Multilateral development banks (MDBs), chief among them the World Bank, were established to provide capital to developing countries that couldn’t raise it at home or on affordable terms abroad. For decades, they filled that gap. But as more countries move from low- to middle-income status (according to the World Bank’s classification), and the global financial environment becomes more challenging, the role of MDBs must evolve, too.
Consider India, where there is no longer an appreciable gap for MDBs to fill. In 1991, according to our calculations, external finance covered about 15% of the central government’s fiscal deficit; by 2025–26, that figure had fallen to 1.5%. In the intervening years, the country’s capital markets have deepened significantly, to the point that domestic market borrowing now covers more than 70% of the deficit.
In this, India is simply a prominent example of a more general rule: as middle-income countries develop more sophisticated financial systems, the case for MDB finance grows progressively weaker. The World Bank does not lend to middle-income countries with the long maturities and heavily subsidised rates provided to low-income countries, but on close to commercial terms. At a time when rising global interest rates and depreciating local currencies have made dollar-denominated external debt more expensive to service, price is no longer the chief attraction of MDB finance.
If they are to retain or even strengthen their relevance to middle-income countries, MDBs need to rethink their proper role. India’s experience suggests they should be primarily in the business of providing knowledge, not capital.
As the world’s fastest-growing major economy, India has changed its development priorities substantially over the past generation, with the goal of becoming a developed country by 2047. Spending on social sectors such as health, education and sanitation comprises less than one-tenth of today’s development expenditure, according to our calculations. The government is instead pouring investment into infrastructure, transport, industrialization, and urbanisation. The biggest constraint on completing such complex and technically demanding projects is often know-how, not money.
Bengaluru’s metro rail project, financed by the Asian Development Bank, provides an instructive example. The goal is not merely to expand the city’s metro rail infrastructure, which India can increasingly finance by itself, but to reshape how the city thinks about planning. That has meant integrating the metro expansion with other forms of public transport—from buses to commuter rail and non-motorised transport—from the outset. It has also involved zoning for mixed land use around the new stations to improve walkability and promote commercial opportunities. The loan is a vehicle for a more valuable resource: knowledge that can create a playbook for other Indian cities.
A recent report surveying MDB client countries confirms the widespread demand for knowledge and technical assistance—often dubbed “Finance+” by government officials. The expectation is that every dollar borrowed from an MDB will yield more than one dollar in value through access to knowledge and technology, institutional capacity-building, and diffusion of best practices. A corollary is the so-called “Budget+” principle: MDB finance should catalyse and complement domestic public and private capital, not substitute for it.
Neither concept is new. But they have taken on new urgency as competition among development financiers intensifies. Like many other middle-income countries, India can now choose between MDBs, a large pool of bilateral lenders, foreign capital markets, and, most importantly, domestic creditors. In that crowded marketplace, MDBs’ comparative advantage lies not in their lending rates, but in their convening power, cross-country and sectoral knowledge base, and ability to structure projects that attract private capital at scale.
That last point matters enormously. The originate-to-distribute and toll-operate-transfer models that some development-finance institutions have adopted offer a glimpse of what Budget+ might look like in practice: projects designed to be “bankable,” with user fees, offtake guarantees, and risk absorption by the state making them an attractive asset class for private investors. The World Bank’s new India partnership framework moves in this direction, with resources from its lending arm, the International Bank for Reconstruction and Development, being used to leverage private capital, rather than simply replacing it.
These ideas underpinned the recommendations made by the Independent Expert Group during India’s G20 presidency. The 2023 report called on MDBs to co-design long-term transformative programs with client governments and to embrace a new operating model that treats knowledge transfer and private-capital mobilisation as core, rather than supplementary, components.
The challenge, of course, is implementation. MDBs are still organised around lending, and their incentive structures reward disbursement. Knowledge transfer and capacity-building are harder to measure and price, and attributing them to any one institution can be challenging. Only by changing those incentives—privileging the quality of the developmental impact over the quantity of the loan—can MDBs become the development-finance institutions that today’s world needs.
— Tanu M. Goyal is a senior fellow at the Indian Council for Research on International Economic Relations. Shekhar Aiyar is Director and Chief Executive of the Indian Council for Research on International Economic Relations. ©Project Syndicate
