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India as an Emerging Donor

India has traditionally been perceived, both domestically and globally, as an important aid receiver. But it has also had a foreign aid programme of its own which can be traced to the 1950s and 1960s. India's aid programme was small, focused on building local capacities and viewed as benign. In the past few years, there have been marked shifts in the size, focus and strategic thinking behind India's foreign aid programme. As an emerging donor on the world stage, India needs to align its aid strategy not with its ambitions but with a realistic assessment of its strengths and historical roots. Otherwise, it will open itself up to the same criticisms which are often directed at the other major donors.

COMMENTARYEconomic & Political Weekly EPW march 21, 2009 vol xliv no 1211India as an Emerging DonorDweep Chanana Opinions expressed here are personal and not those of the organisation the author works with. Dweep Chanana ( is employed with the philanthropy services at UBS AG and has worked previously with UNDP in Kenya. India has traditionally been perceived, both domestically and globally, as an important aid receiver. But it has also had a foreign aid programme of its own which can be traced to the 1950s and 1960s. India’s aid programme was small, focused on building local capacities and viewed as benign. In the past few years, there have been marked shifts in the size, focus and strategic thinking behind India’s foreign aid programme. As an emerging donor on the world stage, India needs to align its aid strategy not with its ambitions but with a realistic assessment of its strengths and historical roots. Otherwise, it will open itself up to the same criticisms which are often directed at the other major donors. Residents in Kabul recently began to enjoy near uninterrupted electri- city thanks to a new transmission line that brings power from Uzbekistan. They can thank India for it, as well as for a road linking Afghanistan’s main cities to Iran, and the new Afghan parliament building – still under construction. If and when a stable Afghanistan emerges, a fair bit of it will be made by India. Further away, India is busy in Africa too, commit-ting recently to double lines of credit to $5.2 billion. To a certain extent, India’s benevolence is inspired by competition with China, which has used aid effectively to secure oil interests in Africa and Asia. But even if it is catch-up, it reflects a new consciousness of aid as an instrument of foreign policy. Through aid, India hopes to build new alli-ances and further its trade, energy and po-litical interests. It also hopes to present the country as powerful and self-reliant. This reveals a lot about India’s ambitions. Yet, it is unclear if India has the capability to deliver on those ambitions. So, is India’s benevolence strategic or unabashed self-promotion? What interests does India’s aid strategy further. And most important, is it realistic, taking into account both India’s strengths and many weaknesses? Critics will note that two questions are not posed here. First, whether India should have a foreign aid programme at all or use its scarce resources for internal develop-ment? For the second fastest growing major economy the choice is no longer between domestic spending and foreign policy, of which aid is a component. Rather, increasing trade, ensuring access to energy resources, and building military alliances are all necessary to ensure India’s unhindered rise. The second question is whether India’s aid should be allocated where it is most needed or will have the greatest impact. As any aid sceptic will point out, aid allocation has little to do with actual need. Flows are determined more by factors such as colonial and trade links and less by the quality of governance or potential for impact.1 However, as this analysis will show, India’s approach to aid delivery does avoid some of the most egregious problems associated with western aid delivery. Aid Programme in Perspective It would be a mistake to suggest that India’s giving is new. India has been giv-ing substantial military and economic aid within south Asia since independence. In 1958 India had already committed Rs 100 million in multi-year grants to Nepal2 and a Rs 200 million loan to Myanmar. The UK’s foreign and commonwealth office es-timates that India finances nearly 60% of Bhutan’s budget.3 There are no consolidated estimates of India’s overseas development assistance. In its absence, annual budgetary alloca-tions are a useful proxy – similar to the United States’ Foreign Operations Appro-priations Bill. In 2008, India allocated ap-proximately Rs 26.7 billion (or $547 million)4 to aid-related activities, defined here5 as grants, contributions to inter-national organisations (IOs) and inter-national