Not By Aid Alone

Updated: May 25 2002, 05:30am hrs
There is nothing much to celebrate in the news that the Asian Development Bank has decided to double its funds for India over the next three years from the current level of Rs 5,000 crore per year to Rs 10,000 crore per year. Of course, it is good to be able to draw on lower cost debt resources like those made available by multilateral agencies like the World Bank and ADB. However, in the medium-term, India must learn to reduce its dependence on external borrowing and mobilise resources required for development either at home or through the equity route.

This is what China is doing: Even as it reduces its borrowing from ADB, it sucks in more foreign investment and positions itself to increase its influence within ADB, demanding a larger role in the governance of the institution. ADB’s Rs 30,000 crore funding for India, to be spread over the three-year period, is focussed on the infrastructure sector, with the bank targeting about 28 projects in such areas as roads, power and railways. These are all long gestation areas where the ADB’s favourable rate of interest is useful.

India has emerged as the world’s largest borrower from multilateral agencies. Admittedly, the country has a good record of debt repayment and its external profile is in fact very robust. India’s debt service ratio was estimated to be 15 per cent in 1999-2000, which compares well with many other developing countries. The 1990-1991 crisis taught us some tough lessons and we have managed our external finances well.

This is one reason why India looks attractive to external lenders, and agencies like the ADB would be quite happy to lend. On the demand side, cash-starved state governments are happily queuing up to draw on these funds and the lenders are quite happy to meet the demands of states like Andhra Pradesh and Maharashtra. However, both the state and the union government must exercise utmost prudence in borrowing because their capacity to repay is not improving at the rate it should for them to be able to service the debt. Consider the resistance of farmers to pay for power as just one hurdle in building the repayment capacity, and it can be seen that borrowing today is easy but repaying tomorrow may not be equally so. Mobilising funds at home is the real challenge.