Economic and Political Weekly

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

by Angshuman Choudhury and Ashutosh Nagda

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 is the second article in a two–part series that assesses India’s budgetary aid programme to countries in its extended neighbourhood.

Read the first part of this series “How India Funds the World: Financial Assistance in the Immediate Neighbourhood” here.

India has traditionally relied on the extension of financial assistance to countries in the “near abroad” to maintain geopolitical clout in its neighbourhood, and to keep crucial economic partnerships functional. The Bharatiya Janata Party (BJP)–led National Democratic Alliance (NDA) government’s flagship “Neighbourhood Policy” provided New Delhi with space to boost its financial assistance profile across the extended South Asian  region. This, in conjunction with the government’s intention to forge new strategic and political partnerships has allowed India to take its donor credentials beyond the immediate neighbourhood. 

Afghanistan

Traditionally, India has seen its western frontier as the primary source of its security threats. A Taliban-ruled Afghanistan has always been an unfavourable proposition for India, thus making a  civilian government in Kabul a valuable geostrategic ally. Further, Afghanistan’s favourable geographical position as a gateway to Central Asia makes it a key regional partner for New Delhi.

Against this backdrop, India has emerged as one of the leading donor nations to Afghanistan in the subcontinent. Its grants to Afghanistan have shown a mixed trend in the last five years. Continuing with the upward surge from the UPA II’s time (Rs 490.96 and Rs 585.31 crore in 2012–13 and 2013–14 respectively), India’s aid to Afghanistan rose from Rs 661.97 crore in 2014–15 to Rs 880.44 crore in 2015–16. In 2016–17, aid money witnessed a significant dip of Rs 617.42 crore. From thereon, the next two FYs witnessed a gradual upward climb to an actuals spending of Rs 365.96 crore in 2017–18 and a revised estimate of Rs 470 crore in 2018–19. As per the 2019–20 interim budget, aid allocation is set to fall to Rs 325 crore.

India’s aid money in Afghanistan goes into various sectors such as infrastructure, health, education, agriculture, and post-conflict reconstruction, among others. Two major infrastructure projects—the reconstruction of Afghanistan’s parliament and the Afghan-India friendship dam—were completed in Afghanistan with India’s assistance in the first two FYs of the NDA government, thus coinciding with the sudden fall in India’s assistance between 2015–16 and 2016–17.

A significant addition to India’s development portfolio in Afghanistan is the Small Development Projects (SDP) scheme with a primary focus on rural development, education, health, and vocational training. In the area of skill development, India offers training, fellowships and scholarships to Afghan officials and nationals in various fields such as technical and economic cooperation, agricultural research, cultural relations etc. Over the years, India has also provided Afghanistan with extensive developmental assistance programme worth $3 billion (Times of India 2019).

The history of violent politics in Afghanistan has left a huge institutional and economic gap in the country. For India, it is important to invest its resources in Afghanistan in order to gain a geoeconomic and geostrategic leverage. A secure and friendly Afghanistan is key to India’s security concerns, especially with respect to Pakistan. Traditionally, New Delhi has had a clear space to build an effective relationship owing to China and other regional countries’ sparse interest in Afghanistan. However, Beijing’s rapid inroads in Afghanistan via the BRI require India to strengthen its geoeconomic and political clout in Kabul at the earliest. 

Mauritius

India and Mauritius have shared a strong relationship since the latter’s independence in 1968. For India, the economic and strategic importance of the Indian Ocean makes Mauritius, an Indian Ocean island country,  a key partner to engage with. During a visit to Mauritius in 2018, President Ramnath Kovind recognised Mauritius as a “gateway” to the Indian Ocean Region (IOR) and Africa.

The core of the India–Mauritius relationship lies in their active maritime outreach in the IOR by the NDA government. The importance of the IOR for India was reinstated when it launched the SAGAR initiative, which was India’s vision for the IOR. Mauritius, which is surrounded by some of the most important sea lanes that act as energy and trade lifelines, thus holds geostrategic importance for India. 

Mauritius’ importance to India did not translate into budgetary aid during the NDA government’s first two years in power. Interestingly, this was in line with the  UPA’s policy of the previous two FYs. Mauritius was first introduced in FY 2016–17, when it was allocated Rs 409.97 crore. In FY 2017–18, Indian aid to Mauritius dropped to Rs 350.39 crore, but this drop in aid was accompanied by a simultaneous rise in the budget estimates of 2018–19 and 2019–20, where Mauritius is expected to receive Rs 660 crore and Rs 700 crore respectively.

India’s recent Memoranda of Understanding (MoUs) with Mauritius have focused primarily on strengthening the maritime relationship between the two nations. over the last few years, India has extended several Line of Credits (LoCs) to Mauritius, the most recent being the $500 million LOC to finance infrastructure projects, which was extended during the Mauritius Prime Minister Pravind Jugnauth’s visit to India in 2017 (Srivats 2017), and the $100 million LoC extended during President Kovind’s visit in 2018 to procure the Multipurpose Offshore Patrol Vessel (MPOPV) (DD News 2018).

This recent rise in aid allocation is a positive sign. India’s aspirations to lead a peaceful and economically active Indian Ocean will need an active Mauritius on its side. With China constantly vying for space in the country, India needs to retain Mauritius in its budgetary aid profile. 

Mongolia

India and Mongolia have long historical and cultural linkages, despite the absence of a shared land or sea border. According to the Ministry of External Affairs, “for Mongolians, India is one of [the] counter-weights to their neighbours, a “spiritual neighbour, a declared third neighbour and strategic partner and centre for pilgrimage” (Ministry of External Affairs 2018). For New Delhi, Mongolia’s unique geographical position—between Russia and China—is a geostrategic asset. 

