India must review its approach to foreign aid

The country must empower borrowing nations to become independent of Indian assistance and result in a win-win for all

India's foreign aid
According to a report on April 2, India provided a Line of Credit (LOC) worth $1 billion (rice being part of this), in addition to a short-term loan of $500 million in February for purchase of petroleum products.

By Sanjeev Nayyar

The crisis in Sri Lanka and the help India has extended to the island nation have brought into focus the importance of helping neighbours, amongst others, in times of crisis.

According to a report in ThePrint on April 2, India provided a Line of Credit (LOC) worth $1 billion (rice being part of this), in addition to a short-term loan of $500 million in February for purchase of petroleum products. In November 2021, India gave 100 tons of liquid nano nitrogen fertiliser, and 40,000 tons of fuel was supplied outside the LOC facility. In March 2022, an agreement was signed by the governments of India and Sri Lanka whereby State Bank of India would provide a $1 billion ‘short term concessional loan facility’. India had also in 2022 agreed to provide Sri Lanka with a 4,000 MT Floating Dock and Dornier Aircraft as a grant and LOC.

So what does the Line of Credit and deeper intent man? Excerpts from the answer to question no 418 in the Lok Sabha provide a clue: “Extension of GoI Lines of Credit on concessional terms is an important component of India’s diplomatic strategy. The scheme also attempts to promote India’s strategic political and economic interests abroad by positioning it as an emerging economic power, investor country and partner for developing countries. The LOC scheme is also expected to boost Indian export of goods and services to hitherto untapped markets and successfully showcase India’s expertise in project planning, design and implementation in diverse areas.” Simply put, LOC is a loan at a concessional rate of interest.

Set up in 1981, Export Import Bank of India (EXIM) is fully owned by the Government of India. LOCs are primarily done through EXIM. For details, see the accompanying graphic.

While LOCs are based on foreign policy and friendly recipient governments, here are observations from LOCs approved during 2013-2019.

  1. The quantum of LOCs has doubled between 2013-14 and 2018-19.
  2. Africa is consistently a significant beneficiary. “Exim Bank also extends its own commercial Lines of Credits to various financial institutions and other entities in Africa.”
  3. There is a gradual move towards India’s neighbourhood.
  4. Amongst India’s neighbour’s Bangladesh, Nepal, Maldives, Sri Lanka and Myanmar are beneficiaries in that order. Bangladesh has a disproportionately high and Myanmar, Sri Lanka a low share.
  5. LOCs approved for Mongolia in 2016-17.

The EXIM site provides year-wise data till FY2018-19. However, it does provide Operative LOCs as on March 23, 2022, giving the project values in $ Million by country: Africa $25,433, Bangladesh $7,758, Mongolia $1,256, Myanmar $343, Nepal $850, Sri Lanka $1,449, Maldives $548 and Uzbekisan $445. LOC also includes Syria $125, Cuba $243, Guyana $80, Honduras $53, Nicargua $36, Surinam $125, Fiji $56 and Papua New Guinea $100.

A comparison with LOCs up to 2018-19 with those as on March 23, 2022, indicates higher LOCs to Sri Lanka and Mynamar. In October 2021, India agreed to provide a $200 million LOC to Kyrgyzstan. Clearly, the set of countries whom India provides LOCs has grown in the last few years.

The answer to Lok Sabha Question 3848 of March 2022 stated, “Besides lines of credit Grant in aid assistance projects are being implemented in Afghanistan, Bangladesh, Mauritius, Nepal, Sri Lanka, Seychelles, Maldives, Myanmar, and Tajikistan.”

Bhutan does not appear in LOC or Grant in Aid. However, a 2019 reply to a Lok Sabha question shows Grants and Aid to Bhutan of Rs 2,745 crore in 2019-20 BE.

It is suggested that the government of India, through an annual Press Release in the April-June quarter, gives country-wise information of LOCs approved and grants given during the preceding financial year. This does not seek to undermine the government, but lending is a risky business.

According to the Economic Times, “EXIM’s gross NPAs reduced to Rs 11,678 crore in 2018-19 from Rs 11,976 crore a year ago. Net NPAs stood at Rs 2,288 crore as compared to Rs 4,028 crore by the end of 2017-18.” In March 2021, in EXIM’s Annual Report, the managing director said, “The improvement in the Bank’s credit skills is also evidenced by the fact that 97.20 per cent of the Bank’s NPAs as of March 31, 2021, are legacy cases sanctioned prior to March 31, 2017.”

Returning to concepts, India’s assistance could take various forms namely LOC, grants, concessional loans and if asked, assistance in monetary policy.

India’s focus should be on its neighbourhood, Afghanistan, Maldives, Central Asia, Africa, Indian/Pacific Ocean countries and countries with people of Indian origin like Fiji. Nevertheless, the focus shall be dynamic. We should not help countries who have consistently worked against India’s interest or export terror worldwide. Given India’s growing international profile the value of assistance could leapfrog. What can the government do? Taking the EXIM public could help raise capital without affecting the fiscal maths.

For countries that need loans, it might be better if a government-owned bank like the State Bank of India, which has the advantage of balance-sheet size and low cost deposits, is at the forefront.

All forms of assistance should be guided by the Indic concept of dharma or righteouness. It comes from the Sanskrit root word dhri which means to hold, that eventually maintains balance.

So India’s efforts should help sustain nations. It must empower them to become independent of Indian assistance and result in a win-win for all. It should not be India’s intent to drive borrowers into a debt-trap. Every project should be executed timely and make people remember India with gratitude just like those of Southeast Asia do for monuments like Angkor Watt.

If followed, these will distinguish India from the rest and aid foreign policy in a significant way.

The author is a chartered accountant and founder, www.esamskriit.com. Views are personal

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