DEVELOPMENT INDUSTRY

DEVELOPMENT  PROCESSES & THE DEVELOPMENT INDUSTRY:---

The development industry involves international organisations, government departments, big international charities and social movements, who are all working to fight against the causes of poverty and inequality.

Development industry

Ever since independence, development of the country and the community has always been the top priority of the government. The Constitution of India mandated the Government to establish an egalitarian social order by securing to the people social, economic and political justice. And, the nature of the state was to be a welfare one. Hence, the country embarked onto a path of planned socio-economic development to attain the goals of justice. However, the paradigms of development have changed over time based on experiences. The thrust in the development process has also shifted accordingly. While the experiment with development continues, real development seems to be elusive even after over six decades of governance.

During the initial decades, development was conceived in terms of economic development and the emphasis was on a growing public sector with massive investments in basic and heavy industries. Objectives of development were formulated and prioritized by a centralized planning system. In fact, it was essentially a ‘government-led, bureaucracy managed and expert-guided’ enterprise. And, the core concern of development thinking was achieving material prosperity through economic, industrial and infrastructural development. This basic approach to development continued to guide policy makers for the next few decades until new realizations started dawning upon them.

Though, the constitutional mandate was to build an egalitarian social order based on the principle of social equity, all attempts towards the same failed miserably. Growth happened without justice. Surely, the planning process was able to create social and economic infrastructure, provided an industrial base by fostering the development of heavy and basic industries, it failed to provide adequate employment, eliminate poverty and bring about institutional reforms aimed at reduction in concentration of wealth and income. Moreover, the benefits of social and economic infrastructure have accrued largely to the relatively affluent and those living in urban areas, meaning thereby that only urban India saw some semblance of development. Rural India remained as backward as ever. While the bureaucracy and the social elite flourished, the vast underbelly of the nation remained impoverished. The literacy level was still very low. Education continued to be the privilege of social elite. Masses had no access to basic health care system. They did not have access to safe drinking water. Infant and maternal mortality rate was very high. People lived in abject poverty, meaning thereby that they were without land, without water, without shelter, without food and without employment.

In other words, while the economic growth model that focused on GDP growth and infrastructure development did chose agriculture and industry as priority areas for development, the social sectors, such as education, public health, rural infrastructure etc. remained, by and large, neglected. Failures on the social development front not only resulted in the vast growing population being looked at as a problem or liability, but also made the development process highly unsustainable.

In view of these fundamental failures of development planning, the 6th Plan document (1980-85) emphasized the need for reappraisal of developmental strategy. In the meantime, there were other issues that also posed new challenges before the development planners, such as issues of gender development, sustainable development, environmental preservation, social and economic exclusion of certain social groups, rights issues, etc.

So, a serious rethinking as to what constitutes development and how development should take place was called for. Gradually, therefore, a new developmental thinking emerged on the scene. Moreover, by the end of 1980s there also emerged the concept of ‘human development’… According to Mahbubul Haq, the founder of the UN’s HDR, “The basic purpose of development is to enlarge people’s choices…” It means creating an enabling environment for them to exercise choices. Any development strategy, therefore, must aim at human development by focusing:----

•Facilitating greater access to knowledge; •Better nutrition and health services;

• More secure livelihoods; Security against crime and physical violence; Satisfying leisurely hours;

• Political and cultural freedoms;

and 

• A sense of participation in community activities. Similarly, for Prof. Amartya Sen, development meant ‘expansion of human freedoms’, i.e., enhancement of the

capacity of individuals to fully lead the ‘kind of lives they value’. This could be possible if certain basic rights of the individuals, such as right to elementary education, right to basic health care, right to work, etc, are secured. In other words, development must move beyond economic growth. It must encompass major social goals such as reducing poverty, enhanced opportunities for better education and health and in general improved quality of life.

In the same way, Joseph Stigliz, the eminent modern American development economist and whose views are expressed basically in the context of ‘globalisation’ looked at development as ‘transformation’. He argues, ‘development is about transforming societies, improving the lives of the poor, enabling everyone to have a chance at success and access to health care and education’.

Role of Self Help Group in Development

Self-Help Groups are informal associations of people who choose to come together to find ways to improve their living conditions.

They help to build Social Capital among the poor, especially women. The most important functions of a Self-Help Groups are (a) to encourage and motivate its members to save, (b) to persuade them to make a collective plan for generation of additional income, and (c) to act as a conduit for formal banking services to reach them.