Despite its geostrategic importance, India’s grant assistance to Mongolia in the last five years has been one of its lowest. Between 2014 and 2019, a combined total of Rs 19.13 crore was spent in actual as well as estimated budgets. The NDA government started with a grant of Rs 2.28 crore, a slight increase from previous year UPA’s Rs 1.5 crore. The grant amount witnessed a big jump to Rs 7.49 crore in the next FY 2015–16, when PM Modi became the first Indian Prime Minister to visit Mongolia. However, this high was short-lived as the amount spiralled in the next two consecutive FYs of 2016–17 and 2017–18, where the grant extended amounted to Rs 1.94 crore and Rs 0.42 crore respectively. The estimated figures for the years 2018–19 and 2019–20, with an estimated amount of Rs 2 crore and Rs 5 crore respectively, infuse some hope in bilateral relations between the countries.

A unique element in New Delhi’s relationship with Ulaanbaatar is its funding of latter’s long-awaited oil refinery project as a part of the $1 billion LoC agreement made during Modi’s visit in May 2015 (Reuters 2018). Both countries have also regularly cooperated in the security arena through the civil nuclear deal of 2009, a joint working group for defence cooperation, and a joint military exercise called Nomadic Elephant (Prasad 2009).

Oddly, the well-oiled Indian–Mongolia security relationship at has not culminated in a strong economic partnership, sparing few LoCs, the most recent one being the $1 billion given during Modi’s visit to Mongolia in 2015, for the country’s infrastructure sector. A major reason for the same is China’s economic leverage in Mongolia and its geographical proximity to the country. China’s regional influence was well established in 2016, when it imposed an economic blockade to cut off Mongolia, in response to the latter’s invitation of the Dalai Lama (Al Jazeera 2016). Mongolia had then publicly requested India to bail it out (Bhattacherjee 2016), but New Delhi, on its part, either failed to act or was reluctant to do so.

Mongolia’s importance to India lies in the concept of balance of power, as India can provide Mongolia relief from Chinese coercion. However, India needs to be sure about the role Mongolia wants it to play and act accordingly. 

Seychelles

Seychelles’ geographical position as an Indian Ocean littoral makes it an important country for India, particularly as a look-out base. The NDA government, armed with its flagship Indian Ocean policy in the last five years, SAGAR, has steadfastly looked to increase its geostrategic sphere of influence in the Indian Ocean.

Over the years, India has extended various development assistance programmes to Seychelles under the Indian Technical and Economic Cooperation (ITEC) and India–Africa Forum Summit (IAFS). Since FY 2016–17, Seychelles has been introduced as a separate entity in the union budget as a foreign aid recipient, and has been extended grants under this. In Seychelles’ debut year in the union budget, which came right after Modi’s visit to the country in 2015, it was allocated Rs 49.98 crore. FY 2017–18 witnessed a solitary spike of allocations to Rs 223.16 crore which interestingly coincided with the opposition—who had opposed the Assumption Island agreement—securing a majority in the Seychelles’ parliamentary elections of 2016. This allocation is estimated to reduce in FY 2018–19 and 2019–20 to Rs 100 crore and Rs 75 crore respectively.

The core assistance money went to a host of sectors such as agricultural research, education, infrastructure, IT, and implementation of Small Development Projects (SDPs). A significant chunk is dedicated to their robust defence engagement with central focus on the maritime front. A key part of the strategic maritime cooperation was the signing of an agreement between both countries for joint construction and operation of Assumption Island, which was later halted due to political opposition in Seychelles (Pant 2018). 

The importance of the Assumption Island project, which showed signs of revival in 2018, lies in India’s attempt to restrict Chinese moves in the Indian Ocean region. In this context, New Delhi also extended an LoC of $100 million to Seychelles in 2018  to acquire Indian defence equipment to boost its maritime capacity (IANS 2018). 

Contrary to developments in most other countries, India does not face any direct threat from China in its relationship with Seychelles, due to the absence of any major Chinese geoeconomic or geostrategic project (Joshi 2018). This allows New Delhi to focus on preserving its geostrategic and geoeconomic clout in the island country. India needs to maintain uniformity in its aid disbursement to Seychelles to foster a trust-based and time-tested relationship, and also allay concerns of France, one of New Delhi’s important maritime strategic partners, about China’s growing clout in the Indian Ocean.

Conclusion 

As the South–South Cooperation framework deepens and regional hegemons use financial assistance to foster horizontal partnerships, India must maintain the current pace of aid allocation. There is no immediate imperative to move beyond the neighbourhood and the Indian Ocean in terms of core budgetary allocation. From a realist perspective, New Delhi must, in fact, strengthen and stabilise its assistance to the countries next door to contain the Chinese BRI juggernaut. However, India must simultaneously ensure that the donor-recipient relationship does not begin to resemble the vertical relationship that donor countries in the Global North share with their lesser-developed recipients in the South. India, as a large donor country in a region populated by smaller ascendant powers, must ensure that smaller powers are not enmeshed in heavy debts. This is particularly important during a time when long-held relationships and perceptions in the broader South Asian region are undergoing critical shifts. In this context, it remains absolutely crucial for India to identify and understand the specific needs in each recipient country before allocating money in the budget. Not only would this avoid excess spending of taxpayer money, but also ensure that New Delhi’s aid reaches the right places and solves the right problems.

Angshuman Choudhury Ashutosh Nagda

Angshuman Choudhury (angshuman.ch93@gmail.com) is a senior researcher and coordinator, Southeast Asia Research Programme, Institute of Peace and Conflict Studies. Ashutosh Nagda is a researcher, Southeast Asia Research Programme, Institute of Peace and Conflict Studies.