A Case for Greater US Focus on Infrastructure Development in South Asia

Infrastructure development is a policy priority for all South Asian countries. According to estimates, South Asia will need $6.3 trillion in climate-adjusted infrastructure investments by 2030 to maintain the current levels of economic growth. However, the region faces significant domestic and geopolitical challenges that complicate this requirement.

Building quality infrastructure will require investments from like-minded partners on transparent and sustainable terms. Given their shared interests, the United States and India are well-positioned to mobilize their resources and address the infrastructure gap in South Asia. This effort would enable both countries to harness South Asia’s economic potential, contribute to regional stability, and counterbalance China’s growing economic engagements in the region.

This policy brief argues that the geostrategic and geo-economic potential of the smaller South Asian (SSA) countries warrants additional vigor in infrastructure investments and financing from regional and global powers. It examines the challenges faced in implementing various projects so far, highlights why the United States should prioritize the region for infrastructure financing, suggests policy interventions for Washington to play a more significant role, and identifies opportunities for U.S.-India coordination and cooperation in the region.

Infrastructure Gap in South Asia

The infrastructure requirements of the region vary by country. Nepal and Bangladesh, for instance, need to annually spend over $1 billion and $25 billion, respectively, to meet their infrastructure requirements.^1,2 The lack of adequate infrastructure results in regional annual GDP losses of about 3-4% and lost opportunities of approximately $50 billion in trade. The Asian Development Bank (ADB) calculated the infrastructure needs of South Asia spread across various sectors – power (56.3%), transport (31.9%), telecommunication (8.7%), and water and sanitation (3.1%).³ Approximately 60% of infrastructure development in the region is financed through public sector enterprises.

However, there are multiple challenges for infrastructure financing in the region. First, at the domestic level, South Asian countries lack the institutional, bureaucratic, and fiscal capacity to meet this demand, as evidenced by the recent economic crises in Sri Lanka and Pakistan.⁴ At the regional level, geopolitical competition between India, China, and other players in the region sometimes leads countries into a developmental deadlock. Therefore, any investment or cooperation mechanism must cater to these two challenges.

Furthermore, there is also a growing interest from some external players, including bilateral donors or partners, such as the United States, China, Japan, Australia, South Korea, India, and development finance institutions (DFIs) such as the ADB, World Bank, and Asian Infrastructure Investment Bank (AIIB).⁵ However, this still leaves a gap in actualizing infrastructure development financing.

South Asia as a Priority for U.S. Investments

In the past, much of the United States’ engagement in South Asia focused on the nuclear-armed countries of India and Pakistan and its post-9/11 involvement in Afghanistan. However, the recent withdrawal from Afghanistan gives the United States a chance to reshape its regional image and priorities. This includes extending support beyond attempts to influence the region’s security dynamics. There are three main reasons why the United States should use this opportunity to invest in infrastructure development in South Asia: 1) the economic potential of the region, 2) geostrategic competition with China, and 3) strengthening regional cooperation with India.

The recent withdrawal from Afghanistan gives the United States a chance to reshape its regional image and priorities.

LEVERAGE THE ECONOMIC OPPORTUNITIES IN THE REGION

South Asia is one of the fastest-growing regions in the world. In 2021, it recorded a GDP growth of 8.3%, higher than East and Southeast Asia.⁶ The U.S. can capitalize on this economic growth by investing in infrastructure development to reduce costs, improve market access for goods produced in South Asia, and advance its participation in regional and global value chains. This will enable the United States to both support potential regional partners as well as “provide tangible economic benefits back home.”⁷ Given that the smaller countries of South Asia prioritize economic prosperity through regional infrastructure development, greater U.S.-South Asia economic cooperation can pave the way for mutual economic dividends.⁸

CHINA AS A GEOSTRATEGIC DRIVER

China has significantly increased its engagements in South Asia in the last two decades across trade, development cooperation, diplomatic exchanges, higher education, tourism flows, and other areas. For infrastructure projects, the largest recipients of Chinese loans in South Asia are Pakistan, Bangladesh, and Sri Lanka, which received a total of $49.3 billion in 2020.⁹ This growing Chinese role in the region has driven the United States and India closer together and has generated increased interest from Washington in the SSAs.¹⁰

