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Foreign Aid India Development



Character & Magnitude of foreign aid

We can look at the aid from two angles, viz. (a) authorization of aid, and (b) utilization of aid. The data relating to the authorization and utilization of aid indicate the extent to which aid has been utilized, thereby indicating the extent to which aid has been utilized, thereby indicating the absorption capacity of the economy.

The total aid authorized to India till the beginning of April 2002 has been of the order of Rs. 1,80,940 crores; out of this Rs. 1,27,828 crores is estimated to have been utilized.

A large size of aid, unless of the right type, may not produce the same satisfactory results that a smaller amount of an appropriate type of aid may produce. The character of aid is, therefore, more important than the volume of aid. The character of aid can be judged on the basis of the following criteria:

Loans and Grants

The share of grants in total assistance had steadily increased, from only 7.0 percent in 1974-75 to 23.3 percent in 1979-80. Subsequently, however, it has been gradually falling to 17.1 percent in 1983-84, 11.0 percent during 1986-90, and less than 10.0 percent during 1990-2002. India will do well to remember that free seed is found only in a bird trap.

Tied and Untied Credits

About one-third of the total assistance received by India till now has been in the form of untied credits. A disturbing phenomenon that has been observed in more recent years is that the share of tied credits has been going up, while that of untied credits has been falling. Loans have been tied both to the use and the source.

Mode of Repayment

The mode of repayment is an essential feature that determines the character of loans. When India is called upon to repay the tied loans in free convertible currencies a double cost is imposed on it. If only India could convince its creditors to shift to rupee as a mode of repayment India would have solved to a large extent its problem of external debt.

A further related phenomenon is the term of repayment. Short-term loans generally impose higher burden than do the long-term loans.


Among the major purposes for which India secured assistance the most important were the industrial development programmes, the second in importance were the programmes relating to development of the infrastructural facilities. Among these, we may include programmes relating to the development of transport and communications and power projects. Loans were also used to develop the basic industries like iron and steel, and for oil and petroleum products during more recent years. The purposes of loans have been in conformity with the needs of a developing economy. This is one aspect of Foreign Aid that has augured well for economic growth.


India has received aid from various sources, both institutional and individual countries. We can conveniently divide these different sources into two parts, viz. (1) Forum members, and (2) Others.

Forum Members

In the wake of serious foreign exchange crisis that hit the Indian economy during 1957-58, the Aid India Consortium was formed. The Consortium presently is known as the India Development Forum. The object of this formation is to coordinate the foreign aid india development programmes of different sources that are extending financial assistance to India. The Forum has been the major source of financial assistance to India. About 90 percent of the total aid, including loans, grants and commodity assistance, utilized in India till the end of 2002 has come from this source. Within the Forum, the major donor has been the United States of America. The I.B.R.D. and the I.D.A. have been assisting to India since 1949. While the I.B.R.D. arranges market loans at concessional rates of interest, the I.D.A. provides loans free of interest; it only imposes nominal service charges. Among the other major donor countries within the Forum are United Kingdom, Canada, Germany and Japan.


Among others, India is getting aid from various multilateral and bilateral external agencies, as also various individual countries. A large proportion of assistance through these agencies has taken the form of grants.


The above sources can also be alternatively classified as bilateral and multilateral aid. About 60 percent of the total aid received has been in the form of multilateral aid; about 90 percent of the total multilateral assistance has come from the World Bank. Bilateral aid has accounted for 40 percent of the total external assistance; during the past five years, taken together, Japan has led the group of India's bilateral donors having accounted for 22.5 percent of bilateral aid utilized by India.


The impact of aid on the economic development of a country cannot possibly be quantified. The reasons are obvious; some of which are as follows:

" To the extent aid and non-aid resources are mutually substitutable the impact of either cannot be segregated.

" The impact of aid resources on the capacity they help to create in the economy extends far beyond the point where they are applied.

" There are many intangible factors, which aid helps create, whose impact on productive capacity cannot be measured.

However, what can be attempted is reviewing the significance of the participation of aid in the process of creation of productive capacity. The following points may be noted in this connection:

As brought out in a recent World Bank study, every dollar of foreign aid attracts two dollars of foreign investment. This is because aid increases the confidence of the private sector and helps to provide public services that investors need, such as education and infrastructure.

The availability of foreign aid india development has enabled India to undertake far more ambitious programmes of development than would have been possible with her own resources. This has been true about all the sectors in the economy, be it agriculture, industry, power or transport.

The role of FA in providing technical services for indirect participation in the building up of productive capacity has been quite important. Even more so, from a long-term point of view, has been the role of such assistance in augmenting the technical resources of the country. Technical assistance has helped to enlarge technical resources through (a) the provision of expert services; (b) training of Indian personnel, and (c) helping the establishment of new or the development of existing educational, research and training institutions in the country.

Above all, the effect and the significant contribution of FA have been to strengthen the public sector and increase the governmental share of the country's productive capacity. Furthermore, as Michael Lipton and John Toye in a recent study have demonstrated conclusively that project aid for the development of infrastructural facilities, urban slum upgrading, rural primary health care, family planning and nutritional assistance have achieved the desired results. It is in this sense that FA has played a crucial role in India's economic development.