Tuesday, May 26, 2009

Different sources of external assistance for India

What are the different sources of external assistance for India? Why has external assistance utilization increased steadily over the period? Comment.

The sources of external assistance for India are grouped under:
1. Consortium Members: Comprising Austria, Belgium, Canada, Denmark, France, West Germany, Italy, Japan, Netherlands, Norway, Sweden, UK, USA, the World Bank, and International Development Association.
2. USSR & East European Countries: Which include Bulgaria, Czechoslovakia, Hungary, Poland, USSR, and Yugoslavia.
3. Others: Consist of Australia, European Economic Community (E.E.C), Oil Producing & Exporting Countries (O.P.E.C.), etc.

The external assistance – source wise, authorized and utilized are presented for select years in tables and Consortium members have been the major source of external assistance for India, be it loans or grants. The PL 480/665, etc. assistance was obtained from the USA for food imports. On an average, more than three-fourths of the total external assistance came from the consortium members to India.

A more disaggregated picture reveals that India acquires external assistance for various purposes from various sources:
· Loans are received from international institutions such as the World Bank and international Development Association for specific projects. The loans given by the I.D.A. are on easier terms, i.e., interest free loans for the development of ports, etc.
· Credits are given by individual countries such as the U.S.A., the U.S.S.R., the U.K., West Germany, Japan, Canada, etc. Most of these loans are project loans.
· Specific aid loans for a particular purpose, such as agriculture development loans from the World Bank, irrigation loans by the I.D.A., etc.
· Grants given for various social purposes including technical training, health, and nutrition by different countries like the U.S.A., U.S.S.R., etc.
External assistance to India is broadly classified under loans, grants and P.L. 480/665 assistance.

Independent India had a negligible share of external debt. However, after the beginning of economic planning in 1951, to cover the investment and the balance of payments gap, the government resorted to seeking external assistance. The amount of external assistance approved by different sources and utilized by India has grown steadily over a period of time since then.
India got external assistance in several forms. It includes outright grants, loans repayable in rupees and loans repayable in foreign currencies. Technical assistance has also been made available on different terms from different countries. Deferred credits have also been provided by foreign suppliers.
During the first five-year plan, the utilization of external assistance comprising loans, grants and commodity assistance amounted to approximately Rs. 400 crore. It was utilized mainly for the procurement of commodities like wheat and capital goods required for various development projects including irrigation and power projects, etc.
The emphasis on the development of basic and heavy industries for rapid industrial development during the second five-year plan prompted the Government to go for more external assistance. Besides, the trade deficit widened during this period owing to a large increase in imports. All this necessitated a huge foreign capital inflow. The total external assistance utilized was approximately Rs. 1500 crore, during the second plan.
During the third five-year plan, the policy of strengthening the industrial base of the country was continued. On the defense front, the Chinese invasion of 1962 and Indo-Pak war in 1965, forced the country to concentrate on defense industry production and development. Further, due to adverse monsoons, agricultural production was far insufficient to meet the country’s demand. This necessitated large imports of food grains and other agricultural commodities under the US Public Law 480 programme. As a result of all these, India had to utilize external assistance to the extent of almost Rs. 2900 crores, during the Third Plan period.
During the three annual plans. The drought conditions in the country necessitated heavy food imports under PL 480. In addition, the development of defense industries, trade deficit, etc. led to reliance on external assistance to the tune of more than Rs. 3000 crores.
During the Fourth Plan, thanks to recovery in agricultural production, the Country’s dependence on PL 480 food aid came down. Further, due to currency devaluation of 1966, exports grew significantly during this period thereby reducing the trade deficit. Due to these factors, the amount of external assistance utilization stood at Rs. 4183.7 crores.
After the Fourth Plan, external assistance sought by India increased dramatically. The major factors, which led to a sharp rise in India seeking external assistance, were:
· Steep rise in the international prices of crude oil and petroleum products, Increase in the prices of food and fertilizers in the world market.

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