financial institutions (IFIs), direct loans, and subsidies for preferential bilat-eral loans (see Table 1, p 12). In addition, it also approved lines of credit through the Exim Bank of $704 million in 2007-08, 2 For a politico-economic focus on the third front politics, see Pritam Singh (2008): “Political Eco-nomy of the ‘Third Front’ in India”, Contemporary South Asia, Volume 16, Issue 4, December.3 The unresolved tension in the Akali-BJP relations in Punjab is a relatively less explored phenome-non. There is a constant pressure on the top Akali leaders from its lower and middle ranging leader-ship to sever relations with the BJP for several reasons, but particularly on the Ram mandir is-sue, the anti-minority politics of the BJP and the attempts by the RSS to Hinduise Sikhism. It is this pressure which led top ranking Akali leader Su-khdev Singh Dhindsa to openly declare that the Akali Dal had nothing to do with the re-emphasis on Ram mandir issue in the recent BJP politics. If a third front were to emerge as a successful alter-native to the Congress, the main rival of the Aka-lis in Punjab, the pressure on the Akali Dal leader-ship for severing ties with the BJP and joining the third front will intensify. The BJP’s state unit in Punjab is also unhappy with the Akalis’ attempt to expand their electoral base among the urban Hindu groups. On Akali Dal (Badal)’s expanding electoral base among the Punjabi Hindus and the attempts by the Akali Dal to rebrand itself as a Punjabi regional party, see Pritam Singh (2007): “Punjab’s Electoral Competition”, EPW, 10 February.4 Shiv Sena is the only regional party in India that continuously aims to overcome the contra-dictionbetween regional nationalism and the Hindu-hegemonic Indian nationalism by project-ing compatibility between Marathi regionalism and Hindu nationhood.5 For a very perceptive piece on this see Biswamoy Pati (2009): “Biju Janata Dal: Signals for Change”, EPW, 28 February.6 A very fine example of left unity is the recent com-ing together in Bihar of the CPI, CPI(M) and CPI (M-L) (Liberation) to form a combined front to jointly contest the coming parliamentary elec-tions. See Chirashree Dasgupta (2009): ‘The Unit-ed Left Bloc in Bihar’, EPW, 7 March. A true left unity in India would, however, mean going be-yond this three party bloc and a negotiated inclu-sion of all left currents in India including the ones rooted in the Indian socialist tradition.
42% Pacific 6% Rest of Asia est Asia North Africa 18%
COMMENTARYEconomic & Political Weekly EPW march 21, 2009 vol xliv no 1213the ITEC umbrella. Increasingly, however, companies also work on their own, having benefited from the initial association. A remarkable characteristic of these efforts is that they generate reciprocal benefits for India mostly through soft power – the power to “attract or co-opt” – rather than through the hard power of coercion or payment. As Joseph Nye Jr, who coined the term, points out9 “soft power resources often work indirectly by shaping the environment for policy, andsometimes take years to produce the desired outcomes”. This is most evident in Afghanistan where, according to Jayshree Bajoria of the Council on Foreign Relations,10 India-Afghanistan relations have benefited substantially from the fact that “many current Afghan leaders, including President Karzai, studied at Indian universities”. It can also be argued that this approach is highly effective at generating a positive developmental impact. As noted by Rajan and Subramanian of the IMF, western aid programmes undermine growth and de-velopment in at least two ways.11 They un-dermine local institutions by diverting skills and resources away from the public and private sectors. But large-scale trans-fers of aid also reduce a country’s competi-tiveness – an effect known by economists as the “aid curse” or “Dutch Disease”. By building domestic capacity and staying small scale, India’s TA efforts try to avoid both problems. This might explain why India’s aid to Africa has generally been viewed positive-ly by recipients. Of course, it helps that India shares a colonial history with Africa and that as a fellow “developing country” it has been safe from accusations of taking a paternalistic approach. The availability of more money, however, is changing all this in two critical ways. First, the focus on “soft power” is being replaced by a greater emphasis on the allocation of strictly bilateral grants. As evidence, consider that over the last two years the “Aid to Africa” budget has grown to substantially exceedITEC expenditure. Second, the geographical reach of such targeted bilateral aid flows has expanded to include Afghanistan and countries in Africa. Clearly, India’s near-abroad, as illustrated by its aid periphery, has ex-panded substantially. This expansion is not so interesting in