However, despite signing onto China’s Belt and Road Initiative (BRI), the SSAs have made limited efforts to follow through. For example, out of the twenty-seven projects offered by China’s President Xi Jinping to Bangladesh in 2016, only three were subsequently signed.¹¹ This lukewarm response by SSAs reflects their cautious approach towards BRI and concerns about a potential debt burden. This creates both incentive and space for the United States to engage more with the region. While it may be difficult to match China dollar for dollar, the U.S. can fashion the image of a responsible partner as well as reap economic benefits by providing transparent and high-standard alternatives in the region.

Despite signing onto China’s Belt and Road Initiative (BRI), the SSAs have made limited efforts to follow through.

ENGAGING INDIA AS A REGIONAL PARTNER

India is increasingly investing in South Asian infrastructure, with approximately 86% of its development assistance for the region directed towards infrastructure building.¹² In the last decade, India has operationalized nine integrated check posts, revived inland waterways, facilitated rail connectivity, and constructed South Asia’s first petroleum pipeline, among many other regional infrastructure projects. India’s renewed engagement with and reorientation towards its immediate neighborhood is also due to China’s growing footprint. In Nepal, India recently took on two hydropower projects abandoned by China.¹³ During Sri Lanka’s ongoing economic crisis, India has already provided approximately $4 billion in support, while China has hesitated to restructure its loans.¹⁴

New Delhi requires support from like-minded partners to balance China’s growing portfolio in the region.

The 2022 U.S. Indo-Pacific Strategy declares New Delhi “a like-minded partner and leader in South Asia and the Indian Ocean.”¹⁵ However, with India’s economic and military resources diverted due to the ongoing border standoff with China, India’s ability to invest in the neighborhood’s development could become constrained. This may affect India’s capacity to become a regional leader. New Delhi, therefore, requires support from like-minded partners to balance China’s growing portfolio in the region.¹⁶

Thus, it is in the United States’ interest to engage bilaterally with India and support its engagement with the SSAs and the Indian Ocean countries through trilateral, quadrilateral, and other multilateral mechanisms, especially in critical infrastructure development. India’s position on other like-minded partners’ roles in the region has evolved from initial resistance to acceptance and accommodation. This includes welcoming the involvement, for instance, of the United States in its neighboring countries such as the Maldives and Nepal. The United States can use this opportunity to further engage the SSAs through its various development agencies.

United States’ Current Investments in South Asia

The United States is already involved in development cooperation and project financing in South Asia through multiple agencies. However, it remains a pressing need to optimize these engagements. This section outlines the activities of three prominent U.S. agencies – the United States International Development Finance Cooperation (DFC), the United States Agency for International Development (USAID), and the Millennium Challenge Corporation (MCC) – that have a relatively large footprint in the region and provide scope for further expansion.¹⁷

THE UNITED STATES INTERNATIONAL DEVELOPMENT FINANCE CORPORATION (DFC)

DFC is the United States’ development finance institution, which mobilizes private sector funds to address development challenges globally. Established in 2019 through the Better Utilization of Investments Leading to Development (BUILD) Act, DFC was formed by combining the Overseas Private Investment Corporation (OPIC) and the Development Credit Authority of USAID. DFC’s total investment cap is $60 billion, focusing on low and lower-middle-income countries.¹⁸

Among the DFC’s sectors, finance and infrastructure comprise the largest share.¹⁹ In South Asia, DFC’s investments in infrastructure development have been limited to India and Nepal so far (Table 1), and Bangladesh is currently under review for investments.²⁰ With a higher investment cap than OPIC and experience from implementing infrastructure projects in other regions, DFC can expand its portfolio in the region by increasing its focus on key infrastructure development initiatives in the SSAs.

