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5 Predictions for India’s Development Cooperation Under New Government

May 28, 2014

On Monday, Narendra Modi took the oath as India’s new prime minister, offering a new, more conservative government that has come to power after winning an electoral landslide. The new leadership has also raised questions about the implications for India’s foreign assistance program. The new government has already signaled a more activist foreign policy engagement than the previous government, with a greater focus on economic development. Rumored restructuring and streamlining of India’s ministries are likely to create a more muscular Indian foreign policy, one that seeks to use all foreign policy tools, including development assistance, in its engagement abroad. The invitation and attendance of several regional and international heads of government at Prime Minister Modi’s swearing-in ceremony was a clear signal of the new government’s foreign policy focus, as well as the keen interest in closer engagement on the part of India’s neighboring countries. What will the new Modi government herald for India’s development cooperation program? Here are my top five predictions:

1. Indian development cooperation is likely to continue to increase. While India has given development assistance since the late 1940s, the volume of its foreign assistance has grown rapidly since the late 1990s, increasing seven-fold between 2000 and 2015. This trend is very likely to continue under the new government.

2. India’s foreign assistance program represents more value for money – which other countries will increasingly recognize. Not only is Indian aid increasing in volume; in terms of purchasing power, Indian aid represents more than the actual rupees. The majority of Indian foreign assistance, like the aid from developed countries, is de facto tied aid, i.e., used to purchase Indian goods and services (approximately 70 percent of the grants India gave in 2012 were tied, similar to the figure for U.S. aid). Yet since the purchasing power of each U.S. dollar spent in India is greater than the purchasing power of the same dollar spent in the United States, a $1,000 grant from the Indian government would, for example, cover the full cost of training an Afghan bureaucrat in India for three weeks, while it would cost several times that amount to train the same bureaucrat at any institution in the United States. Indian development cooperation in purchasing power parity terms is several times higher than its dollar term at current prices, as seen in this figure. In 2014, Indian development assistance was $1.4 billion in current prices, making it comparable to the aid budget of Austria and South Korea.

Indian foreign aid

Figure: Indian Development Cooperation (grants and loans) at Current Prices vs. Purchasing Power Parity terms, 1997/98 – 2014/15 in USD million.

Yet if one uses the purchasing power parity terms, India’s aid is $5.3 billion, larger than Norway’s aid budget and comparable to that of Australia – and that is not even counting the assistance India gives through lines of credit. Other developing countries are recognizing the value Indian development cooperation represents, leading to a growing demand for Indian development assistance.

3. The vast majority of India’s grants and loans will to continue to go to its South Asian neighbors. Since 2000, over 80 percent of India’s foreign grants and loans have gone to countries in India’s neighborhood, with Bhutan alone garnering nearly half of that assistance. That trend is likely to continue. For the first time since Indian independence, several South Asian country leaders were invited and attended the swearing-in ceremony of India’s head of government – a harbinger of renewed interest in developing partnerships in the South Asian neighborhood.

4. The majority of lines of credit will continue to go to Africa. In addition to grants, loans, and technical assistance, India also provides development assistance to other countries in the form of lines of credit (LOCs), which are administered by India’s Export-Import Bank. Though viewed by some countries as an instrument for increasing trade, India views its LOCs as an integral part of engaging in “mutually beneficial” development partnerships, which include increased trade. The value of India’s operational LOCs in May 2014 was about $10 billion, over 60 percent of which went to African countries. This trend is likely to continue, since the new government’s foreign policy will have an increased focus on trade, including with the African continent.

5. India will “Look East,” not west, for foreign aid paradigms to follow. India’s increased engagement in its own neighborhood, regional competition with China, and the greater relevance of development paradigms from its neighborhood for its own development, will continue to lead India to look to Asia for patterns of development cooperation. India considers LOCs to be an integral part of its development partnership program, much like China does. If the LOCs are added to the grants and loans provided by the Indian government, the total annual foreign aid, at approximately $2.5 billion in 2014 in current value, is comparable to that of several OECD countries. And yet, while Indian foreign assistance today is comparable to that of Austria or Italy’s, the Asian countries’ development trajectory is of greater relevance. This, along with an increased interest in engaging the Asian neighborhood, will lead India to look east for methods of engaging in development partnerships.

Given these trends in India’s development partnerships abroad, India’s engagement in its neighborhood and beyond is only likely to deepen and diversify under Prime Minister Modi’s new government. To shed light on this changing development landscape, since 2012 The Asia Foundation has supported the Indian Development Cooperation Research (IDCR) initiative based at the Centre for Policy Research, a leading, non-partisan, and independent Indian think tank.

The IDCR initiative focuses on researching and disseminating analyses on India’s development assistance program. It is in the process of developing a comprehensive database of Indian development assistance and publicly disseminating narratives on Indian bilateral development partnerships. Last week we launched our new interactive website, where you can find our latest research on Indian foreign assistance.

India today is already a significant development partner, particularly when one compares the value of Indian aid. Being a right-of-center government with a clear majority in the lower house gives the new government significant leverage to engage in a formidable foreign and defense policy. This was already evinced by Prime Minister Modi’s reiteration of India’s commitment to supporting Afghanistan’s development during his meeting with Afghan President Karzai, the day after assuming office and in defiance of the recent terrorist attack on the Indian consulate in Herat, Afghanistan. Given the rise of India as an international power, its growing economy, and its significant strategic interests in the Indo-Pacific region and beyond, the new Indian government is very likely to widen and deepen its already substantial engagement in international development partnerships.

Guest blogger Rani D. Mullen is a visiting senior fellow at the Centre for Policy Research in India and associate professor at the College of William & Mary in Williamsburg, Virginia. She was also a 2013 – 2014 Fulbright-Nehru Senior Scholar in India. She can be reached at rani.mullen@gmail.com. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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