Tuesday, June 2, 2009

ROLE OF EXTERNAL ASSISTANCE IN INDIAN ECONOMY

The Indian economy today is no longer reliant on external assistance for the financing of its
plan outlays or for gross capital formation. The change is evident from the changing pattern of
external assistance. The reliance on food aid has been done away with and the economy has matured sufficiently to move away from the compulsions of accepting tied aid. External assistance today plays more of a supportive role in financing major infrastructure projects, social sector projects and in building up the institutional capacity. Accordingly, the policy on external assistance has been recast to affirm this changing role of external assistance and to emphasize the reform orientation in India’s economic policy.
One of the major challenges before the policymakers has been the rising burden of debt
service charges. This has been largely attributable to the comparatively harder terms of external aid,both in terms of interest rates and maturity periods. Efforts to tackle this problem were made through measures like
a) reducing dependence on external assistance gradually, and
b) shifting the focus towards obtaining loans and credits of longer maturities and with
lower interest charges.
The structure of external assistance in India appears to be skewed in favour of a few states.
Central sector/multi state sector projects and seven or eight prosperous states account for nearly 90% of the disbursements. On the other hand, disbursements to states like Bihar and the north eastern and special category states are negligible. States like Andhra Pradesh, West Bengal and Gujarat continue to remain the major absorbers of external assistance. These issues need attention.
External assistance is composed of loans and grants. However, most of the assistance in the
initial periods of planning was in the form of interest-bearing loans, while only a fraction was in the form of outright grants. Loans accounted for 90% of the aid receipts during the first ten Five Year Plans, while only the remaining 10% were grants.
Government of India now does not accept aid in areas where it has substantial control. Bilateral aid is accepted only from the G-8 countries, the Russian Federation and the EC. State Governments cannot access external aid directly either through bilateral or multilateral
sources. This remains the mandate of the central government.
External assistance made available by various multilateral and bilateral agencies to India
comprises of loans and grants. The World Bank extends assistance through its concessional lending window, the IDA, and market based lending through the IBRD. The assistance from the Asian Development Bank (ADB) is also market based. These form the principal sources of multilateral external assistance to India. The significant bilateral sources offering external assistance include Japan, Russia, Germany and United Kingdom.Japan is the largest bilateral donor to India.At present UK is the largest external bilateral development partner in terms of grants.
The sector-wise disbursement figures indicate that right up to the mid 1990s, infrastructure
remained the focus of external assistance. With the turn of the century, priorities have shifted
towards the social sectors like health and education. This shift is largely in consonance with the
commitments to fulfill the MDGs that commit nations to raise the poor out of poverty and hunger, get every child into school, empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria, and other diseases, and ensure environmental sustainability.

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