Impact of Downturn on India’s Aid Program for Neighbors

Reuters Indian Prime Minister Manmohan Singh, right, with Lyonchhen Tshering Tobgay, prime minister of Bhutan, in New Delhi, on Aug. 31.

Bhutan, a tiny kingdom set amid the peaks of the Himalayas, and cradled between the east Indian states of Sikkim, West Bengal, Arunachal Pradesh and Assam, has been an integral part of India’s strategic policy for decades. The country’s new prime minister, Tshering Tobgay, secured an aid package from India worth 5,000 crore, 50,000 million rupees ($781million) for his nation during his recent visit to New Delhi.

Mr. Tobgay’s predecessor, Jigme Y. Thinley of the Druk Phuensum Tshogpa (DTP), lost the recent general elections, which some attribute to India’s decision to block subsidies on kerosene and cooking gas for Bhutan. Others suggest this was done in retaliation to Mr. Thinley’s alleged liberal use of the newly omitted clause from the Indo-Bhutan Friendship Treaty of 1949. Previously, the treaty demanded that Bhutan align its foreign policy with India. However, a revision of this treaty in 2007 omitted this clause, and Mr. Thinley’s government reportedly started to entertain warmer ties with Beijing after placing an order of 15 buses from China. This decision reportedly did not fare well with the government of India.

More than 50 percent of India’s current foreign aid and development budget is spent in its immediate neighborhood. Countries such as Bhutan, Afghanistan, Nepal, Sri Lanka, Maldives, Bangladesh and Myanmar are home to major projects in areas such as hydroelectricity, power generation, agriculture and housing development. In fact, during the infamous blackout last year that left millions without power in northern India, the government imported electricity from Bhutan’s India-financed hydroelectricity project to temporarily power the national capital.

India has also been active in rebuilding projects in Sri Lanka â€" ranging from construction of houses and schools to development of railway infrastructure in the country’s sensitive northern region. New Delhi has pumped in significant amount of money to rebuild parts of the country after its long and bloody civil war ended in May 2009. Even with India’s rich and at times turbulent history with Colombo, it now faces a stern challenge by China, which is also investing heavily in a country right at India’s doorstep.

However, other countries such as Afghanistan, whose aid from India has topped $2 billion, and Myanmar, which is set to get a further $500 million line of credit from the Export-Import Bank of India (EXIM), now also command extra financial and diplomatic attention. The EXIM Bank plans to open a branch in Myanmar as well, as Indian projects in the country gain steam.

India has also extended more than $10 billion in loans through the line of credit mechanism to developing nations around the world. More than 60 percent of these loans have been given to countries in Africa, mostly orchestrated via the African Union. Delhi’s reach through such financial assistance streaks across the continent, covering countries as far as Cote d’Ivoire and its neighbors on the western coast of the continent.

Early last year, India launched the Development Partnership Administration (DPA), the country’s own unified development agency similar to America’s USAID and the UK’s DFID. With more than $15 billion spread over five years, the agency brought together most aid and development programs run by the Ministry of External Affairs since the 1960s under one umbrella.

India, however, is still a net aid recipient facing its own development challenges. A lot of developmental aid that India receives from abroad has helped the country develop vital areas such as health care, education and agriculture. A recent research report by the London-based Institute for Public Policy Research made a case for continuing British aid to India, given how it remains among the worst countries when it comes to child mortality rates and malnourishment.

However, now that India is looking toward increasing its global footprint of aid and development, the country requires a robust and thriving economic environment to finance its ambitions. But does India have the confidence in its economic capabilities to fulfill these goals?

With India’s gross domestic product growth crashing from a celebrated 8 percent over the last few years to 4.4 percent in the latest quarter, many areas like foreign aid and development may see a cash crunch.

“Our development partnership progress has increased in scope and range as our economy has grown, particularly over the last decade,” said P. S. Raghavan, special secretary, Development Partnership Administration in the Ministry of External Affairs.

“Having said that, the volume of money that the government puts aside for such programs has to bear a relationship to the fiscal situation of the country, nobody is denying that,” Mr. Raghavan said. “As India sustained a growth rate of 8 percent to 9 percent, the budget for the programs that we do abroad obviously grew in relation.”

Others believe that India’s economic downturn may not affect its foreign aid ambitions due to its relatively young age as a donor and the modest aid budget that the country has committed to at the moment.

“India’s foreign aid amount is fairly small with around 70 percent of the entire budget going to its neighborhood,” said Rajesh Rajagopalan, professor at the School of International Studies, Jawaharlal Nehru University.

“About 50 percent of India’s aid and development budget goes to countries such as Bhutan and Afghanistan,” he said. “The political situation and questions over stability in countries such as Afghanistan are more of a concern for Indian aid projects. If the security situation in Afghanistan worsens, many Indian projects may become economically unviable”.

B Mathur/Reuters Indian Prime Minister Manmohan Singh, right, with Hamid Karzai, president of Afghanistan, in New Delhi on Oct. 4, 2011.

Afghanistan is a crucial recipient of Indian aid. New Delhi has given specific attention to the troubled country because of its economic and strategic importance in the region. India has committed significant amount of money to development aid in Afghanistan, working aggressively in areas such as agriculture, electricity, health care, and it is even building the new parliament building in its capital Kabul. Other challenging projects include completion of highways in regions of the country that are still largely under the influence of local warlords and Taliban commanders.

“Yes, we have a pretty large portfolio in Afghanistan,” Mr. Raghavan said. “People talk about our expenses in Afghanistan of $2 billion, actually that’s an understatement. Our exposure is more than that. A large number of consulting costs for development are not billed to the projects.”

“So, our overall development assistance is under-quoted rather than over-quoted,” he added. “However, it is important to remember that irrespective of the economic situation, projects that have already been committed by the Indian government will not suffer”.

India enjoys a comfortable position in Afghanistan, in both the government circles and the public sphere. The country’s soft-power capabilities in Afghanistan, including small factors such as the rampant popularity of Mumbai’s film industry “Bollywood,” work in favor of India increasing its development and economic footprint there in the future.  The dynamics of Indian-Afghan relations, however, are bound to change over the coming years as Kabul now pushes New Delhi to offer increased military aid on the eve of U.S. troop withdrawal from the country in 2014, which may take India’s role to a previously uncharted strategic and economic landscape.

“Unlike many European countries, India is not in outright economic stagnation. But with fewer than anticipated resources, it is inevitable that foreign aid will come under scrutiny,” said Shashank Joshi, South Asia expert and Research Fellow at the Royal United Services Institute in London.

“India’s aid program is one of the pillars of its soft power in Afghanistan,” Mr. Joshi said.  Diminished aid will not have a “dramatic effect” on India’s role in the region as 2014 approaches, he said.

“Kabul is most interested in military aid - which India is carefully limiting at the moment - rather than development aid,” he said.  However, in the long run, Afghanistan is more likely to be stabilized with development aid, he added.

If India fails to avoid an economic paralysis in the coming months, future commitments of development projects and commissioning of new ones may slowdown. These projects are both strategic and demand driven, with some attaining more importance for the country’s national interests.

Kabir Taneja is a freelance journalist based in New Delhi.