India: 20 Years of Development Assistance Through Lines of Credit
In 2003, India began an ambitious foreign development programme, issuing
lines of credit (LoCs) to developing countries all over the world through the state-owned Exim Bank of India. Today,
LoCs amount to more than $30 billion, an astonishing 1% of total GDP, funding hundreds of projects across 65 countries.
I look at exactly how LoCs work, how they differ from Official Development Aid, and the impact they are having in recipient countries.
What is an LoC?
A line of credit, or LoC for short, is an amount of money made available by a bank or financial institution to a loanee, which could be an individual, company or government. The loanee may access the funds when needed for the agreed purpose, and must also pay interest on the amount used.
The Indian government started issuing LoCs systematically under the Indian Development Initiative in 2003. Repackaged in 2015 as the Indian Development Assistance Scheme (IDEAS), India strove to make their loans more attractive against those of China and other lenders. The vast majority of loans have gone towards funding infrastructure projects.
India provides LoCs through its state bank Exim, which raises funds by issuing bonds, and later by redeeming the interest paid on its loans. An arm of the Indian state, the government of India owns the bank.
Exim’s vision is the ‘globalisation of Indian businesses and empowering growth of partner countries’.
Whilst there are substantial financial and diplomatic rewards for India in issuing such loans, the benefits should be mutual. Indeed, the Indian government has asserted that its objectives are wholly bilateral and that shaping its actions is a
fundamental vision of the world as one family — ‘Vasudhaiva Kutumbakam’ — as well as its own experience of colonial rule.
The difference between LoC’s and traditional foreign aid
Whilst India’s lines of credit may seem to resemble foreign aid, there are some fundamental differences:
In accessing a line of credit the recipient country is essentially taking out a loan. This will eventually be paid back with interest, although the conditions of the repayment may be favourable. Officially, foreign aid must be in the form of a grant — or may also be the grant element of a loan, sometimes known as a soft loan.
Lines of credit tend to support economic development such as the funding of infrastructure. Whilst foreign aid also provides funds for these types of projects, the
majority of foreign aid goes towards other causes such as health initiatives and humanitarian aid.
Whilst the vast majority of foreign development provided by India is in the form of LoCs, India has also provided funds in the form of grants.
Recent reports suggest that India issues more than $2 billion in grants, making the country a net donor of foreign aid.
Case Study: Indian LoC’s and grants in the Northern Province of Sri Lanka
India has primarily extended lines of credit and grants to its many neighbouring countries. Bangladesh, Nepal, Sri Lanka and Myanmar have been among the top recipients. The northern province of Sri Lanka in particular, with its strong cultural links to India, and its thirst for finances following the Sri Lankan civil war, has been a key beneficiary. Below are three examples of infrastructure projects completed in the northern province of Sri Lanka with use of LoCs and grants from India:
LoC $137m : Reconstruction of Railway Line between Pallai and Kankesanthurai — Completed in 2015, this 56km stretch of railway links Jaffna and the northern coastline to the mainland of Sri Lanka. The railway is a key infrastructure link socially and economically in an area heavily impact by the war.
LoC $45m: Rehabilitation of the Kanakesanthurai harbour — The restoration of this vital trading harbour due to be finished this year is of huge importance to the economic potential of northern Sri Lanka. The realisation of its value will be in facilitating the export of the goods produced by the fisheries and palmyra industry prevalent in the north of Sri Lanka.
Grant $1.35m: Upgrade of Palaly International Airport (Jaffna)
— The northern province of Sri Lanka was until 2014 largely cut off from the rest of the island. The Palaly International Airport opened in 2019, facilitating flights to and from Colombo and Chennai. This significantly develops Jaffna’s exposure to global markets and tourism, as well as tightening the cultural bond between India and Sri Lanka’s Tamil community.
Questions on Efficacy and Fairness of LoCs
Whilst India’s overseas development programmes can largely be seen as having been successful, there have been instances where the allocation of contracts and implementation of projects have
raised questions. Notably, before the restructuring of the LoC programme in 2015, there were instances of where poor tendering of contracts led to the delay or breakdown of projects. This may have been a result of a lack of competition in the tendering process, with only a small number of Indian firms being eligible.
India — A Force in Global Development
Since the launch of the Indian Development Initiative in 2003, India’s development assistance has had a wide ranging impact on financing the progress of neighbouring countries and other developing nations. In some cases, they have supplemented LoCs with grants elsewhere, or allowed favourable conditions of borrowing. The rise of India, as well as China, as providers of developmental assistance has had a significant impact on the global market for such assistance, with both countries offering funds at interest rates lower than that of Western powers. Evidence has even suggested that the World Bank — the main distributor of Western credit — has
reduced its terms on its loans as a reaction to these recent trends.
In 2003, India began an ambitious foreign development programme, issuing lines of credit (LoCs) to developing countries all over the world…
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