Such groups work as a collective guarantee system for members who propose to borrow from organised sources. Consequently, Self-Help Groups have emerged as the most effective mechanism for delivery of micro-finance services to the poor. The range of financial services may include products such as deposits, loans, money transfer and insurance.

•Role of NGOs in the Development

NGOs are defined as the “formally registered not-for profit association of groups or individuals founded on the principles of equality, altruism and voluntary work spirit to promote human development (including environment and biodiversity) and nation building”.

In India the state policies have significantly influenced the formation of NGOs and their activities.

The government sponsored and aided programmes provided financial assistance to NGOs either as grants or as matching grants to support the implementation of social development projects. In the Sixth Five Year Plan (1980-1985), the government identified new areas in which NGOs as new actors could participate in development. The Seventh Five Year Plan (1985-1990), envisioned a more active role for NGOs as primary actors in the efforts towards self-reliant communities. This was in tune with the participatory and empowerment ideologies, which was gaining currency in the developmental discourse at that time.

Government support and encouragement for NGOs continued in the Eighth Five-year plan, where a nationwide network of NGOs was sought to be created. The Ninth Five-year plan proposed that NGOs should play a role in development on the public-private partnership model. Also, the agricultural development policies of the government and its implementation mechanisms provide scope and space for NGOs. A case in point is the watershed development program, which has led to the growth of NGOs working for rural development. This has also been acknowledged in the Tenth Five-year Plan Document.

Such proactive state support to NGOs has also brought in the element of reporting and regulations. This is being done through a series of legislative and administrative measures, which are often considered by NGO workers as affecting the performance and efficiency of NGOs. However, the Constitutional provision for right to association ensures that the NGOs enjoy adequate autonomy in terms of their management and governance. In the words of Prof. Amartya Sen, the relationship between the state and NGOs is one of ”cooperative conflict”.

With the increasing role of the NGOs in development activities they are now attracting professionals from various other sectors, and capacities are being built in support areas such as financial management, resource mobilization, human resources, leadership development, governance procedures and practices and institutional development.

•Role of Microfinance Institutions in Development Process

“Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.”

Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling, etc.

Salient Features of Microfinance:----

•Borrowers are from the low income group Loans are of small amount – micro loans

Short duration loans

•Loans are offered without collaterals High frequency of repayment

•Loans are generally taken for income generation purpose

•Microfinance sector has grown rapidly over the past few decades. Nobel Laureate •Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and NonBanking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs.

Role Played by Microfinance Institutions

According to the latest research done by the World Bank, India is home to almost one third of the world’s poor (surviving on an equivalent of one dollar a day). About half of the Indian population still do not have a savings bank account and they are deprived of all banking services. Poor also need financial services to fulfill their needs like consumption, building of assets and protection against risk. Microfinance institutions serve as a supplement to banks and in some sense a better one too. These institutions not only offer micro credit but they also provide other financial services like savings, insurance, remittance and non-financial services like individual counselling, training and support to start own business and the most importantly in a convenient way. The borrower receives all these services at her/his door step and in most cases with a repayment schedule of borrower’s convenience. But all this comes at a cost and the interest rates charged by these institutions are higher than commercial banks and vary widely from 10 to 30 per cent. However in the past few decades it has helped out remarkably in eradicating poverty.

•Some Examples :-- Microfinance Programme of SIDBI

Small Industries Development Bank of India (SIDBI) launched its micro finance programme on a pilot basis in 1994 using the NGO / MFI model of credit delivery wherein such institutions were used as financial intermediaries for delivering credit to the poor and unreached, mainly women. Learning from the experience of the pilot phase, SIDBI reoriented and upscaled its micro finance programme in 1999. A specialised department viz. ‘SIDBI Foundation for Micro Credit’ (SFMC) was set up with the mission to create a national network of strong, viable and sustainable Micro Finance Institutions (MFIs) from the informal and formal financial sectors. SFMC serves as an apex wholesaler for micro finance in India providing a complete range of financial and non-financial services to the MFIs so as to facilitate their development into financially sustainable entities, besides developing a network of service providers and advocating for appropriate policy framework for the sector.

SFMC is implementing the National Micro Finance Support Programme (NMFSP). The overall goal of NMFSP is to bring about substantial poverty elimination and reduced vulnerability in India amongst users of microfinance services, particularly women. The NMFSP is being implemented in collaboration with the Government of India, the Department for International Development (DFID), UK and the International Fund for Agricultural Development (IFAD), Rome.

