Emerging Economies like India’s Make Aid Recipients the New Donors

February 29, 2012

By Nick Langton

Rapid economic growth in Asia and other developing regions of the world is triggering a sea change in international aid. Countries that were once beneficiaries of assistance are now emerging as donors themselves, while traditional donors are reassessing their objectives and modalities in order to stay relevant. Nowhere is this more evident than in India.

Per capita income in India has more than doubled in the past decade with an estimated 267 million people, or 22 percent of the population, now considered middle class. Photo by Karl Grobl.

India is widely viewed as an economic success story, which is certainly true on one level. Growth for the current year is projected around 7 percent, and was averaging 9 percent before the last global economic downturn. Per capita income has more than doubled in the past decade with an estimated 267 million people, or 22 percent of the population, now considered middle class. At the same time, approximately 450 million people, or almost 40 percent of the population, still live below the poverty line. The juxtaposition of India as a rising Asian power, yet also a country with significant development challenges, is reflected in its aid policies.

Although India has long been wary of foreign aid, it has had many international benefactors over the years, including large rival programs of the Soviet Union and United States during the Cold War. The Soviet Union invested in state-run steel and power plants, while the United States favored softer assistance for agriculture, health, and education. In 2003, in an effort to streamline aid, but also to signal its growing international prominence, India asked all but five countries – Germany, Japan, Russia, the United Kingdom, and the United States – to discontinue their aid programs. Among the political imperatives was a desire to bolster India’s campaign for a permanent seat on the U.N. Security Council.

Currently, India’s economic success, on the one hand, and budget pressures within donor countries, on the other, is threatening the longevity of the remaining aid programs. Critics ask why a country with a burgeoning middle class, space program, and gross national income of $4.16 trillion annually should receive foreign aid. Britain is India’s largest bilateral donor, with an annual program of GBP 280 million (over $445 million). In 2010, Indian Finance Minister Pranab Mukherjee famously described this as a “peanut” in the country’s total development spending, sparking an international row. While both governments have since reiterated their commitment to the program, the UK’s Department for International Development (DFID) has refocused its strategy to adjust to India’s evolving circumstances. Its current five-year plan targets India’s poorest states, with special attention to women, girls, and the role of the private sector in reducing poverty. DFID is supporting new forms of financing, such as vouchers and incentive schemes, and is looking at ways that Indian experience and expertise can be used globally on issues ranging from climate change to disease control.

With a budget of approximately $100 million in fiscal year 2012 that is expected to decline in future years, the U.S. government’s aid program in India is far smaller than Britain’s. The U.S. Agency for International Development (USAID), which administers the program, is aggressively seeking to reinvent itself in India, seeking a “smooth pivot” that responds to the new environment. Like DFID, one of USAID’s goals is “to partner with Indian public and private sectors to identify innovations and best practices that have a significant impact in India and globally.” USAID and the Federation of Indian Chambers of Commerce and Industry (FICCI) have each contributed $7.5 million to the Millennium Alliance, which is investing in innovations from civil society, academia, and the private sector. They plan to work together to raise $50 million more in the coming year. USAID is also planning “triangular” cooperation with the Indian government on programs in Kenya, Liberia, and Malawi, and the establishment of centers of excellence for international training within India.

India’s own aid program (which the government prefers to call “development cooperation” in the spirit of south-south partnership) has been in existence since the 1950s when it began offering assistance to Nepal. The program expanded during the 1960s to include its flagship Technical and Economic Co-operation (ITEC) scheme, which provides training in Indian institutions for nationals of 158 countries, deputes Indian experts abroad, and funds projects, study tours, equipment donations, and disaster relief. Indian development cooperation currently exceeds $2 billion annually, about half of which goes to Afghanistan. In an effort to better coordinate its efforts, and as a precursor to the establishment of a full-blown development cooperation agency, the government has recently moved to create a Development Partnership Administration within the Ministry of External Affairs to liaison with the multiple ministries and divisions involved.

The challenges that India faces in managing its growing development cooperation program are shared with the governments of other emerging economies such as Brazil, China, and South Africa. On March 5-7, over 30 development experts representing more than 10 countries will convene in Delhi for the fifth round of the Asian Approaches to Development Cooperation Dialogue series. Countries represented include a range of both emerging and traditional donors, as well as recipient countries, from inside and outside the Asian region. The dialogue series is supported by the Korea Development Institute and The Asia Foundation, with the Delhi meeting hosted by the Research and Information System for Developing Countries (RIS), a think tank affiliated with the Government of India’s Ministry of External Affairs. Participants will discuss approaches to pro-poor growth, lessons from Asian countries’ experiences as both beneficiaries and donors, and how those compare with the approaches of traditional donors belonging to the Development Assistance Committee (DAC) of the Organization for Economic Co-operation and Development (OECD). The goal of the ongoing dialogue is to broaden sharing and perspectives among both emerging and traditional donors, assisting them to navigate the complex and rapidly changing terrain of development cooperation.

Nick Langton is The Asia Foundation’s country representative in India. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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