How India Funds the World: Financial Assistance in the Immediate Neighbourhood

In the schema of realist international politics, where political relationships between aspiring powers are often decided by economic underpinnings, financial aid is often a key instrument of foreign policy. In most cases, it serves as a long-term insurance to preserve old relationships, while in others, it acts as a direct incentive to forge new partnerships. Using figures from the "Expenditure Profiles" in the union budgets of the past five fiscal years, this article is the first in a two–part series that provides an assessment of India's budgetary aid programme to countries in India's geographic neighbourhood.

India has traditionally extended financial assistance to countries in its immediate neighbourhood in order to maintain geopolitical clout and to keep crucial economic partnerships up and running. This long-standing policy is gradually becoming a centrepiece of Indian foreign policy as the hegemony of the global North1 gives way to a new geopolitical reality wherein regional powers in the global South2 steadily gain international influence through new horizontal partnerships and investments. India’s broadening foreign aid spectrum must be seen in this dynamic context of rapidly expanding South–South Cooperation3, a distinct feature of which is the "equal partner" relationship between the donor and recipient countries.

Contrary to popular perception, the foundational logic of India’s foreign assistance, particularly under the National Democratic Alliance (NDA) government, is not altruism. Rather, it is a complex set of realist geopolitical and geostrategic factors which has compelled New Delhi to sustain or expand its donor profile.  The primary reason for this is China’s rapidly growing clout in India’s neighbourhood and in the Indian Ocean. The NDA’s tenure saw an increasingly assertive Beijing slowly but surely expand its sphere of influence in India’s backyard under the ambit of the Belt and Road Initiative (BRI). Through big ticket connectivity and development projects, China has been quietly chipping away at India’s entrenched clout in South Asia and in the Indian Ocean Region (IOR). Seen in this context of hegemonic competition, New Delhi’s foreign aid allocations in the past five years saw both, continuity and expansion, and also bear some striking hallmarks of a highly reactive foreign policy aimed at safeguarding critical geopolitical influence.

The NDA government’s flagship “Neighbourhood Policy” announced at the very outset of its term gave ample space to New Delhi to boost its financial assistance profile and build complementarities across the extended South Asian region4 (Passi and Bhatnagar 2016). New strategic and political partnerships with Indian Ocean littoral countries also allowed the government to take its donor credentials to countries beyond the immediate neighbourhood. New Delhi has used its aid as a political incentive to achieve favourable foreign policy outcomes from recipient countries, or as a brickbat when faced with recalcitrance. However, there is no uniform pattern in this, and Indian aid allocation varies as per context. For instance, India increased its aid to the Maldives after the arrival of a pro-India government in 2018, while in Seychelles, it started giving money after a political opposition that was critical of the government’s pro-India tilt formed a majority in Parliament. Further, New Delhi’s aid to Nepal remained consistent despite anti-India upheavals in the latter. 

An assessment of the foreign aid figures in the “Expenditure Profiles” of the Union Budgets from Financial Year (FY) 2014-15 to 2019-20 (interim budget) reveals standard and new patterns of aid allocation and disbursement. While a major chunk of the aid went to the neighbourhood, New Delhi also dolled out targeted assistance to countries in the extended neighbourhood, such as Seychelles and Mauritius. A common thread here is the attempt to forge bona fide partnerships with crucial maritime nodes in the Indian Ocean, in line with the NDA government’s Security and Growth for All in the Region (SAGAR) policy, which was introduced to ensure a “safe, secure and stable Indian Ocean Region (IOR)” and also to “safeguard its mainland and islands and defend its interests (Padmaja 2018).”  In this regard, the NDA government entirely dropped the Indian Technical and Economic Cooperation (ITEC) programme, a long-running bilateral financial assistance framework, from the budget. This was replaced with the introduction of new recipient countries and an increase in aid allocation to existing ones, indicating that the aid from within ITEC was disaggregated to allow more focused assistance in strategically critical countries. Further, a significant amount of financial assistance was extended for targeted developmental initiatives through the  line of credit (LoC) mechanism, which was disbursed via the Export-Import (EXIM) Bank, which facilitates India’s export and import activities, overseas investments and other developmental projects. Beyond the neighbourhood, India also extended aid to African, Eurasian, and Other Developed Countries (ODCs), but these regions were beyond the remit of this assessment.