SIDBI is also focusing on development of microfinance in the weaker States which have inadequate access to formal financial services such as Uttar Pradesh, Bihar, Jharkhand, Orissa, Chhattisgarh, Madhya Pradesh, Rajasthan and the North-Eastern States.

• SHG – Bank Linkage Programme

This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the SHG model the members, usually women in villages are encouraged to form groups of around 10-15. The members contribute their savings in the group periodically and from these savings small loans are provided to the The group’s members meet periodically when the new savings come in, recovery of past loans are made from the members and also new loans are disbursed. This model has been very much successful in the past and with time it is becoming more popular. The SHGs are self-sustaining and once the group becomes stable it starts working on its own with some support from NGOs.

Issues Related to Microfinance Institutions :----
• Financial Illiteracy

One of the major hindrances in the growth of the microfinance sector is the financial illiteracy of the people. This makes it difficult in creating awareness of microfinance and even more difficult to serve them as microfinance clients. Though most of the microfinance institutions claim to have educational trainings and programmes for the benefit of the people, according to some of the experts the first thing these SHG and JLG members are taught is to do their own signature. The worst part is that many MFIs think that this is what financial literacy means. It can be dangerous when one doesn’t know how to read but he/she knows how to accept or approve it (by signing it).

• Inability to Generate Sufficient Funds

Inability of MFIs to raise sufficient fund remains one of the important concern in the microfinance sector. Though NBFCs are able to raise funds through private equity investments because of the for-profit motive, such MFIs are restricted from taking public deposits. Not-for-profit companies which constitute a major chunk of the MFI sector have to primarily rely on donations and grants from Government and apex institutions like NABARD and SIDBI. In absence of adequate funding from the equity market, the major source of funds for MFIs are the bank loans, which is the reason for high Debt to Equity ratio of most MFIs.

MFIs receive debt from banks against their equity and in order to increase their portfolio size they need to increase their debts for which they further need to increase their equity. The problem of inadequate funds is even bigger for small and nascent MFIs as they find it very difficult to get bank loans because of their small portfolio size and so they have to look for other costlier sources of fund.

• Dropouts and Migration of group members:-----Majority of the microfinance loans are disbursed on group lending concept and a past record of the group plays an important role in getting new loans either through SHG-Bank linkage or through MFIs. The two major problems with the group concept are dropouts (when one or more members leave the group) and migration (when one or more members move to another group). Most MFIs lend on the basis of the past record of the group i.e. SHG or JLG and also on the individuals repayment performance. In absence of a decent past record, members are deprived of getting bigger loan amounts and additional services.

• Transparent Pricing

Though the concern about the transparent pricing in the microfinance sector has been an older one, it is gaining significance with the growing size and the increasing competition in the sector. Non-transparent pricing by MFIs confines the bargaining power of the borrowers and their ability to compare different loan products, because they don’t know the actual price. In absence of the proper understanding of the pricing, clients end up borrowing more than their ability to payback which results in over-indebtedness of the borrower.

MFIs, in order to make their products look less expensive and more attractive, are disguising their actual/effective interest rates (better known as the Annualized Percentage Rates – APR) by including other charges like service charge, processing fee, etc. Some MFIs even take interest free deposits for lending microloans. There have been cases where the interest rates are linked with the loan amount, which means a higher interest rate for smaller loans (because of higher transaction cost). This is resulting in highest interest rate being charged to the poorest clients, which contradicts with the social aspect of microfinance.

Ambiguity in the pricing by MFIs is inviting regulatory bodies to implement strict measures like interest rate caps. But simply putting an interest rate cap may encourage MFIs to look for clients with larger loan requirements. This may deprive the clients with smaller loan requirements who are supposed to be the actual beneficiary of microfinance.

• Cluster formation – fight to grab established market

MFIs’ drive to grab an established market and reduce their costs is resulting in formation of clusters in some areas leaving the others out of the microfinance outreach. By getting an established microfinance market, MFIs reduce their initial cost in group formation of clients, educating them and creating awareness about microfinance. This is one of the reasons for the dominance of the microfinance sector in the southern states. Now the problem is that a similar trend is being followed in the northern states as well.

This cluster formation is restricting MFIs from reaching to rural areas where there is the actual need for microfinance. People in urban and semi-urban areas are already having access to microfinance through SHGbank linkage or individual lending, but in rural areas people don’t have access to banks and so SBLP is not much active in such areas. Because of the initial cost involved in serving a new location, MFIs are not willing to go to such remote locations. This is the reason most of the MFIs have their branches in urban and semi-urban areas.

