Essay on Foreign Aid to India | Economics

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Essay on Foreign Aid to India

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Essay # 1. Amount of Foreign Aid in India:

In absolute terms India has been the biggest recipient of foreign aid for development purposes during the past four decades. However, its position is not enviable if we consider the amount of aid in relation to its population. During the First Plan period India had received on an average an external assistance of Rs. 40 crores per annum.

This was certainly a modest amount by any standards. Thereafter, for more than a decade there was a steady increase in external assistance. During the Third Plan period this country received, on an average, an external assistance of Rs. 573.3 crores per annum, which was 3.2 per cent of national income. After the Third Plan was over, the long-term planning was suspended for three years.

As the country’s economy was in a bad shape in this period and it was not easy to raise adequate resources from domestic sources, reliance on foreign aid increased during the three years of Annual Plans. However, the Fourth Plan marked a distinct change in the pattern of finance.

This change was induced basically by two reasons:

(i) The USA cut down aid to India drastically as the latter refused to tow its lines on a number of political issues, and

(ii) Because of the increasing uncertainty of aid and the rising debt servicing charges, the Government of India opted for a policy of increasing self-reliance.

Under the Fifth Five Year Plan, self- reliance was again accorded a high priority and thus the aid received for the plan in percentage terms was approximately on the same scale as under the Fourth Plan. The Sixth Plan envisaged a net inflow of foreign resources of Rs. 9,929 crores (Rs.5, 889 crores as net aid and Rs. 4,040 crores as other inflows from abroad).

This was about 10.2 per cent of the total public sector plan outlay of Rs. 97,500 crores. The Seventh Plan envisaged net capital inflow from abroad of Rs. 18,000 crores which was again 10 per cent of the public sector plan outlay of Rs. 1,80,000 crores.

These data show that utilisation of foreign aid in India has been considerably less than the authorisation. For instance, the total authorisation of foreign aid upto the end of Fourth Plan was Rs. 13,056 crores while utilisation was merely Rs. 11,922 crores.

The shortfall has been particularly marked during the period of the Sixth and Seventh Plans. Another important conclusion that emerges from the table is that the authorisation of foreign aid has increased considerably during the last decade. In fact, the authorisation of foreign aid during the Sixth Plan was Rs. 16,761 crores which rose by more than two and a half times to Rs. 44.971 crores in the Seventh Plan.

Though authorisation of assistance has registered a perceptible increase in recent years, utilisation has risen at a much slower rate in percentage terms; utilisation was 65 per cent of authorisation in the Sixth Plan and only 50 per cent in the Seventh Plan. However, during the period 1990-91 to 1994-95 utilisation was 83 per cent of the authorisation (Rs. 51,963 crores out of Rs. 62,419 crores).

Essay # 2. Forms of Foreign Aid:

India has received three forms of foreign aid-loans, grants, and PL 480/665 etc., assistance repayable in rupees and/or in convertible currency. Loans are meant to help the country in meeting the shortages of resources to carry out its development plans. However, if not utilised properly in the long period, they become a burden on the economy as substantial proportion of foreign exchange earnings is used up for servicing them (as amortisation and interest payments). Grants carry no such burden of repayment and are therefore better on this account.

A substantial part received under PL 480/665 from USA till 1967-68 was repayable in rupees. However, after this year, the USA expressed its willingness to grant assistance under this head only in convertible currency. Aid under PL 480/665 was completely stopped after 1977-78.

Total authorised foreign aid upto the end of the Fourth Plan was Rs. 13,056 crores of which the share of loans was Rs.9, 665 crores (i.e. 74%) and the share of grants was Rs. 753 crores (i.e. 6%). The remaining Rs.2,638 crores (i.e. 20%) was the share of assistance received under PL 480/665.’ During the Fifth Plan period, total authorised foreign aid was Rs. 9,844 crores of which the share of loans was Rs. 7,913 crores (i.e. 80%) and the share of grants was Rs. 1,795 crores (i.e. 18%). Assistance under PL 480/665 was a negligible Rs. 136 crores. During the Sixth Plan period, the share of loans and grants comes out to be around 90 per cent and 10 per cent respectively.

During the Seventh Plan, the share of loans rose further to 93.9 per cent. Taking the period of planning as a whole, total authorised foreign aid to India amounted to Rs. 1,48,556 crores of which the share of loans was Rs. 1,32,439 crores (i.e. 89%) while the share of grants was Rs. 13,343 crores (i.e. 8.9%). The remaining Rs. 2,744 crores (i.e. 2%) was the share of assistance received under PL 480/665.

External assistance is often classified as tied aid and untied aid. To prevent the misuse of assistance, the lending countries and international financial institutions generally prefer to give aid for particular projects. Since this assistance can be utilised for specific purposes only, it is called tied aid. A country receiving tied aid thus does not have the freedom to use it for other purposes. From the point of view of the borrowing countries united aid is better, as there is always some flexibility in its utilisation.

Essay # 3. Foreign Aid and Capital Formation:

For evaluating the role of external assistance in the capital formation in the public sector during planning period we must consider the ratio of aid to overall investment in this sector. During the Second and Third Plan periods the external assistance had accounted for 25 per cent of the total investment in the public sector. Subsequently, under the three Annual Plans contribution of external assistance to investment in the public sector rose to 40 per cent.

Thereafter the relative importance of external assistance in Indian plans declined. Between 1955-56 and 1967-68 the ratio of aid to import surplus was also high which implied that a major part of aid was spent on meeting this deficit.