A look into individual recipient countries gives a clearer picture of India’s donor profile over the past five years. This article series explores, from New Delhi's point of view, the quantum of aid, the logic behind each choice of recipient, the specific target areas and future trajectories. This is explored in the context of the geoeconomic competition that India faces from an increasingly assertive China in a region that was traditionally its own domain of influence. 

Myanmar

Under the NDA government, India has renewed its diplomatic push towards Southeast Asia, within the ambit of the flagship Act East Policy (AEP). Through this policy prism, Myanmar forms a critical strategic link, especially with the coming of a democratically-elected civilian government in Naypyitaw under Aung San Suu Kyi. In AEP parlance, Myanmar is India’s “land bridge” to Southeast Asia and its lucrative markets (Yhome 2016). 

Thus, the steady increase in India’s grant assistance to Myanmar is hardly surprising. Between the 2014 and 2019 interim budgets, a combined total of Rs 1,286.03 crore was spent in actuals or was allocated for future spending. Although the government started in a ditch with an actuals spending of just Rs 51.79 crore in FY 2014-15 (as compared to Rs 164.86 crore in the previous FY under UPA-II), the money spent gradually rose to Rs 223.55 crore in 2017-18. The next two FYs saw even loftier estimated allocations of Rs 370 crore (2018-19) and Rs 400 crore (2019-20, interim budget), the  highest amount of aid ever extended to Myanmar by India. 
  
The core assistance money went to a host of sectors, including but not limited to health, education, capacity building, agriculture, physical connectivity, digital connectivity, and post-conflict reconstruction. A significant chunk of the allocation is dedicated to Small Development Projects (SDPs), with a special focus on border development projects. Separately, the EXIM Bank also gave the Myanmar Foreign Trade Bank (MFTB) an LoC of $198.96 million in 2015 for irrigation projects (Economic Times 2015).

The central idea here is to invest in building institutional and physical capacity in Myanmar and thus retain geoeconomic leverage—a foreign policy objective made even more imperative by China’s rapid strides into Myanmar. Over the past decade, Beijing has rapidly consolidated its economic and political clout in the country through large infrastructure projects under the BRI, and by providing logistical support and political backing to warring ethnic armed groups in northern Myanmar. It has already signed a comprehensive agreement for a China–Myanmar Economic Corridor (CMEC) to connect its Yunnan Province to Myanmar’s southern coast along the Rakhine State (Thiha 2018). In comparison, India’s engagement in Myanmar remains siloised, small-scale and predominantly economic in nature. Slow implementation has impeded progress too, unlike China’s hyper-fast project deadlines. Yet, the current level of grants, if sustained, could bear significant geopolitical returns for India in the longer run as Myanmar’s diplomatic profile expands. 

Bangladesh

Bangladesh is perhaps India’s closest partner in the neighbourhood today. Since 2009, when the “pro-India” Awami League government under Sheikh Hasina came to power, New Delhi has shown a greater interest in the bilateral relationship. Both countries have since maintained strong links on a host of fronts, including through co-participation in crucial regional groupings such as the Bay of Bengal Initiative for Multisectoral Technological and Economic Cooperation (BIMSTEC) and the Bangladesh–Bhutan India–Nepal (BBIN) Initiative. 

Under the NDA government, the bilateral has seen continuity in good health. However, its budgetary aid spendings to Bangladesh—which have reduced from Rs 197.84 crore in FY 2014–15 to Rs 78.02 crore in 2017–18 (actuals so far)—do not reflect this. Compared to the UPA’s last actuals spending of Rs 604.66 crore in FY 2013–14, these are dismal numbers. Nonetheless, this does not mean that the government has pulled the plug on economic assistance. India has extended two LOCs to Bangladesh since 2014, one worth $2 billion in June 2015 and the second worth $4.5 billion in April 2017. This has allowed the government to reduce core budgetary allocation to Bangladesh under the “budgetary aid” section. Still, the last two allocations in FY 2018–19 and 2019–20 (interim) stand at Rs 120 crore and Rs 175 crore, respectively, indicating a return to earlier numbers.

According to the MEA, most of the budgetary aid money has gone to national and community-level development projects, including construction of educational establishments, dispensaries, deep tube wells, community centres, community clinics and renovation of historical monuments. Notably, the money is also financing three Sustainable Development Projects and the long-pending Agartala–Akhaura rail link, besides other joint connectivity and energy projects. 

