New Delhi: India’s latest budget reveals fresh details about the Union external affairs ministry and its foreign aid strategy. The Wire dives into 16 years of data to uncover the real trends behind the diplomatic rhetoric.
Highest allocation due to redeeming doubtful debts
The ministry’s revised estimates for the previous fiscal year at Rs 29,121.88 crore represent the highest allocation the MEA has received in the past 15 years. This amount is 61% higher than 2023-24’s budget estimates. It also exceeds the previous year (2022-23)’s actual expenditure by over 71%.
Moreover, this is the first time in a decade that the MEA’s revised estimates have significantly increased, instead of decreasing compared to the budget estimate. In 2013-14, the increase in the budget estimate was just Rs 75 crore, or less than 1%.
According to the budget documents, the largest allocation is for the Exim Bank to fulfil its invocation of the Indian government’s guarantee on “doubtful debts”. These are soft loans extended by India through the Exim Bank, primarily to African countries, that are unlikely to be repaid.
Of the Rs 11,071.88 crore increase in the MEA’s revised estimate for 2023-24, Rs 9,013.72 crore, accounting for 81.4% of the funds, is designated for the Guarantee Redemption Fund. The remaining increase is primarily allocated to international training programs, special diplomatic expenses, and the passport and immigration division.
MEA’s share in government expenditure remains less than 1%
Due to the sharp rise in the revised estimates, the MEA’s share of the Indian government’s total expenditure has ballooned from 0.4% in 2022-23 to 0.65% in 2023-24. However, since the MEA budget will not be inflated by the Exim Bank’s guarantee invocation this year, this share is projected to decrease sharply to 0.46 percent of the budget, marking only a slight improvement from its lowest proportion of 0.37% in 2021-22.
Although the Indian government’s expenditure budget has steadily increased each year, the foreign ministry’s percentage share has not risen proportionally and has instead fluctuated considerably.
As the chart illustrates, the MEA’s budget under the NDA government’s last five years has remained much below 0.5%, with the sole exception of last year’s anomaly. In contrast, the previous decade saw the budget never falling below 0.6%.
The concern about the MEA’s minimal share in the Union budget has been a recurring topic in nearly every parliamentary standing committee meeting on external affairs regarding budget allocations. There have been repeated calls for the ministry to receive “at least 1% of the overall budget”.
While agreeing in principle, successive foreign secretaries have said that the Indian government’s overall spending has grown at a faster rate than the budget allocated to the MEA.
India’s actual spending on grants versus allocation
Broadly speaking, India’s actual spending on international grants and sovereign loans has closely reflected the state of the Indian economy over the past 15 years.
These diplomatic financial aids are primarily managed by the MEA, with smaller ancillary lending overseen by the Union finance ministry. Both are consolidated in the Union budget under a chapter on the external sector.
For the current year, it stands at Rs 9,621.9 crore, reflecting a 315% increase over the past 15 years.
Looking further back, in 2004-05, the projected allocation for loans and grants to foreign governments was Rs 1,723.52 crore during the first year of UPA-I. By the end of UPA-II in 2014-15, this allocation had risen to Rs 8,379.15 crore, marking a 386% increase.
In the first 10 years of the NDA government, the allocation grew from Rs 9,478.34 crore in 2014-15 to Rs 9,621.9 crore in 2024-25, representing a modest increase of 1.5%.
The actual expenditure, for which data is available only from 2009-10, also grew, though not as sharply. Indian aid disbursement increased by 195% over 13 years, from 2009-10 to 2022-23. Since these figures are based on audited receipts, the latest budget documents will only reflect spending from two years prior.
In 2009-10, the projected allocation for foreign aid was Rs 2,314.92 crore, but actual spending was Rs 2,401.95 crore. This trend of higher expenditure than what was initially allocated continued for the next three years. However, from 2014-15, a widening disparity emerged between India’s financial commitments and actual disbursements. Although the figures aligned more closely again from 2018-19, the COVID year of 2021-22 saw a significant shortfall in spending.
Share of grants and loans in India’s total expenditure budget
India began to be noticed as an aid donor in the latter half of the 2000s. When examining India’s development assistance, comprising grants and loans provided to other countries, within the context of the overall Union budget, this aid has never exceeded 0.5% of the total expenditure of the government.
As the graph shows, India’s allocation for foreign aid grew consistently for seven years from 2009, both in absolute terms and as a share of India’s budget, with a slight dip in one year.
However, from 2016 onwards, the trajectory has been more volatile.
In 2016-17, India’s economy slowed sharply due to the shocks of demonetisation and the rollout of the Goods and Services Tax (GST), which also impacted the Union budget.
From 2015 to 2016, actual expenditure on foreign aid dropped by over one-fourth (26.5%). It decreased again the next year, though not as precipitously, before starting to recover.
Another significant drop of 26% occurred from 2020-21 to 2021-22, directly impacted by the worldwide COVID-19 lockdown, before the numbers began to climb back up.
Over the last 15 years, the lowest share of foreign aid in Union government’s expenditure was in 2021-22 at 0.16%, while it peaked at 0.59% in 2015-16.
Breakup of grants and loans
Bhutan has consistently been the largest recipient of Indian development aid, with funds primarily directed towards hydropower project construction. Yet, as the chart below shows, its proportional share of India’s external assistance has declined.
