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India drastically steps up its foreign aid over past decade

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Lanka receives over USD 2.6 bn since 2005

India is considered one of the potential superpowers of the world. This potential is attributed to several indicators, the primary ones being its demographic trends and a rapidly expanding economy and military. In 2015, India became the world’s fastest growing economy with a 5% estimated GDP rate (midyear terms).

As India develops and modernizes, the government has started to lend a helping hand to poorer nations across the world. Many see India’s foreign aid as both a tool for diplomacy and an act of good faith. As in the words of India’s Development Partnership, its approach to foreign aid is, “shaped by India’s struggle for independence and solidarity with other colonized and developing countries and the inspiring leadership of Mahatma Gandhi.”

The nation is transitioning from a recipient to a donor, as the nation often gives more in foreign aid than it receives.

Recent Trends

The Indian Government allocated $1.32 billion for foreign aid in its 2019-2020 budget year (around 0.3% of the budget). This amount follows a trend of India drastically stepping up its foreign aid over the past decade. The budget went from around $500 million in 2010 to a peak of $1.5 billion in 2015. The main focus of India’s foreign aid centers on the development and modernization of its recipients.

Most of India’s foreign aid goes to countries in Asia and Africa, as it seeks to improve relations with its neighbors and assert its global presence. India is providing aid to include Myanmar ($56 million), Bangladesh ($24.5 million) and Bhutan ($392.7 million). Aid that these nations receive has the goal of promoting regional stability and creating higher living standards. The Indian Government has also taken more interest in Indian Ocean countries such as Mauritius ($161 million), Sri Lanka ($35 million) and the Maldives (~$81 million) to increase Indian presence in the Indian Ocean. The Brookings Institute has even called the nation “The Neighborhood First Responder,” helping with disaster relief in Sri Lanka, Afghanistan and Myanmar. Humanitarian aid has gone to nations like Fiji after Cyclone Winston hit the nation in 2016. Recently, India has helped combat the COVID-19 pandemic through monetary aid, donating food and distributing vaccines.

Brazil, which faces a vaccine shortage, received 2 million doses from the Indian government. Indian development cooperation has been part of a conscious effort to build solidarity with other developing nations and promote economic cooperation among post-colonial states.

Case of Sri Lanka

Foreign assistance has played a prominent role in Sri Lanka’s socio-economic development from the time of its Independence. With insufficient domestic resources to finance large-scale infrastructure projects, foreign aid has been indispensable for the country.

Foreign assistance has also been utilized for investments in agriculture, industry and social sector projects including education, health, poverty alleviation, rural development, etc. In recent times, a great deal of reconstruction activities related to natural disasters and civil war has also been carried out using foreign assistance. After promotion to the status of a middle-income country, it became necessary for Sri Lanka to observe more conditionalities and policy changes to access funding from the World Bank. This was yet another reason for Sri Lanka to reduce the level of engagement with traditional donors and explore alternative avenues for borrowing with relatively less conditionalities.

This consequently resulted in a surge in the flow of bilateral aid from non-traditional Southern donors such as China that did not place as much importance to political or non-economic issues while lending, making it easier for the Sri Lankan government to deal with them. Consequently, within a few years, China assumed the role of Sri Lanka’s largest donor. According to Sri Lanka’s Department of External Resources, by 2016, China had provided 55% (i.e., more than half) of the total foreign assistance received by the island nation. While India’s share was only 5 per cent of the total, European Union countries contributed 21 per cent.

India’s development cooperation with Sri Lanka is unique and is built on foundations of political understanding, a historic past, geographic realities and socio-cultural empathy. Since 2005, Government of India has committed a total of USD 2.6 billion to Sri Lanka, out of which USD 436 million is grant assistance and USD 2.17 billion under Lines of Credit. The developmental assistance projects are entirely based on the priorities set by the Government and the people of Sri Lanka. They have been widely appreciated for the value they generate per unit of assistance provided, their transparent approach and timely implementation through recourse to local materials and manpower, in a manner that supports local economies. The assistance focuses especially on capacity-building, human resources development, uplifting of weaker sections as well as infrastructure development.

Recent Crisis

Since 2010 Sri Lanka witnessed a sharp rise in foreign debt, reaching 42.9% of the country’s GDP by year 2019. The onset of the COVID-19 pandemic induced global recession accelerated the crisis and by 2021 the foreign debt rose to 101% of the nation’s GDP causing an economic collapse.

To resolve the debt crisis, BELLWETHER noted that Sri Lanka would need a credible fiscal plan and monetary policy, taxes have to be hiked in order to repay debt, and interest rates and opening of imports will allow taxes to flow back to the Treasury.

While it is possible to raise rates and generate dollars to repay foreign debt by curtailing domestic credit, it is not practical to do it on an ongoing basis for many years. If investors see foreign reserves going up after debt repayments, confidence may come back. But it is a painful affair, which may or may not work given the current ideology.

The damage to the once-prosperous tourism industry induced by the COVID-19 pandemic has also been blamed for failing to generate enough national revenue to pay off the debts.

The Sri Lankan government has recently declared that there is a possibility of it obtaining a further USD 1.5 billion in aid from India, weeks after New Delhi announced a billion-dollar assistance package and a balance of payment support to the island nation which is facing a severe foreign exchange crisis. Foreign Minister Prof. G L Peiris told reporters in the central town of Kandy that further Indian assistance was forthcoming. Finance minister Basil Rajapaksa, as a result of his talks held in New Delhi with India’s Finance Minister Nirmala Sitharaman and Foreign Minister Dr S Jaishankar, was able to obtain a relief package.

“There is no doubt whatsoever that Indian support at this critical juncture has made a world of difference. It has helped us to tide over the immediate difficulties which were obviously acute,” Prof. Peiris told The Hindu, referring to a series of announcements, including one billion dollars in various lines of credit, a currency swap arrangements of $ 400 million and a debt deferral of $515 million for two months from Sri Lanka.

China recently rejected a request by the Sri Lankan President Gotabaya Rajapaksa for “restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic.” With Chinese Foreign Ministry Spokesperson Wang Wenbin remarking, “Sri Lanka will surely overcome the temporary difficulties as soon as possible”.

In other words, Sri Lanka is moving away from China while getting close to India over the failure of Colombo to pay back Chinese loans worth $4.5 billion, amidst fears of a “debt trap”. 

Tuesday, March 22, 2022 – 01:00

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