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News > Blogs: "Perspectives, Provocations & Initiatives" > India’s Progressing Ambitions in Development Finance

India’s Progressing Ambitions in Development Finance

India’s development assistance through concessional grants and loans has more than doubled in the last five years, maintaining influence in Latin America, Asia and Africa.

Image: electro_n1k CC BY-SA 2.0 Ministry of Finance in India
Image: electro_n1k CC BY-SA 2.0 Ministry of Finance in India
The announcement of the ‘India Development Initiative’ in 2003-04 Union Budget of India was the starting point for the country’s journey towards becoming a non-traditional creditor in the international development finance space. It was established to, mainly, provide grants and project assistance to countries in Africa or South Asia. Initially, grants of assistance were limited to India’s neighbourhood wherein it played the role of a big brother, given its economic growth, democratic values and sheer size. Over time, the initiative has allowed the country to make quite an impact and build inroads in the African development market, a place long been dominated by Chinese agencies. The initiative today, is called Indian Development & Economic Assistance Scheme or IDEAS.

IDEAS

Lines of Credit (LOCs) form an important tool of Indian diplomacy. The country has been issuing LOCs under ‘IDEAS’ (Indian Development & Economic Assistance Scheme) to African nations and other developing countries within India’s strategic arc since 2005-06. The objective of the scheme is to provide concessional financing for projects and contribute to development of infrastructure capacity in the recipient developing countries.

The scheme is operated through the Department of Economic Affairs (DEA) housed at the Ministry of Finance (MoF), Government of India (GoI). The Ministry of External Affairs (MEA) gets to select the projects keeping in mind country’s foreign policy and requests received from perspective recipient countries. Once approved by the DEA, the LOCs are implemented via Export-Import Bank of India (Exim Bank). The lending bank raises finances from the market to fund the LOCs, in return the recipient countries are expected to provide a sovereign guarantee to the lending bank. The GoI is responsible for provision of the Interest Equalisation Support (difference between the cost of borrowing and concessional lending rate) to the lending bank.

IDEAS plays a crucial role in strategically positioning and promoting India’s image as an emerging economic power in the global arena, it acts as a medium for exploring the country’s political and economic interests abroad.

In Africa

India has maintained a long-standing development cooperation policy with Africa; however, it was only in June 2018 that the policy received formal recognition under ‘ten guiding principles for India-Africa engagement' the African countries have been a prime destination for the Indian government’s LOCs. 181 LOCs have been extended by the government to over 41 countries in the continent, totalling up to approximately US$ 11 billion (1st August,2019). The LOCs financed by the Exim Bank of India are given out as loans on concessional terms to the African nations. These loans help fund various infrastructure projects in recipient countries, but the money often comes with its own set of terms. Such as, 75% of the goods and services required for the infrastructure projects covered by Indian finance should be procured from Indian firms.

Initially, the Indian firms and bureaucracy in African countries received backlash for slow delivery of projects and corruption. However, in the last four years India has managed to deliver numerous ambitious infrastructure projects in countries across the continent. The National Assembly Building in Ghana, water treatment factories in Tanzania, the President’s Office in Ghana, and IT Parks in Mozambique to name a few. At the same time, Indian firms in African nations have come under scrutiny for tax evasion, ignorance of labour laws and environmental degradation. Especially the agribusiness and mining firms, which have been condemned for participating in land grabbing and displacement of local communities.

On the energy front, a resource-rich Africa serves as an attractive and cheap destination for India’s growing needs, as well as a land for India’s big-ticket plans and commitments focusing on renewable energy. For example. the launch of International Solar Alliance (ISA) in 2015 made space for India to transition from a regional leader to a global player and lead the journey towards a promising sustainable future. In the same spirit, India promised a concessional credit line of US$ 10 billion to finance energy projects in Africa realised over the course of five years, out of which 15-20 percent (approx. US$ 2 billion) is reserved for off-grid solar energy projects.

In order to build an honest picture of Indian investment in Africa, it is better to leave Mauritius out. The country receives a big chunk of Indian FDI since it serves the purpose of a tax haven for the country, therefore much of the Indian investment in Mauritius finds its way back to India. This leaves Mozambique, Egypt, South Africa, Tunisia and Kenya top the list for receiving the maximum Indian FDI in Africa.

China & India are not the same

As Asia’s largest economies China and India have been successful in forming new narratives of development in the African continent. Unlike the western donors, they do not interfere or dictate terms of change in the domestic economic and political matters of recipient nations, making them attractive destinations for development finance. India is no comparison when it comes down to the amount of money China is pumping into the African economy. However, India takes pride in advantages it enjoys over China, i.e. a common language, democratic nation, proximity and popularity of the Indian culture in African nations.

High growth rate of many African countries and discovery of oil attract the two economies to invest in the continent, and both China and India seek access to energy resources. But there are large differences in terms of scale between the two. Indian companies have not managed deep penetration into African economies like China. Unlike China, Indian public sector companies in the African energy market have been unable to make an impact. Drifting away from the Chinese model, Indian enterprises have not relocated their manufacturing activities to African countries.

The future?

It seems like India is still in the process of organising itself vis-a-vis the international trends of non-traditional credit in international development finance, but the economy is catching up on a faster pace than expected. It will be interesting to see how India deals with the more experienced player, China, in the same space and terrain. Particuarly given the history the two nations share in both their national and international landscape.
 

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