions were “ripe for a progressive normalization of the monetary stance.” It welcomed the recent decision by the Reserve Bank of India (RBI) to begin the process of monetary tightening, and called for a further gradual withdrawal of monetary accommodation. During the global crisis, India benefited from fiscal stimulus which was already in the pipeline and the authorities responded to the downturn with further injections of fiscal and monetary stimulus. But this has left the country with a double-digit deficit and public debt stands at close to 80 percent—one the highest levels in the emerging world.

3) Tackling the deficit: The IMF welcomed measures announced by the Indian authorities to tackle the country’s ballooning deficit starting from the next budget. New Delhi plans to reduce the central government deficit by 1½ percentage points to 5½ percent of GDP in 2010, but further measures could be necessary, according to IMF’s mission

4) Financial sector reform: The IMF has identified the need for financial sector reforms to facilitate infrastructure investment and fiscal consolidation. Currently, commercial banks in India are limited in what they can do because of the short-term nature of their deposits set against the long-term and risky needs of infrastructure projects. A deepening and widening of the financial system, including the further development of the corporate bond markets, are possible solutions

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Critique

IMF at one side has benefited its member countries by providing help in balance of payments, determining their exchange rates, spreading of technical knowledge, improving international economic relations, acting as a friend at the time of need and making member countries free from political pressure while on the other side, it has often failed in achieving stability in exchange rates (the value of various currencies is increasing or decreasing in the open market), achieving stability in the prices of gold; establishing a free trade system, getting stability in international money market.

1. It has been severely criticized for serving the needs of G-7 countries and has failed to stimulate global stability for which it was set up.

2. Its policy of providing financial assistance to the poor developing countries subject to the fulfilment of certain conditions by the latter has come in for severe criticism. These conditionalities refer to the structural adjustment policies, namely a) privatization of public enterprises b) capital market liberalization c) liberalization of foreign trade and investment. If conditions related to all these are not forthcoming it doesn’t provide any financial assistance. Infect capital market liberalization has proved to be disastrous for many counties because they were not able to deal with great volatility of capital inflows and outflows. This policy only resulted in East Asian crisis in the late nineties.

3. Elimination of subsidies on food and fuel has been resisted by developing countries. In 1998 riots broke out in Indonesia due to this.

4. It has not been able to solve the twin problems of poverty and unemployment.

ConclusionHowever IMF functions as a light-house for monetary and financial hindrances. It manages the financial oil for the economic machine of the world. It is in reality an international institution which helps the needy countries at the time of financial difficulties

finally it may be said that IMF has strengthened the monetary discipline among its members by timely assisting them to tide over their balance of payments deficits. It has helped the members in technical matters relating to fiscal and monetary policies, debt servicing, balance of payments, currency devaluation etc. IMF working during last 62 years since 1947 shows that all has not been well with it. It has met only with limited success. Members have violated Fund's rules regarding the alteration in the par values of the currencies. The countries whose currencies were in short-supply did not take any material step to rectify it. The success of the IMF towards the establishment of multi-lateral system of trading will depend upon the degree to which the underdeveloped countries can implement their development plans with the framework of financial stability free from the distorting effects of inflation.

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References:

Indian Economy by RudraDutt

Indian Economy by K.P. Sundaram

Business Environment by Salim Sheikh

www.imf.org

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