It is high time for the MFIs to understand that though microfinance is a resalable product, increasing the outreach of the microfinance sector by including new clients and serving new locations is what which is needed the most at the moment.

• Multiple Lending and Over-Indebtedness

Both of these are outcome of the competition among the MFIs. Microfinance is one such sector where the Neoliberal theory of free market operation fails, at least to some extent. Though competition is good for many sectors but in this case it is going against both the parties. In order to eat away each others’ market share, MFIs are ending up giving multiple loans to same borrowers which in some cases is leading to over-indebtedness (a situation where the borrower has taken loans more than her/his repaying capacity) of the borrower. MFIs are getting affected because borrowers are failing to make payments and hence their recovery rates are falling, while over-indebtedness is making the borrower go to depression and in some cases forcing them to commit suicide.

Some experts advocate that multiple lending is not but over-indebtedness is dangerous. This may be true but multiple lending is eating away the opportunity of new borrowers, and in a country where it is believed that the microfinance sector is able to cater to only 10-15 percent of its potential clients, even multiple lending proves out to be a big concern.

Recommendations

1. Proper Regulation: The regulation was not a major concern when the microfinance was in its nascent stage and individual institutions were free to bring in innovative operational models. However, as the sector completes almost two decades of age with a high growth trajectory, an enabling regulatory environment that protects interest of stakeholders as well as promotes growth, is needed.

2. Field Supervision: In addition to proper regulation of the microfinance sector, field visits can be adopted as a medium for monitoring the conditions on ground and initiating corrective action if needed. This will keep a check on the performance of ground staff of various MFIs and their recovery practices. This will

  also encourage MFIs to abide by proper code of conduct and work more efficiently. However, the problem of feasibility and cost involved in physical monitoring of this vast sector remains an issue in this regard.

3. Encourage rural penetration: It has been seen that in lieu of reducing the initial cost, MFIs are opening their branches in places which already have a few MFIs operating. Encouraging MFIs for opening new branches in areas of low microfinance penetration by providing financial assistance will increase the outreach of the microfinance in the state and check multiple lending. This will also increase rural penetration of microfinance in the state.

4. Complete range of Products: MFIs should provide complete range of products including credit, savings, remittance, financial advice and also non-financial services like training and support. As MFIs are acting as a substitute to banks in areas where people don’t have access to banks, providing a complete range of products will enable the poor to avail all services.

5. Transparency of Interest rates: MFIs are employing different patterns of charging interest rates and a few are also charging additional charges and interest free deposits (a part of the loan amount is kept as deposit on which no interest is paid). All this make the pricing very confusing and hence the borrower feels incompetent in terms of bargaining power. So a common practice for charging interest should be followed by all MFIs so that it makes the sector more competitive and the beneficiary gets the freedom to compare different financial products before buying.

6. Technology to reduce Operating Cost: MFIs should use new technologies and IT tools & applications to reduce their operating costs. Though most NBFCs are adopting such cost cutting measures, which is clearly evident from the low cost per unit money lent (9%-10%) of such institutions. NGOs and Section 25 companies are having a very high value of cost per unit money lent i.e. 15-35 per cent and hence such institutions should be encouraged to adopt cost-cutting measures to reduce their operating costs. Also initiatives like development of common MIS and other software for all MFIs can be taken to make the operation more transparent and efficient.

7. Alternative sources of Fund: In absence of adequate funds the growth and the reach of MFIs become restricted and to overcome this problem MFIs should look for other sources for funding their loan portfolio. Some of the ways through which MFIs can raise their fund are:----

• By getting converted to for-profit company i.e. NBFC: Without investment by outside investors, MFIs are limited to what they can borrow to a multiple of total profits and equity investment. To increase their borrowings further, MFIs need to raise their Equity through outside investors. The first and the most crucial step to receive equity investment are getting converted to for-profit NBFC. Along with the change in status the MFI should also develop strong board, a quality management information system (MIS) and obtain a credit rating to attract potential investors.

• Portfolio Buyout: It is when banks or other institutions purchase the rights to future payment stream from a set of outstanding loans granted by MFIs. In such transactions MFIs are responsible for making up any loss in repayment up to a certain percentage of the portfolio and this clause is known as “first loss default guarantee”. The above clause ensures that the MFI retains the correct incentive to collect these loans. To ensure security to the buying institution, MFIs are allowed to sell off as much of the outstanding portfolio as is financed by accumulated earnings or equity.