itself. However, it is an illustration of India’s reassessment of its place in the world order. Indians increasingly see the rise of their country as inevitable, and in this new world view no country is too far to benefit from India’s benevolence. Complementing Indian Aid To understand India’s relative strength in aid delivery, it is useful to analyse the one sphere where it has had relatively greater success – in complementing trade and in-vestment. Indian companies have operat-ed in east Africa since long before the terms “emerging” and “frontier” markets became fashionable. Indian trade with Africa stood at over $9 billion in 2004-05 and has been growing at about 25% in recent years. The large Indian diaspora in the region notwithstanding, some credit must go to India’s historical stance on foreign trade and investment that has complemented, and been complemented by, India’s tech-nical assistance strategy. India first provided official guidelines for investments abroad in 1970. While that policy on joint ventures has provided in-creasing flexibility to Indian multination-als, it has historically prohibited majority participation, encouraged partnership agreements with local financial institu-tions and development banks, and instru-cted entrepreneurs to offer training to local partners. Investments are also often in sectors that build local capacity or serve local consumption – one-third of east African joint ventures were in the pharmaceutical, basic metals and alloys, and machine tools industries.12 This approach is substantially different from that of Chinese and western multination-als which usually take majority stakes, im-port much of the skilled manpower from the home country, and often repatriate profits– and are thus accused of being “neo-imperialist”. Indian investments have either con-sciously, or by happy coincidence because of low capital availability, promoted long-term economic development in the host country. As with India’s technical assist-ance programme such investments typi-cally also promote India’s general influ-ence and create an affinity for and ability to work with India as well as goodwill benefits. India’s new aid strategy, of offer-ing large loans and grants through the Exim Bank, is therefore useful because it builds on this foundation and is aimed at giving Indian corporations an added ad-vantage, rather than at replacing the current paradigm. Conclusions India first gave aid to Nepal in the 1950s; it created ITEC in 1964; and it joined the African Development Fund in 1982. India’s foreign aid programme is neither new nor suddenly strategic. Nevertheless, in recent years aid allocation has been marked by a desire to seek greater representation on multilateral fora, an expansion of India’s near-abroad and a move from soft to hard power. If anything is new, it is the hope that through aid India can gain recogni-tion as a world power and advance certain strategic interests. However, at present India’s aid pro-gramme is more a reflection of the coun-try’s standing in the world, than a driver of it. If a reminder of that is needed, China is happy to provide it. China joined the African Development Bank later than India, yet holds more voting shares. It continues to win oil contracts across Africa and central Asia. And India’s periphery, where much aid has been spent since independence is now home to a rela-tively hostile government in Nepal, and a Burmese junta over which India has little, if any, leverage. India has a poor record of leveraging hard power to gain strategic benefits. One problem is that it has never had too much spare cash to throw around. India’s grants, no matter how big, cannot compensate for the country’s overall lack of clout nor outweigh recipients’ consideration of the interests of other powers. Thus they cannot overcome vastly superior Chinese bids for oil fields, Chinese competition for access to Burmese ports or Russian opposition to Indian military presence in Tajikistan. Curiously enough, India’s shift to hard power comes at a time when America’s sharp decline of soft power should serve as a cautionary tale. India is also not “prepared for the risks that accompany hardpower politics, as illustrated by the
