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ON A NEW NOTE
- The decision to give up a portion of aid signals India’s coming of age

June 3, 2003 marked the end of an era of India’s dependence on aid. The government of India issued a press note on June 3, 2003, which announced that not only will India discontinue receiving grants aid from many countries, but also all outstanding bilateral creditors will be repaid. In effect, the government of India has decided to dispense with grant aid from countries other than the European Community, Japan, the United States of America, the United Kingdom and Russia. This press note follows the budget announcement of the finance minister, Jaswant Singh, to the same effect.

The press note goes on to say that in future those countries, which were giving aid before, can divert such aid directly to non-governmental organizations, instead of to state and central governments. Whether the freeing of NGOs to such an extent would be consonant with the demands of national security is a different issue. The NGOs do have an important role, but the extent to which they draw support from foreign governments has to be controlled. Otherwise, national sovereignty may be in jeopardy.

The press note of June 3 puts a further gloss on its decision by saying that this step would enable “partners” with smaller assistance packages to transfer resources to developing countries in greater need of official development assistance. There is an element of hubris about this. India seems to be jubilant about its ability to do without aid when it says patronizingly that the countries which were offering aid before can use their resources to help more deserving and poorer countries.

While this does sound patronizing, the decision itself shows a sign of maturity. That India has decided to dispense with the grant aid from various countries is, indeed, noteworthy. Grants do not come without conditions and they are always preceded by appraisal missions. They are followed by supervision missions, which constitute some intervention in our sovereignty. The latest decision to discontinue aid is an indication of India’s ability to do without the assistance from at least the excluded countries.

It is pertinent to note that the total grants from donors included in India’s budget estimates for 2003-04 were only Rs 1,451 crore and out of this, the excluded countries, the US, the UK, Japan, the EC, Netherlands and Denmark accounted for just Rs 500 crore. Considering the size of India’s budget, the impact which the government’s decision would make is not too significant. The selective exclusion of these countries from the latest decision is obviously because of considerations of both diplomacy and size of assistance.

That the government of India has decided to discontinue grant aid from many countries is significant from the point of view of overall aid strategy. Time was when India needed aid badly both to balance the budget as well as to bridge the balance of payments. Considering the current magnitude of India’s budget and the decreasing amount of grant aid from the developed world, the decision to discontinue grant aid is both timely and just. Further, from the BoP point of view, India’s current account is in surplus. Aid flows may only add to the embarrassment of riches.

There was, indeed, a time when India’s aid diplomats concentrated on getting grant assistance from various richer countries of the world. The US was particularly important in this list. It had provided grants in aid as well as commodity assistance, the latter in the form of PL 480. PL 480 grants had at one time both beneficial and negative impacts on India’s agriculture. It was an anodyne, which led India to neglect agriculture till the crisis of the Sixties came, leading to the sharp realization that such neglect presented a grave danger to India. PL 480 was discontinued with India’s Green Revolution.

We have also to mention that the European Economic Community, which extended considerable commodity assistance in terms of the milk grant, paved the way for the successful initiation and implementation of the Operation Flood programme. Over time, however, there has been increasing aid fatigue in the developed countries. In particular, the US has been reluctant to increase its aid to various countries. Besides, the demands of other countries, like those of Africa, have become more persistent. India has rightly made a virtue of necessity and announced its declaration of independence from aid.

The Union government’s decision has been possible because of the success of the economic reforms, in particular the increased foreign exchange inflows, which have strengthened the reserves of India. In particular, India is able to manage a current account surplus — thanks to the booming exports of goods and services. All this has also helped the government to take a bold decision, in a sharp departure from the past.

There have been comments in the media that the decision is an act of flamboyance, especially when India is still in need of more resources for human development. It has also been remarked by some observers that India’s repayment of loans to various countries, which has been announced in the press note of June 3, would need a borrowing by the government of India in terms of rupees to purchase two billion dollars needed for the transaction. This argument does not, however, cut much ice. Decrease of external debt is definitely a positive signal.

While the decision to discontinue aid, such as grants in aid from select countries, is welcome from many points of view, it will also help reduce the burden of coordination of aid agencies that falls on the ministry of finance. Aid has often been a soft option for many development programmes, for which the mandarins of the finance ministry refused to find rupee resources. The concerned ministries, like health and education, often turned to richer countries for help, as they were unable to raise the rupee resources from North Block. That soft option is not closed. The progress of India in future will depend on the economic statesmanship displayed by the bureaucracy and the political hierarchy in the finance ministry regarding various demands, especially from the soft sector, hitherto in receipt of external grants.

While the announcement of cessation of aid marks the coming of age of India, it is not a complete denial. India has not, for instance, turned its back on aid for defence equipment, which is available from countries like the US, UK, France and Germany, which offer such aid to nurture their own defence industry. It is ironical that at a time when global peace is an admitted objective of all countries, aid on liberal terms is offered to poorer countries for purchase of weapons of mass destruction. Admittedly, the pursuit of creation of jobs in defence industries is at the root of this perverted priority. Anyway, India has not yet decided to turn away defence-oriented grants and loan assistance. The history of India’s defence procurement is replete with incidents of pressures and misjudgments, arising from purchases, motivated by grants and loans offered by richer countries. The Westland helicopter is an instance in point. It was thrust on India backed by aid with a generous grant element. But the helicopters proved totally un-airworthy.

Whether India will decide to refrain from defence-oriented aid raises important policy issues. Such a decision alone will turn out to be a true indication of India’s coming of age. If we pay for the defence equipment with our own resources, our judgments will be less clouded by diplomatic pressures and will be governed only by the necessity and cost-effectiveness of the equipment purchased. There will be less scope for accusations of corruption, which are now being routinely levelled against India by the Western media. It is to be hoped that India will extend the decision in the press note to a self-denial of “aid” for purchase of defence equipment also.

Jaswant Singh’s budget announcement and the press note, which offer an indication of a bold decision to discontinue grant aid, will begin the process of cleansing of India’s economic management from dependence on institutions abroad. But, when we will be able to say “No, thank you” to the Bretton Woods twins as also to regional banks is of course a different question. The answer to that is in the future. That depends on how we manage to develop and grow on the basis of our own resources — our savings and better governance. Hopefully, true independence is not too far away and the press note of June 3 will be the beginning of the end of aid.

The author is former governor, Reserve Bank of India

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