•Role of Charities in Development Process

A charitable trust is an irrevocable trust established for charitable purposes. In India, trusts set up for the social causes and approved by the Income Tax Department, get not only exemption from payment of tax but also the donors to such trusts can deduct the amount of donation to the trust from their taxable income. The legal framework in India recognizes activities including “relief of the poor, education, medical relief, preserving monuments and environment and the advancement of any other object of general public utility” as charitable purposes.

A large percentage of charities operating in India are involved in social development, though many are associated with religious organizations. Religious organizations in India are also the largest recipients of donations and have floated affiliated organizations to undertake developmental activities. Other popular activities in the voluntary sector are community/social service; education, and promotion of sports & culture.

•Foreign aid in Development

Foreign aid is considered as an important ingredient for financing the developmental programs of the developing countries. Currently, it is considered as an important instrument of the foreign policy of states. It acts as a major source of foreign exchange earnings for developing countries. After World War II, developed economies have been providing hundred billions of dollars in terms of foreign aid to the developing world with a welfare motive. Even before the First World War, foreign aid was used as a profitable investment.

However, it was only in the post-war period that the flow of foreign aid began in a planned way, when developed Western countries started contributing primarily for the development of infrastructure, alleviation of poverty, emergency relief, peace -keeping efforts and socioeconomic reconstruction programs of their war allies. Adding to this, there are a number of mechanisms through which aid can contribute to the process of economic growth, i.e. (a) aid stimulates investment in both physical and human capital; (b) aid act as a supplement to the scarce domestic resources and acts as a major source of foreign exchange earnings; (c) aid increases the capacity to import necessary capital goods and technology; (d) aid helps to raise the productivity of both capital and labor through technological transfers and also promotes indigenous technical change; (e) aid also brings other crucial resources for development such as managerial skills, organizational capability, research ideas and market access.

It also helps the underdeveloped economies in filing three major gaps; (1) saving-investment gap; (2) exportimport gap; and (3) technological know-how gap. At the same time huge amount of external assistance inflows may create threat for large amount of external debt burden in the long run to developing economies. The extent to which foreign aid can be a decisive factor in the economic development of developing economies remains controversial. Many countries in the world accept foreign aid and get different benefits along with a few adverse results.

Forms of Foreign Aid

Different writers have given different forms of foreign aid. Prof. Hans J. Morgenthau has given six forms of foreign aid. They are humanitarian foreign aid, subsistence aid, military aid, bribery, prestige aid and economic development aid. Chester Bowles classifies foreign aid in terms of countries: nations requesting aid because of mal-distribution of wealth; nations with inadequate G.N.P. willing to mobilise their own resources; nations lacking the competence; organization and will to use aid; and nations whose situation is not clear. However, foreign aid can be classified as:----

A. Military Aid

It is the oldest form for foreign aid. It helps in gaining allies. Both Great Britain and France supplied money and material in gaining allies in the European countries. The recipient countries provided men. The Soviet Union and the United States allocated considerable amounts of money for military aid. The only objective of this kind of aid is to strengthen the military capability of their respective allies. It is a way to reduce burden of stationing one’s own military in another country. This kind of aid makes the recipient completely dependent on the donors for the supply of modern equipments, ammunitions, replacement and maintenance of the equipments supplied.

This enables the donors to exercise almost complete control over the military movements of recipient countries. This policy of arming certain countries by a particular great power against other country takes the form of cold war. There have been certain areas such as West Asia and Indo-China where this cold war turned into hot war many a time between the countries of region concerned.

If North Vietnam was supported and given military assistance by the Communist power, South Vietnam was supported by the American bloc. In this way, local conflicts arising out of indigenous causes turn into hot bed of super rivalry.

Most of the wars now going on in the Third World fought by increased sophisticated weapons can be intensified or brought to a halt at the will of the supplier. If and when the great power feel that they need a rest from the tensions of such proxy wars, they can do so by reducing the volume of supplies.

B. Technical Assistance

It is the least expensive among the aid programmes with big benefits. It aims at providing technical know-how instead of equipment and funds. Experts and specialists from advanced countries go out to render technical advice on different projects such as malaria control, agricultural mechanization, public management, teaching, programme, family planing and population control, habitat programmes, medical and sanitary facilities, development of indigenous resources, etc., none can deny that the ‘Point Four Programme’ and the ‘Peace Corps’ initiated by the United States for development in the field of administrations, agriculture, horticulture and education had nothing to do with the political-economic considerations. Moreover, the transfer of technology has been limited to a few areas that benefit only the imperialist countries. These include:

• Industries consuming too much energy. Industries that pollute atmosphere.Mining and extractive industries to get raw materials for use in the imperialist country. Agricultural production industries to get edibles.