COMMENTARYmarch 21, 2009 vol xliv no 12 EPW Economic & Political Weekly14SAMEEKSHA TRUST BOOKS1857Essays from Economic and Political WeeklyA compilation of essays that were first published in the EPW in a special issue in May 2007. Held together with an introduction by Sekhar Bandyopadhyay, the essays – that range in theme and subject from historiography and military engagements, to the dalit viranganas idealised in traditional songs and the “unconventional protagonists” in mutiny novels – converge on one common goal: to enrich the existing national debates on the 1857 Uprising.The volume has 18 essays by well known historians who include Biswamoy Pati, Dipesh Chakrabarty, Peter Robb and Michael Fisher.The articles are grouped under five sections:‘Then and Now’,‘Sepoys and Soldiers’,‘The Margins’,‘Fictional Representations’ and ‘The Arts and 1857’.Pp viii + 364 2008 Rs 295Available fromOrient Blackswan Pvt LtdMumbai Chennai New Delhi Kolkata Bangalore Bhubaneshwar Ernakulam Guwahati Jaipur LucknowPatna Chandigarh Hyderabad Contact: info@orientblackswan.combombing of the Indian embassy in Kabul in July 2008 – a reaction to India’s grow-ing influence there. The expansion of India’s portfolio of de-livery strategies is necessary because it al-lows greater flexibility in delivering aid. Soft power is particularly beneficial in democracies because, according to Nye, “leaders have less leeway to adopt tactics and strike deals”. But hard power works better in authoritarian regimes or in coun-tries undergoing conflict – illustrated by China’s relative success in securing energy assets in Africa and central Asia. To be effective, India needs to mix hard and soft power, now that its sphere of aid delivery is expanding substantially. However, India must accept that it cannot win by matching other powers dollar-for-dollar. It would therefore do better to align its aid strategy not with its ambitions, but with a realistic assess-ment of its strengths – the soft power that Shashi Tharoor calls “India’s greatest asset” and an entrepreneurial private sector highly integrated into the global economy. India should also recognise that an aid and investment strategy that historically promoted local capacity building has set India apart from other donors. While turning out to be partly altruistic, it has also served Indian interests rather well. Rather than abandon that by adopting the western model of large-scale grant making, Indian policymakers should recognise the benefits the country derives from building lasting social and cultural links. Finally, India must not underestimate the potential for backlash against a vast expansion of bilateral aid. As a developing country India benefited from generous goodwill amongst recipients. As an “emerg-ing donor” that goodwill is diluted and India opens itself to the same criticisms often directed at other major donors such asUSAID, or indeed China. This is not to say that India should not give aid to other countries. Foreign aid is, to paraphrase, politics by other means. India may be somewhat premature in thinking it can play with the big boys, but it is important, nevertheless, to play the game.Notes 1 Bilateral and multilateral aid flows are typically analysed separately to understand their deter-minants. For more on the determinants of bilateral aid, see Alberto Alesina and David Dollar, “Who Gives Foreign Aid to Whom and Why?” Journal of Economic Growth, Vol 5, No 1, March 2000. 2 Adjusted for inflation, this amount would be ap-proximately INR three billion in 2008. 3 Country profile: Bhutan, (accessed 7 January 2009). 4 The exchange rate used is Rs 48,7326 to $1. This is the monthly average for January 2009 as pro-vided by 5 The definition used here differs from that of the OECD’s Development Assistance Committee’s broadly accepted definition. To understand the standard definition, see Larry Nowels, “Foreign Aid: Understanding Data Used to Compare Donors”, CRS Report for Congress, Congressional Research Service, 7 June 2006. 6 This figure excludes loans provided by Indian public-sector enterprises, such as the $450 million loan by the NTPC to the Trincomalee Coal Power Plant in Sri Lanka, in 2007 (See “Foreign Borrowing of $500 Million”, Position Paper, Transparency International Sri Lanka, September 2007). 7 This line item only seems to account for contribu-tions to the regular programme budget of various international organisations, but may not account for all aid delivered to or through IOs. Programme aid delivered through multilateral IOs does not seem to be included here. For instance, in 2007 India provided over$8.8 million in funding through the World Food Programme, but contri-butions by the Ministry of Agriculture to the WFP that year were only about$1 million which is not included in the contributions to the WFP under the 2007-08 budget. 8 EdwardLuce,In Spite of the Gods: The Strange Rise of Modern India (London: Little, Brown) 2007. 9 Joseph S Nye Jr, “Soft Power and Leadership”, Compass: A Journal of Leadership, Spring 2004. 10 Jayshree Bajoria, “India-Afghanistan Relations”, CFR, 23 October 2008, http://www.cfr. org/pub-lication/ 17474/indiaafghanistan_relations.html (accessed 7 January 2009) 11 Raghuram G Rajan and Arvind Subramanian, “What Undermines Aid’s Impact on Growth?” IMF Working Paper WP/05/126, June 2005. 12 A C Prabhakar, “An Evaluation of Indian Joint-ventures in East Africa”,, October 2008.

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