Table 1. DFC’s Infrastructure Investments in South Asia

Source: Project Data Bank, USIDFC.

THE UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT (USAID)

USAID leads the international development and humanitarian efforts of the U.S. government. It mainly focuses on smaller projects through grants rather than loans. However, USAID has a significant ground presence in the region and is keen to partner with India and the SSAs to implement development projects through a trilateral cooperation mechanism.²¹ Currently, USAID’s project portfolio in the region is limited to socioeconomic projects (Table 2). Still, it has the potential to undertake community infrastructure development projects (such as schools, hospitals, vocational centers, etc.) to complement its larger efforts in the region and get more local buy-in.

Table 2: Mapping USAID Disbursements by Country and Sector in South Asia (2021)

Source: USAID

THE MILLENNIUM CHALLENGE CORPORATION (MCC)

MCC is the third key U.S. government agency providing development assistance to South Asia. Established in 2004, MCC concentrates on the agriculture, energy, transportation and infrastructure, health, and finance sectors. Notably, the MCC provides grant projects along with financial involvement from beneficiary nations.

Currently in South Asia, MCC only has an arrangement with Nepal.²² In 2017, Nepal signed a $500 million compact (grant) with MCC, plus an additional $130 million from the Nepalese government, intended to maintain road quality, increase the availability and reliability of electricity, and facilitate cross-border electricity trade between Nepal and India.²³ The Nepalese Parliament approved the plan in February 2022.²⁴

OTHER INSTRUMENTS

Beyond the domestic agencies, the United States has also mobilized multilateral forums towards infrastructure financing, showing its growing interest in the area.²⁵ At the 48^th Group of Seven (G7) summit in June 2022, the member states unveiled the Partnership for Global Infrastructure and Investment (PGII). The PGII aims to help developing countries secure funding to build critical infrastructure such as roads, railways, bridges, and airports by mobilizing $600 billion from G7 members by 2027.²⁶ A key challenge remains – while China, with an autocratic state system, can mobilize funds quickly, the G7, with multiple partners, needs to establish a protocol for easy and early disbursement of funds without getting mired in bureaucratic processes.

Addressing the Challenges and Increasing Engagement

It would be difficult for the United States and India to match the amount of Chinese investments in South Asia. Instead, both countries would benefit from focusing on their comparative strengths such as knowledge sharing, capacity building, and promoting norms and standards.²⁷ This requires several policy and operational interventions from Washington and New Delhi to create a conducive environment for implementing infrastructure development projects in South Asia.

DEVELOPING MINIMUM CRITERIA FOR PROJECT IMPLEMENTATION

Beyond increasing financial disbursements, the United States and India could collaborate to establish more timely project implementation mechanisms. China has expanded its regional investments by leveraging rapid financing with fewer standards and regulations, enabling faster execution on a large scale. By comparison, most development agencies or partners have standards and norms on environmental and social impact that require a longer implementation timeline.

The formulation of specific rather than one-size-fits-all criteria would help external partners or agencies in understanding and accommodating the capacities and needs of the beneficiary countries.

By working together, the United States and India can establish a framework of the minimum criteria, norms, and standards that are essential for project implementation. This framework can be designed to align with the specific objectives of a project, keeping in mind the development and capacity challenges faced by the beneficiary countries. The formulation of specific rather than one-size-fits-all criteria would help external partners or agencies in understanding and accommodating the capacities and needs of the beneficiary countries, thereby expediting the implementation process. Additionally, both countries can coordinate regional assessments and share best practices to implement this mechanism. With India’s past experience in regional development and the resources from the United States, the countries are well-positioned to achieve this objective.

PRIORITIZING NATIONAL PROJECTS

Devising mechanisms for gap and top-up financing or supporting counterpart (borrower) financing would help further close the region’s infrastructure gap. ²⁸ This can be done in two ways.

First, the United States and India can tap into the existing projects of multilateral agencies in the region to meet any financing gaps or provide top-up financing to a part of an existing project.²⁹ The CASA-1000 Power Transmission Project (covering Central and South Asia) involved bilateral and multilateral donors working together to complete an ambitious infrastructure project.³⁰ Given that a template for such a mechanism exists, it can be similarly applied to US-India cooperation on regional project implementation.

