India will be second largest shareholder of China-backed Asian Infrastructure Investment Bank

India along with 20 other countries on Friday signed an agreement to become founding members of the China-backed Asian Infrastructure Investment Bank (AIIB) to aid the infrastructure development in the Asian region and reduce the dependence on Western-dominated World Bank and IMF.

Usha Titus, a joint secretary at the economic affairs division of the Ministry of Finance, signed the MoU on behalf of India at a ceremony at the Great Hall of the People in Beijing.

China’s Vice Finance Minister Jin Liqun, who was also the former Vice-President of the Asian Development Bank, has been appointed as the Secretary General of AIIB.

The bank, to be headquartered in Beijing, is expected to be operational by next year.

The MoU specifies that the authorised capital of AIIB is $100 billion and the initial subscribed capital is expected to be around $50 billion.

The paid-in ratio will be 20 per cent.

Voting rights are to be decided after consultations among the members over fixing the bench marks which were expected to be combination of GDP and Purchasing Power Parity (PPP).

Based on this formula, India will be second largest share holder of the bank after China.

Elaborating on decision to participate in AIIB, Titus said India’s view is that the new bank provides rich resource capital base for infrastructure financing, which is good for the regional development.

Chinese Foreign Ministry spokesperson Hua Chua Chunying welcomed India’s participation in new bank.

China regards India’s support as a major boost to the bank’s formation which was largely seen as an effort to enlarge funding for the Asian countries reducing the dependence on ADB and other Western-dominated global financial institutions like World Bank and IMF.

China was keen about India’s participation and an invitation in this regard was extended by Chinese President Xi Jinping during his first meeting with Prime Minister Narendra Modi on the sidelines of BRICS summit in Brazil in July.

The AIIB is in addition to the BRICS (Brazil, Russia, India, China and South Africa) Development Bank formed this year, which will be based in Shanghai. It is set to commence its operations with an Indian as its President.

Besides India and China, other AIIB members are Vietnam, Uzbekistan, Thailand, Sri Lanka, Singapore, Qatar, Oman, the Philippines, Pakistan, Nepal, Bangladesh, Brunei, Cambodia, Kazakhstan, Kuwait, Lao PDR, Malaysia, Mongolia and Myanmar.

Some Abstained

Australia, Indonesia and South Korea skipped the bank’s launch as the United States said it had concerns about the new rival to Western-dominated multilateral lenders.

The IMF and the World Bank are accused by many countries of leading policies that do not serve economic interests of Asian, African and Latin American countries. Many also see them as institutions serving Western policies.

Media reports said US Secretary of State John Kerry put pressure on Australia to stay out of the AIIB.

The Australian Financial Review said Kerry had personally asked Australian Prime Minister Tony Abbott to keep Australia out of the AIIB.

“Australia has been under pressure from the U.S. for some time to not become a founding member of the bank and it is understood Mr Kerry put the case directly to the prime minister when the pair met in Jakarta on Monday ­following the inauguration of Indonesian President Joko Widodo,” the paper reported.

In a speech to delegates after the inauguration, the Chinese president said the AIIB’s operation needs to follow multilateral rules and procedures.

“We have also to learn from the World Bank and the Asian Development Bank and other existing multilateral development institutions in their good practices and useful experiences,” Xi said.

Asian Development Bank (ADB) President Takehiko Nakao, who was in Beijing, said he did not think the AIIB was a threat to the ADB’s role.

Japan, which along with the US plays a major role in the ADB, was conspicuous by its absence.

China has a 6.5 per cent stake in the ADB, while the US and Japan have about 15.6 per cent each.

The ADB, created in 1966, offers grants and below-market interest rates on loans to lower to middle-income countries. At the end of 2013, its lending amounted to $21.02 billion, including co-financing with other development partners.

According to a joint study by the ADB and Asian Development Bank Institute, the infrastructure finance gap in Asia alone is somewhere in the range of $8 trillion for the next decade.

In India itself current requirement for infrastructure development is estimated to be over $1 trillion.