Despite a strong relationship with Bangladesh, India has reason to worry. According to a 2018 analysis (Bhandari 2018), China has committed $31 billion worth of development money in Bangladesh. It is already working on two large BRI projects in Bangladesh—the Dhaka–Jessore rail line and the Payra power plant, with a third—the Karnaphuli Tunnel—in the offing. Even the proposed 20 km rail-and-road bridge over Padma river, touted as Sheikh Hasina’s dream project, has large amounts of Chinese money involved (Financial Times 2018), although some recent reports indicate otherwise (Chaudhary 2018). While only $1.2 million of India’s $2 billion LoC has been released so far by the EXIM Bank (Byron and Adhikary 2019), the $4.5 billion LoC promised in 2017 remains unused by Bangladesh. The next government in New Delhi must ponder over whether the LoC route is a more effective assistance option over budgetary aid, given the characteristic sluggishness of Indian bureaucracy.

Nepal

The NDA government’s bilateral relationship with Nepal, once considered among one of India’s most trusted regional partners, has been rough. Over the past five years, New Delhi has watched with bated breath as Kathmandu drifted closer into China’s swelling sphere of influence. Combined with the 2015 Madhesi crisis and the ensuing border blockade, allegedly enforced by India, relations have soured between both countries.

Interestingly, tense relations between the two countries have not affected India’s core aid assistance to Nepal. India has spent a total of Rs 1,322.53 crore between 2014–15 and 2017–18 in the country, with an average actuals spending of Rs 330.6 crore. In fact, the degree of Indian aid assistance to Nepal has not seen any significant interruption despite a government change in New Delhi, as evinced by the last actuals spending of Rs 381.37 crore by UPA-II in 2013–14. Even through the roughest phase (read: 2015), aid allocation only scaled higher, with India spending Rs 6.68 crore more in 2016–17 than in 2015–16. According to the MEA, Indian aid money in Nepal is aimed at creating “infrastructure at the grass-roots level” and facilitating projects “in the areas of infrastructure, health, water resources, education and rural and community development.”

Further, the EXIM Bank extended an LOC worth $1 billion (PTI 2015) in 2015 for the “financing of hydropower, irrigation and infrastructure development projects” and another LoC worth $750 million in September 2016 for post-earthquake reconstruction (Economic times 2017), part of which Kathmandu wishes to use for other developmental projects. (Kathmandu Post 2018). In addition, India extended a total of $67 million to Nepal as part of post-earthquake relief-and-rescue efforts in April 2015, followed by another aid package of $1 billion in 2015. Further, in July 2018, New Delhi handed over a second hefty package of 2.1 billion Nepalese Rupees to Nepal for house reconstructions (ANI 2018).

In many ways, the NDA government has relied on these aid disbursements (besides three states visits in four years) to sustain relations with Kathmandu in the face of diplomatic hiccups and to thwart deeper Chinese ingresses. The amounts earmarked in the last two budgets—Rs 750 crore in 2018–19 and Rs 700 crore in 2019–20 (interim)—categorically reflect the current government’s renewed push to resuscitate an under-the-weather bilateral, and perhaps even to exorcise the ghost of 2015 for good.

Despite this charm offensive, China’s clout in the Himalayan nation remains undented. In fact, it is steadily growing, hastened by a communist-led coalition coming to power in Kathmandu in 2017. Both countries have since signed a comprehensive agreement under the BRI in 2017 to engage in a range of sectors, including internal and trans-Himalayan connectivity, aviation, medicine, communications, hydropower, and tourism. Further, they recently signed the protocol of the Nepal-China Transit Transport Agreement (TTA) (Xinhua 2019a), which allows landlocked Nepal to access Chinese sea and land ports, thus weaning Nepal’s geoeconomic dependency on India. What’s more, China remains the highest FDI source for Nepal, with the latter reportedly receiving a total of $505 million in Chinese investments in less than a year (2017-mid 2018).

Given the heft and scope of Chinese projects in Nepal, India needs to do much more than just focus on “grass-roots level development” in order to level the geopolitical dynamic.

