Published on June 24th, 20131
Why does India Provide Development Aid to other Developing Countries?
By Andreas Fuchs (Princeton University, USA) & Krishna Chaitanya Vadlamannati (Norwegian University of Science and Technology (NTNU), Norway)
India, often seen in the west as the poster child and success stories of globalization, is one of the fastest growing emerging economies in the world. Since implementation of market-economic reforms in 1991, economic growth has been both sustained and robust (Bosworth et al. 2006). Despite rapid surge in economic growth and prosperity, many regions and communities in India continue to be severely under developed.
For instance, according to Oxford University’s Multidimensional Poverty Index (Oxford Poverty and Human Development Initiative 2010), a staggering 55% of the Indian population still live in poverty. These poor constitute roughly 400 million people in just eight Indian states namely, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal, which is more than total poor in Sub-Saharan Africa.
Though this resulted in a bevy of rural development programmes which are intended to rectify the situation, there has been steady decline in spending on social sector. On the other hand, it is puzzling to note that India is fast emerging as one of the major players in allocation of development aid to other developing countries. According to the Economist magazine, India is the second largest among the non-DAC donors in providing development aid.
During the 1992-2009 period, official foreign assistance provided by India under the umbrella of the Ministry of External Affairs (MEA henceforth) amounted to US$ 3.55 billion in constant 2000 prices (MEA annual reports, 1993-2010). The Ministry allocated US$ 324 million in constant 2000 prices to aid-related activities in the 2009 financial year alone (MEA 2010). Figure 1 captures the evolution of Indian aid during the 1967-2011 period. This increase in aid amounts can be largely attributed to India’s economic growth over the last two decades.
So why does a poor country like India, once the world’s largest aid recipient, provide large amounts of development aid to other developing countries? The existing empirical aid literature has focused on foreign aid provided by donor countries organized in the OECD’s Development Assistance Committee (DAC hereafter) and largely neglected the so-called new non-DAC donors.
With respect to DAC donors, a consensus has emerged in the aid literature that the provision of foreign aid is not only driven by humanitarian motives, but also by political and commercial self-interests of the respective donor. In our recent article “The Needy Donor: An Empirical Analysis of India’s Aid Motives” (World Development, 44, p. 110-128), we use project-level data provided by AidData to empirically analyze the determinants of India’s aid allocation decisions. We examine whether and how the mixed motives of “traditional” donors are also reflected in India’s aid policy.
Analyzing cross-sectional data on India’s aid commitments by the Ministry of External Affairs to 125 developing countries (using probit and OLS regressions), we find that India’s aid allocation is partially in line with our expectations of the behavior of a “needy” donor. Three factors are characteristic of India’s aid allocation behavior.
First, most of India’s aid is given within its neighborhood. Although India today has aid programs running in almost all world regions, its aid allocation is still largely concentrated on South Asian countries (89.7% of total aid provided by the MEA in the 2008-2010 period, see figure below). The obvious exception is Pakistan, reflecting political tensions between both countries. India’s focus on countries in its region not only reflects the lower aid costs incurred by the poor donor country, but also India’s ambitions as a regional power.
Second, India is more likely to provide aid to countries at a similar developmental stage. India believes that it is in a better position to understand the developmental needs of its peers. The country argues that it “possess[es] skills of manpower and technology more appropriate to the geographical and ecological conditions and the stage of technological development of several developing countries” (as written on the webpages of several embassies). Our empirical analysis confirms that countries with a shorter “developmental distance” to India are indeed more likely to enter India’s aid program.
Third, India’s political and commercial self-interests play an exceptional role in its aid allocation decisions. Like other providers of “South-South Cooperation,” India has never shied away from saying that its aid provides a “mutual benefit.” Indian aid is widely seen as an instrument to gain access to overseas markets for its goods and services, to grease the skids for Indian investment abroad, and also to acquire support for India’s bid for a permanent seat in the United Nations Security Council.
Just recently, India used aid as a foreign policy tool when it cut aid to the Maldives over a political and investment dispute. Our empirical results confirm that commercial and political self-interests dominate India’s aid allocation. When we compare India’s aid allocation with that of other donors, we find (using nested OLS regression method) that India’s political interests, proxied by bilateral voting alignment in the United Nations General Assembly, play a significantly larger role for India than for all traditional DAC donors in the analysis. Although our findings show that India’s own interests dominate its aid allocation, it may nevertheless be the case that India’s assistance is effective in terms of poverty reduction and other developmental goals, a possibility which merits further investigation.
Alesina, Alberto and David Dollar, 2000, Who Gives Foreign Aid to Whom and Why? Journal of Economic Growth 5(1), 33-63.
Fuchs, Andreas and Krishna Chaitanya Vadlamannati (2013) The Needy Donor: An Empirical Analysis of India’s Aid Motives, World Development 44, 110-128.
Bosworth, Barry, Susan M. Collins and Arvind Virmani (2007) Sources of Growth in the Indian Economy, NBER Working Paper 12901.