Second, for large-scale infrastructure projects, a Quad Development Bank (led by the relevant development agencies of all Quad countries) could mobilize funds to compete with China’s strategic infrastructure investments in the region either through direct financing as an institution or through the member countries supporting a part (training, financing, or construction) of the project implemented by the multilaterals.

STRENGTHENING LOCAL BUREAUCRATIC CAPACITY

Limited bureaucratic capacity is one of the biggest hindrances to effective project implementation and management in South Asia. The developing bureaucracies in countries like Sri Lanka and Nepal pose their own challenges with respect to lack of technical, administrative and fiscal capacities. For instance, Nepal encountered several obstacles while concluding and ratifying its MCC compact, including a lack of technical expertise within the bureaucracy.

As the United States expands its regional projects in South Asia, it can incorporate technical, financial and legal capacity building tailored towards assessment and review of infrastructure projects.

India and the United States have considerable experience working around intricate bureaucratic systems and can leverage this for capacity building in South Asia. India has made progress on internal coordination for its domestic projects through mechanisms such as the National Trade Facilitation Committee and the Prime Minister’s Gati Shakti Masterplan for Multi-modal Connectivity. It is, therefore, well placed to share its best practices with neighboring countries. Moreover, as the United States expands its regional projects in South Asia, it can incorporate technical, financial and legal capacity building tailored towards assessment and review of infrastructure projects to focus on the softer aspects of infrastructure initiatives.

ENGAGING IN SMALLER PROJECTS TO INCREASE VISIBILITY AND LOCAL BUY-IN

Due to a lack of awareness, the extent of USAID and DFC’s involvement in development financing in the region is not widely known in beneficiary countries. By contrast, the signs of China’s financial support in the SSAs are conspicuous. Conducting more outreach and increasing their ground presence will enable the U.S. development agencies to go beyond the hard investments and focus on softer areas, such as increasing people-to-people connectivity for increased local buy-in. One way to achieve this would be through cooperation with India on grassroots-level projects, such as building rural roads, vocational centres, hospitals, etc. that improve the visibility of the development agencies at the ground level.

EXPANDING THE STATEMENT OF GUIDING PRINCIPLES

With growing cooperation, New Delhi and Washington should consider expanding the bilateral Statement of Guiding Principles on Triangular Cooperation for Global Development (SGP) to the SSAs for infrastructure development. While the SGP framework promotes cooperation on development in parts of Asia and Africa, India and the United States have mostly applied it for projects in Africa. India’s Development Partnership Administration (under the Ministry of External Affairs) and USAID can also find a way to cooperate on India’s High Impact Community Development Projects in South Asia. By combining their financial and technical capacities, both countries can leverage their relative strengths for economic development in South Asia.

Conclusion

During former U.S. President Donald Trump’s visit to India in February 2020, both countries reiterated their commitment to developing sustainable, transparent, and quality infrastructure in the Indo-Pacific region. South Asia lies at the heart of this region and requires significant investments in infrastructure to maintain current growth rates. However, the region faces significant challenges of both domestic and geopolitical nature, making it essential to secure investments from like-minded partners on transparent and sustainable terms. With shared interests and capabilities, the United States and India are in a favorable position to mobilize resources and address the infrastructure gap in South Asia. This collaborative effort would not only enable both countries to harness the region’s economic potential but also contribute to regional stability and provide a counterbalance to China’s influence.

Therefore, it is in the United States and India’s interest to create competition in South Asia for its most pressing development requirement – infrastructure. U.S. agencies such as DFC, USAID, and MCC have already established a presence in the region. India manages key (albeit smaller scale) infrastructure projects through the Development Partnership Administration in neighboring countries. By working together and addressing the political, technical, and financial barriers to infrastructure development, the United States and India can create a favorable environment for themselves and contribute to the region’s development goals.