The Government of India is going to fork out $11 billion for securing a higher IMF quota. 

Before asking why or passing any critique on the timing of this move, lets first see what this number actually means. 

According to the world bank stats, India's GDP stood at 1.73 trillion US$ as on March 30 2012. To conveniently arrive at a back of the envelope figure, allow me to continue with this number. The current fiscal deficit in India stands at around 5.9 percent of GDP - thats about 0.102 trillion$. The amount doled out or promised to be doled out at $11bn is at 10.8% of our current fiscal deficit. 

Heres another one - There is a commitment on part of the government of India to reduce the fiscal deficit to 5.1% by end of next March ; This amounts to a 0.8 percentage points reduction. In terms of an actual dollar figure, this is approximately $13.8 billion. At that calculation, the $11bn stands at a whopping 79.5% of the targeted deficit reduction for next year. Could this money have found better use in deficit reduction? Maybe.

The part where I mentioned "promised to be doled out" essentially refers to the fact that only $3billion of the slated $11billion is a cash payment. Rest of the amount is going to be paid in terms of local currency bonds. But at what cost? Local bond yields in India shot up yesterday after the S&P downgraded India to outlook negative. With the fiscal deficit widening and no clear policy directives on critical issues such as infrastructure development, inflation reduction & boosting investments, the S&P has stated that India might undergo further rating downgrades. In essence, this would translate to higher bond yields.The rating downgrade that happened yesterday could not have been avoided since it essentially reflected the deteriorating books over the past few months. But a further decline can definitely be avoided by reducing the policy slippage.If the situation continues to worsen, the $8bn chunk shall only get costlier to repay down the line. 

Since we are on the topic, consider this - the government of India has budgeted that it shall net borrow 4.7 lakh crores in this fiscal to boost spending. That number amounts to ~94 billion dollars at a USD/INR of 52.5. This number is significant - Why? As a private company or a public(non government) corporation do you think a bank will lend to you at a similar rate at which it is lending to the entities having the backing of government of India? Definitely not. It would charge you a higher coupon simply because you are a riskier bet than a sovereign backed entity. In such a case, would you opt for the loan? Maybe not. Yes, the rates were cut earlier this month but how does that help you if you are pitted against a superior debtor? The $11 bn does not represent a huge chunk of the government loan - its just about 12.2%. But then it isn't nil and it surely would have had an effect if the Government of India had instead utilized it in reducing its assumable loan. 

Well, I understand that moves such as these of strengthening one's position in the IMF, are taken with a long term view in mind. The question is not "Why?" but rather it is "Why now?". It doesn't matter though because for both, the answer is going to be because... why not?