The evolution of India’s pragmatic policy on foreign aid

The evolution of India’s pragmatic policy on foreign aid

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The evolution of India’s pragmatic policy on foreign aid : Foreign aid, for the purposes of this article, will be construed to mean loans, grants, PL-480 type assistance and, of course, donations/gifts in times of distress

Since Independence, India has had a love-hate relationship with accepting foreign aid. Till about 2003, it was clear that India needed aid but could not dictate terms with the donor. Unsurprisingly, this resulted in a lot of tied aid. Foreign aid, for the purposes of this article, will be construed to mean loans, grants, PL-480 type assistance and, of course, donations/gifts in times of distress.

Indeed, the foremost example of “weaponisation of aid” was the PL-480 assistance, where the United States (US) made it clear that it was fundamentally political in nature and based on quid pro quo. This left a permanent scar and did impact subsequent policy shifts in India concerning foreign aid. India was and still is a big recipient of foreign aid. It is just that more and more of this is now multilateral, and project-specific assistance meant for infrastructure and social spending.

In January 2001, following the earthquake in Bhuj, the then Prime Minister Atal Bihari Vajpayee issued an earnest international appeal for help which scores of countries responded to. Interestingly, this was the last time a formal appeal to the international community for help went out from the Government of India (GOI).

By June 2003, however, things changed. Finance minister Jaswant Singh, in his Budget speech, made a policy statement in which he made clear that India would no longer accept tied aid. One reason was, of course, that the donors often commented on what could be deemed internal affairs of India. This grated on a proud country such as India.

The other reason was purely functional. There were 22-odd countries which gave small (relatively) amounts of assistance and it was becoming difficult, if not impractical, to coordinate all of it. So, in 2003, India requested all these countries to route their assistance through non-governmental organisations (NGOs), the United Nations (UN) and multilateral institutions. These continue to be preferred even today.

India also took a strategic decision in 2003 that bilateral aid will be accepted only from the United Kingdom, the US, Russia, Germany, Japan and the European Union. It was also decided that debt owed to India by heavily indebted poor countries, including Ghana, Mozambique and Tanzania will be cancelled outright. India also repaid debts amounting to $1.6 billion belonging to several countries. It is true, however, that the real shift in our position with regard to foreign aid was articulated by former PM Manmohan Singh in the aftermath of the tsunami in 2004 when he spurned external assistance and said we will rely on domestic efforts. In March 2008, a position paper prepared by department of economic affairs set out the fundamental parameters of India’s policy on receiving foreign aid.

The paper included the following important observations. One, India was no longer reliant on external assistance or foreign aid for financing its plan outlays or for gross capital formation. Two, the economy was strong enough to move away from tied aid. Three, the government would not accept aid in areas where it had substantial control. Four, all countries could provide bilateral assistance directly to autonomous institutions, NGOs and UN agencies, among others. Five, because of debt servicing concerns, the idea was to gradually reduce dependence on foreign aid.

Six, there was a shift in sectoral focus. While, in the early years, it was about agriculture and food aid, it now shifted to infrastructure and social sectors such as health and education. Seven, foreign aid was skewed in favour of states such as Gujarat, Andhra Pradesh and West Bengal but states like Bihar hardly got any assistance. Eight, in terms of composition, loans dominated and there were hardly any grants. And finally, there was preference for multilateral sources rather than bilateral sources of funding.

These principles still constitute the blueprint for India’s policy regarding foreign aid. The policy has a fair amount of flexibility and confers discretion to the central government. This is reflected in the National Disaster Management Policy of 2015. If the national government of another country voluntarily offers assistance as a goodwill gesture in solidarity with disaster victims, the Centre may accept the offer. This policy was again tested in 2018 when floods ravaged Kerala and the United Arab Emirates (UAE) offered bilateral assistance. This had to be politely declined by the Government of India (GOI), much to the chagrin of the state government of Kerala. If the UAE had wished to route its assistance through NGOs or through multilateral agencies, GOI would certainly have welcomed it.

That brings us to the latest case in April/May when a number of countries offered to help when India was in dire straits as a result of the second Covid-19 wave. If you read the fine print of the approach adopted, however, the following observations are in order.

One, gifts and donations are to be routed through the Indian Red Cross. Two, imports of oxygen cylinders and other necessary equipment are “procurement decisions”, to be paid for, including by state governments. Three, to the extent that the government accepted help from foreign governments, the relevant provision of the National Disaster Management Policy referred to here would apply.

It can be argued, therefore, that there has been no fundamental change in the government’s policy when it comes to accepting foreign aid.

The second wave was an exceptional event which called for reasonable departures from the usual procedure. India will thus continue to be guided by a pragmatic policy of foreign aid, with a dose of aatmanirbharta.