Sri Lanka

Sri Lanka’s geopolitical and geostrategic importance to India is clear: it is a critical nodal point in the Indian Ocean and a time-tested partner in the neighbourhood. Despite many past hiccups, New Delhi has always valued its bilateral with Colombo as an important subcontinental relationship. Thus, the island–nation fits perfectly with the NDA government’s “Neighbourhood First” policy. However, as is the case with most other countries  in the  neighbourhood, India faces a frontal challenge from China in sustaining its influence in Sri Lanka. In fact, during the NDA’s term, the island nation became a geopolitical flashpoint for a visible New Delhi-Beijing competition over critical geoeconomic assets. The budgetary aid figures, put in this volatile context, are interesting.

While foreign aid spending in Sri Lanka initially increased under the NDA government—New Delhi spent Rs 499.7 crore in 2014–15 and Rs 403.8 crore in 2015–16, compared to the UPA-II figures of Rs 248.2 crore in 2012–13 and Rs 420.8 crore in 2013–14—it witnessed a sudden drop: India spent a meagre Rs 99.16 crore in 2016–17 (as against an estimate of Rs 155 crore), followed by an even lower figure of Rs 77.89 crore in 2017–18 (as against an estimate of Rs 75 crore). Subsequently, these figures have climbed back up modestly, with New Delhi allotting Rs 165 crore in 2018–19 and Rs 150 crore in 2019–20. The actuals figures are yet to be published.

These figures are intriguing when seen against the attendant political churnings. Initially, there was much chatter about how the NDA government might increase foreign aid to the Mahinda Rajapaksa government in Colombo (Roche 2015), despite the latter’s visible pro-China tilt. However, the 2015 national election saw the elected president Maithripala Sirisena, who was critical of the sitting government’s pro-Beijing policies. For New Delhi, this was good news. What then could explain the rapid dip in aid? Did India believe it was no longer necessary to spend large sums of money in the island country as geopolitical incentive, now that a more pro-India leader was in power? Or, was it due to pragmatic reasons, such as land acquisition hurdles, as some analyses suggest (Stratfor 2018)?  Interestingly, the upward climb in aid allocations from FY 2017–18 came after President Sirisena signed the $1.1 billion debt-for-equity deal on Hambantota Port with China in July 2017 (PTI 2017b), permitting the latter to operate the strategic port on a 70% stake for a 99-year lease period. This was certainly a cause of concern for India, which probably wanted to regain lost ground in bilateral ties with higher aid allocations.

A large sum of India’s aid to Sri Lanka goes into “infrastructure development, housing and shelter, water and sanitation, livelihood, education, research and training, healthcare, industrial development, arts, culture and sports etc” (Ministry of External Affairs 2017). Amongst these, the nearly–complete Rs 1300 crore housing project for Tamils displaced during the civil war, which commenced in 2012, is India’s single largest investment in the country (Economic Times 2012). India has also extended a total of $1.3 billion as an LoC for development of Sri Lanka’s railway sector, with the latest pact signed in June 2017 (Hindu Business Line 2018). On aiding the island partner, New Delhi has always emphasised on the South-South Cooperation template, projecting Colombo as a development partner rather than as an aid recipient country.

However, despite India’s efforts and Rajapaksa’s ouster, Chinese influence in Sri Lanka is expanding: China has managed to push several big ticket projects in Sri Lanka under the BRI banner, including the construction of a port city in Colombo, the development of the Hambantota Port and industrial park, multiple expressways, and a power station (Xinhua 2019b). With these, Beijing has ensured the creation of profitable assets that are bound to incur massive geoeconomic and geostrategic returns in the future.  

Bhutan

Bhutan’s geopolitical and geostrategic importance to India, as a buffer to China,  makes it one of the most important countries in India's attempt to reach out to its neighbourhood. Seen from this perspective, New Delhi's aid to Thimphu has been the highest among other countries in the neighbourhood, although it has been inconsistent.

In 2014–15, the extended aid of Rs 3,260.01 crore was down from the UPA II’s allotment (FY 2013–14) of 3,926.79 crore. In the next FY of 2015–16, the aid amount shot up to Rs 5,368.46 crore. Adding to this inconsistency, the next two FYs— 2016–17 and 2017–18—saw aid dip to Rs 3,441.48 crore and 2,590.14 crore respectively. Interestingly, this coincided with the run-up to the 2018 Bhutanese National Assembly elections, where Indian influence was a key electoral issue. A fall in the amount suggests India's cautious approach. The revised estimate for 2018–19—Bhutan’s election year—remains at Rs 2,510 crore, while the budget estimate for 2019–20 has witnessed a slight increase to Rs 2,615 crore.