In 2009-10, Bhutan received Rs 1,417.22 crore, accounting for 58% of India’s total external aid. Thirteen years later, in 2022-23, aid to Bhutan increased in absolute terms to Rs 2,467.3 crore, but its share of India’s overseas aid dropped to 34%.
For the current year, the projected aid allocation is Rs 2,068 crore, marking the second consecutive year of decline. While Bhutan remains the largest recipient of Indian external aid, its share has now reduced to just 21.49%.
One factor is that India has been extending aid to countries it previously did not. Additionally, Bhutan’s policies is shifting as it moves towards funding most of its future hydropower projects independently.
Hydropower debt constitutes the majority of Bhutan’s external debt, with most of it owed to India. However, this debt is largely considered self-liquidating under a long-term power purchase agreement with India. Simultaneously, Bhutan has been purchasing power from India during the winter months, with some of this demand suspected to be driven by crypto mining.
Looking ahead, Bhutan plans to increase its hydropower generation capacity by 3,119 MW in its 13th Five-Year Plan, but it is now primarily seeking private investment and multilateral financing for these projects.
South Asia’s declining share in India’s external aid
Since overseas aid is a key diplomatic instrument, it is not a surprise that a major chunk goes towards the six South Asian countries of Bhutan, Bangladesh, Nepal, Maldives, Sri Lanka and Afghanistan. Pakistan does not receive any economic aid from India.
But despite the emphasis on ‘neighbourhood first’, South Asia’s overall share in the grants and loans to foreign countries has gone down over the years.
In absolute terms, the highest disbursement of external aid to South Asia in the last decade and a half occurred in 2015-16, amounting to Rs 7,173.4 crore. In comparison, India’s commitment in this year’s budget stands at Rs 3,733.6 crore.
The peak in financial assistance during the early years was largely due to the NDA government inheriting significant infrastructure projects, like the Salma Dam, which were nearing completion and required pre-determined funding.
Once those projects were completed, and along with the reduced aid to Bhutan, there has been a sharp decline in South Asia’s share of aid, both in absolute terms and as a percentage of overall aid distribution.
From 2009-10 to 2015-16, the aid to the six South Asian countries has never dipped below 78% of the total external assistance. But, after peaking at 88% in 2013-14, South Asia’s share in the overall aid has been going down proportionally.
In fact, the budget estimates for 2024-25 indicate that the proposed allocation for South Asia is only 39% of India’s total external aid, representing the lowest percentage on record.
Ebbs and Flows of aid to South Asian neighbours
The patterns of aid allocation has varied for each country over the years. Afghanistan’s highest disbursement occurred in 2015-16, totalling Rs 880.4 crore, as India’s last major project, the Salma Dam, was nearing completion after about 10 years. The dam, which cost Rs 1775.69 crore, was inaugurated in June 2016.
Sheikh Hasina’s return as prime minister of Bangladesh in 2009 led to India offering its largest line of credit to any country at the time when she visited India in 2010. But since the projects to be implemented took some time, the highest amount disbursed to Bangladesh in one year was reached only in 2013-14 at Rs 604.7 crore. After that high, the amount disbursed has come down sharply, except for a spike in 2021-22.
Aid to the Maldives increased more than fourfold in 2018-19, the year opposition candidate Ibrahim Solih defeated Abdulla Yameen in the presidential elections. India had revised its budget estimate to significantly raise aid disbursement to the Maldives that fiscal year. However, the biggest spike in allocation occurred in 2023-24. Even after Solih was defeated by challenger Mohamed Muizzu, the allocation rose to Rs 770.9 crore, as India remained committed to funding major infrastructure projects, like the under-construction Thilamale Bridge, which had been initiated during Solih’s term.
Nepal was the first country where India launched the small community development projects program in 2003, later renamed the High-Impact Community Development Projects Scheme, which provided assistance at the local level. However, for nearly three years, no projects were implemented until 2017, as the process needed to align with Nepal’s new constitution which required all foreign funds to be channelled through a centralised system.
The rise in the India’s allocation for Sri Lanka in the last 15 years began soon after New Delhi announced that it will help fund 50,000 houses in northern and eastern province in 2010. After the pilot project, the project took steam in 2012 and the first phase was finished around 2016.
This year, as the chart show, only Sri Lanka and Nepal have shown an increase in aid allocation for 2024-25 compared to previous years.
Top 10 destinations for Indian aid
While Bhutan’s space as the top destination for Indian development assistance has remained unchanged, there has been a jockeying of the rest of the list of top 10 in the last 16 years.
Comparing the top 10 destinations for Indian aid in 2009-10 and 2024-25, seven remain consistent: Bhutan, Bangladesh, Nepal, Myanmar, Sri Lanka, Afghanistan, and Africa. However, Mauritius, the Maldives, and Iran’s Chabahar port have replaced Mongolia, Central Asia and SAARC. These new entries highlight a strategic focus on the Indian Ocean region, particularly as both Mauritius and Iran have a higher per capita income than India.
The larger region that has been missing is South East Asia, where India has supposedly transformed the relations into ‘Act East’ policy over 10 years. India has extended lines of credits to the smaller economic countries, but besides Myanmar, there are hardly any takers.
This article, first published on September 4, 2024, was republished at 8.30 am on September 5, 2024.
