India - The Needy Donor

Despite rapid economic growth and prosperity, many regions and communities in India continue to be severely underdeveloped. Three factors are characteristic of India’s aid allocation behavior.

February 6, 2013

Andreas Fuchs, Krishna Chaitanya Vadlamannati

India lends a hand to its neighbors. (Source: Manish Swarup/AP)

India, one of the fastest growing emerging economies in recent years, is often seen as a poster child and success story of globalization. Despite rapid economic growth and prosperity, however, many regions and communities in India continue to be severely underdeveloped. According to the 2010 edition of Oxford University’s Multidimensional Poverty Index, a staggering 55% of the Indian population still lives in poverty. These poor constitute roughly 400 million people in just eight Indian states, which is more than the total number of poor in Sub-Saharan Africa. Given this backdrop, it is puzzling that India is emerging as an important player in development cooperation. From 1992-2009, foreign assistance provided through India’s Ministry of External Affairs (MEA) amounted to US$ 3.55 billion (in constant 2000 dollars). 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) and largely neglected the so-called new donors (exceptions include recent work on China and Arab 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” (forthcoming in World Development, earlier working paper available here), 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.

india aid map

India’s aid allocation by country (2008-2010). Source: Own construction based on data from AidData

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 (see Danish scholar Peter Kragelund's good overview on India’s aid activities in Africa). Just recently, India used aid as a foreign policy tool when it cut aid to the Maldives over an 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 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.

The following is a guest post from Andreas Fuchs and Krishna Chaitanya Vadlamannati, and continues AidData's look at non-DAC donors, "emerging" donors, and south-south cooperation.