During the Fourth Plan period, on account of recession in the industrial sector, investment activity did not reflect buoyancy. Hence the country did not require aid on the same Scale as under the Third Five Year Plan and the three Annual Plans. Further, a major part of the aid received in this period was spent on financing the imports and thus its contribution to domestic capital formation was at best marginal. Under the Fifth Plan external assistance did not rise in percentage terms, yet the absolute amount of aid was considerably larger than the under the Fourth Plan.

According to the original scheme of financing of the Sixth Plan the government hoped to raise approximately one-tenth of the resources through external assistance. However, in practice, external assistance contributed only 7.7 per cent of total resources. The Seventh Plan also expected to raise 10 per cent of resources from external assistance. In practice, 9.1 per cent of resources were raised through external assistance.

Essay # 4. External Commercial Borrowings:

India had to rely heavily on external commercial borrowings and NRI deposits to meet the balance of payments deficits in the eighties as there was an increasing shortage of concessional assistance.

Thus our dependence on high cost methods of financing increased. As far as external commercial borrowings are concerned, they were used extensively in the latter half of eighties to finance the current account deficit.

In fact, in this period, external commercial borrowings accounted for more than 25 per cent of the total capital flows into the economy. In 1986-87, their share in capital inflows was almost half (to be exact, 48.1%). India started initially with the conventional syndicated loans, managed by American, European and Japanese banks and then started raising funds in the international bond market. Financial institutions and public sector undertakings together accounted for about 90 per cent of the approvals of external commercial borrowings.

The government now realises the high cost nature of external commercial borrowings and their burden on the economy. Accordingly, it has tried to reduce its dependence on this source of financing the current account deficit. As a result, the share of external commercial borrowings in total net capital flows has been brought down from 34.4 per cent in 1989-90 and 30.6 per cent in 1991-92 to 12.4 per cent in 1993-94 and 14.6 per cent in 1994-95.

External commercial borrowings were modest before 1980-81. In 1980-81 they stood at Rs. 1,038 crores. Over the entire period of the Sixth Plan (1980-81 to 1984-85), approvals of external commercial borrowings stood at Rs.7,259 crores. However, there was a substantial inflow of external commercial borrowings in the period of the Seventh Plan as authorisations were as high as $ 10.8 billion and disbursements were of $ 10.48 billion. However, net transfer comes to only $ 3.58 billion as a substantial amount of money was paid back in terms of debt service payments. Interest payments alone accounted for $ 3,49 billion.

The last year of the Seventh Plan 1989-90 registered a substantial inflow of $ 3.29 billion. However, there was a steep decline in the availability of commercial credit to India in 1990-91.

According to the Economic Survey, 1991-92, the reasons for this decline were as under:

(i) Fall in the overall availability of international credit due to capital adequacy requirements of the Bank for International Settlements;

(ii) The Gulf crisis which created an atmosphere of uncertainty in the international capital market; and

(iii) The downgrading of India’s credit rating for long-term funds by international rating agencies.

In fact, the years 1990-91 and 1991- 92 even saw a net capital transfer abroad as gross disbursements minus debt service payments were negative in these years. Net capital transfer abroad was $ 530 million in 1990-91 which rose to $ 1,080 million in 1991-92. The year 1991-92 even saw a capital outflow of $ 70 million.

In fact, against the gross disbursements of $1.10 billion in 1991-92, interest payments alone stood at $ 1.01 billion (which comes to as much as 92 per cent of the gross disbursements). These figures clearly show the high cost nature of external commercial borrowings.

The above trends continued in 1992-93 also. In this year gross disbursements of $ 1.2 billion were short of repayment resulting in an outflow of $ 358 million. However, things changed thereafter. Gross disbursements of external commercial borrowings rose to $ 2.9 billion in 1993-94 and further to $ 3.84 billion in 1994-95.

In net terms, external commercial borrowings during 1993-94 and 1994-95 amounted to $ 1,252 million and $ 1,029 million respectively. External commercial borrowings are permitted by the government as an important source of finance for Indian firms for the expansion of existing capacity and also for new investments. There was a large demand for such borrowing in 1995-96 on account of revival of investments in 1994-95 and opening up of infrastructure sectors like power for increasing participation by the private sector.

Before we conclude this section, two more observations made by Bimal Jalan needs to be pointed out. The first observation relates to the delays in implementing the large public sector projects and the consequent debt servicing problem. According to Jalan, most long- term commercial loans have to be repaid in 5 to 8 years.

The gestation period of most of the large public sector projects is at least 4 to 5 years. In fact, these projects are often delayed further due to a number of reasons. This implies that the government has to cover the entire repayment liability before any financial or other benefit is available from the project. Even after going into commercial production, these projects add very little to exports and these further compounds the debt servicing problem.

Jalan’s second observation relates to the risk of depending too much on short-term borrowings. During 1987-91 India borrowed Rs.6.000-7,000 crores by way of short-term loans (of a maturity of less than one year). This was in addition to the accretions of Rs. 10,000 crores of non-resident foreign currency deposits (with a maturity of three years or less). These short-term loans requires continuous ‘re-rolling’ in order to reduce the burden of repayment.

However, with the fall in India’s credit rating, the renewal of the short-term loans became difficult. By March 1991, India’s credit rating slipped to the bottom of the investment grade and India had to make large repayment of short-term commercial loans. These short- term obligations created serious problems and India was pushed to the brink of default in 1991 – first time in its post-Independence history.

As noted by Jalan, “Banks are extremely susceptible to adverse developments in any sphere and can quickly withdraw support with or without adequate cause, in good times; international banks compete fiercely with each other for business. In hard times, they act in unison. The withdrawal of support by a single bank can trigger off a chain reaction among all other banks.” Therefore, it would be a wise policy for India to try to reduce the short-term debt in future.

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