Bhutan receives the highest amount of aid from India who has donated $4.7 billion between 2000 and 2017 (Stratfor 2018), reflecting a healthy bilateral. Further, 79% of Thimphu's imports and 90% of its exports are to and from New Delhi, making India, Bhutan’s largest trading partner. The Bhutanese infrastructural development has also witnessed India's active involvement through the building of roads and hydropower projects. For instance, the 336 megawatts Chulkha Hydropower Project, commissioned in 1988, was fully funded by the Indian government. In 2009, India and Bhutan initiated a 10,000 MW Hydropower Development agreement under which several hydropower projects such as the Punatsangchu-I Hydropower Project, Punatsangchu-II Hydropower Project, and the Mangdechhu Hydropower Project were commissioned, all of which are currently under construction (Ranjan 2018).  

Notably, India been actively involved in financing much of Bhutan's five-year plans. Out of Thimphu's 10 completed five-year plans,, India completely financed the first two, and its share in the recent Eleventh Five-Year Plan (2-13-2018) is 68% of the total assistance received by Bhutan from external sources. This is unlike India’s financial engagements with any other country.

Nevertheless, India also has many loose ends in Bhutan. New Delhi’s perceived needling in Bhutan's domestic elections, the high rates of interest on loans given to Bhutan, and increasing self-interest in the hydropower projects have negatively impacted its  image in Thimphu. China's attempts to woo Bhutan are also cause for concern. Traditionally, Bhutan has avoided an explicit tilt towards China, a prime example being its refusal to accept China's package deal in1996 to settle the border dispute, borne from China’s annexation of Tibet in 1959 (Bisht 2010). Yet, China's soft power offensive—there has been a boom in Chinese tourists visiting Bhutan, scholarships have been extended to Bhutanese students, Chinese artists and Chinese sportspersons are also sent to Bhutan (Ramachandra et al 2018)—and its growing economic clout in the country may convince Bhutan to normalise ties with China, and also gain economic benefits and strengthen its sovereignty. India needs to be careful in its dealings with Bhutan; a hardline approach will see it yet lose another South Asian country to China, with Bhutan being the most important one owing to the border dispute. 

Maldives

As one of the first countries to recognise Maldives' independence, India has maintained a strong historical relationship with the Indian Ocean island nation. Maldives’ importance to New Delhi lies in its strategic geographical location—located 700 km from the Lakshadweep islands and 1,200 km from India's mainland, it is a crucial geostrategic and geoeconomic nodal point, particularly within the ambit of the NDA government’s SAGAR policy.  

The NDA oversaw a rough phase of the bilateral relationship between India and the Maldives, due to the latter’s political instability. Abdulla Yameen’s election as president in 2013 heralded a particular low point, with his pro-China tilt. However, with President Ibrahim Solih coming to power in 2018, normalcy has returned between the two nations.

Interestingly, India's aid to the Maldives, minuscule in comparison to the aid provided to other nations, did not witness any slump during the Yameen years, which coincided with the first four years of the NDA government. In 2014–15, Indian aid was Rs 26.08 crore, which was significantly lower than the Rs 165.77 crore spent in the previous year (FY 2013–14) under UPA in a mixed loan-grant format. The next three FYs saw a consistent rise in India's foreign aid, reaching up to Rs 109.24 crore in 2017–18. The budget in the next FY witnessed a significant jump to Rs 440 crore and the surge continued with an estimate of Rs 575 crore in 2019–20. 

India has played a key role in the establishment of institutions in the health and education sectors in the Maldives. India has continuously supported the development of human resources in the Maldives including capacity building programmes, and provision of training and scholarship opportunities.

But, the past five years has made it amply clear that India needs to be cautious of China’s rapidly growing clout in the region. Between 2013-2018, Maldives tilted heavily towards China, but the recently elected Solih government has brought back Male's “India-first” policy. India, on its part, has pledged financial assistance of $1.4 billion in the form of budgetary support, currency swap agreements and concessional lines of credit (Miglani 2018). Despite a current lull in tensions, Maldives' domestic politics still remain uncertain and a sudden change in government could once again tilt the country towards China, which could change the geostrategic dynamic in the Indian Ocean.

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