• Experimental technology that needs a large scale of trials for development such as electronics, communications, chemicals, drugs and pharmaceuticals.

• Industries which need a large number of labour forces.

C. Financial Aid

The simplest form of capital inflow is the provision of convertible foreign exchange, but very little foreign capital indeed comes to the underdeveloped world so conveniently. Financial aid is further divided into various sub-forms, i.e.:

(i) Tied Aid: Tied aid is of two types:

• Nation Tied Aid: is given to the recipient country on the condition that she will spend it in the donor country to solve the BOP problems of that country and to stimulate exports, i.e., if Pakistan is given aid by US and is asked to import raw materials or machinery from US only then it is ‘nation tied aid’ or ‘resource tied aid’.

• Project Tied Aid: is given only for specific projects and the recipient country cannot shift it to other projects.

(ii) Untied Aid: Untied aid is the aid which is not tied to any project or nation. It is, in all respects, better than the tied aid because it offers more efficient use of foreign resources.

It is much desired because in the

case of untied aid the recipient country is not bound to spend the foreign resources on specific projects or in the donor country which may charge higher prices than international market.

(iii) Grants: A grant is that form of foreign aid which does not entail either the payment of principal or interest. It is a free gift from one government to another or from an institution to a government.

(iv) Loans: It is the borrowing of foreign exchange by the poor country from the rich country to finance shortterm or long-term projects.

They  are further sub-divided into two types:

• Hard Loans: Hard loans are also called short-term loans. In order to finance industrial imports they are given usually for a period less than five years, and they are paid in the currency borrowed. It contains no concessional element but interest rate is usually lower than the prevailing rate of interest in the international market.

•

Soft Loans: Soft loans are also known as long-term loans. Soft loans are made for 10-20 years and it is repaid in the currency of recipient country. Interest on these loans is lesser than hard loans and often these loans invoice grace period. Concessional elements are comparatively greater.

Foreign Aid to India

The role of external assistance in India has undergone a significant shift in the post-independence period. It initially imparted support for the country’s balance of payment strategy and invaluable means to promote food security and meet invaluable foreign exchange needs. It also helped to release resources for meeting crucial poverty-alleviating expenditure. It mitigates the impact of domestic saving shortages spilling into balance of payment complications by providing concessional funds to finance the trade deficit.

It is much desired because it increases the internal expenditures and generates income. It is given on the basis of humanitarianism, especially in days of emergencies, earth quakes, floods, wars, etc. Over the time, the role of external assistance either for meeting food security requirements or balance of payment support has become increasingly insignificant in volume terms relative to private finance. However, given their competitive cost as well as their long-term access to development assistance continues to be useful in supporting infrastructure financing. Given the persistence of fiscal deficits and the tardy outcome of policy designs to mitigate the fiscal problem, the inadequate availability of resources to meet social sector obligations still requires external assistance for social sector reforms. Foreign assistance is also useful in supporting reform efforts for persuading federal entities to adopt policies that can spur their growth rates and assist in better aligning their reform strategies with the national strategy.

Foreign aid also supported a higher level of investment that could have been financed with domestic savings. This has been particularly valuable for building a viable infrastructure. In recent years, foreign aid has not only continued to provide much-needed additional resources for social sector spending, but has also provided transitional financial arrangements for supporting reform initiatives. One of the most important of these initiatives has been mainstreaming the sub-national State Governments into the national overall reform strategy through strategic financial initiatives. External flows cover about 18 percent of India’s total Gross Budgetary Support for central government ministries’ development programmes and assistance to states, though this has been declining since 1990s.

Thus, aid neither promotes economic growth and hence development at the macroeconomic level, nor adversely affects it. A corollary is that aid is not responsive to changes in India’s income. But still India is depended on foreign aid for the following reasons:

First, aid can help direct the attention of local policymakers towards domestic inequality. This does not mean supporting only advocacy/activist/policy non-government organizations (NGOs), but also supporting innovative and experimental approaches to conventional development challenges. This means supporting knowledge management initiatives and rigorous research, especially to measure the impact of development programmes and policy interventions.

Second, aid is still important when it comes to humanitarian crises such as droughts or natural disasters. While the democratic governments in this country are more than capable of taking care of sudden crises, aid projects have a role in calling attention to as well as actively helping those who are trapped in a vicious cycle of poverty—say the small-holder farmers who are battling rising input prices, lack of credit and the wrath of climate change.