India struggles to keep financial promises to South Asia
Author: Kazi Mohammad Jamshed, University of Dhaka
In 2010, India pledged to finance US $ 7.36 billion in development projects in Bangladesh through lines of credit (LOC). So far, only 10.57 percent of total committed funds have been disbursed. Although the policy of “neighborhood first” and the vision of Indian Prime Minister Narendra Modi “Everyone together, everyone’s development, everyone’s confidence” is an integral part of its foreign policy, India is struggling. to keep its promises. Will this excessive pledge but underdelivery of funds have a negative impact on relations between India and its LOC partners?
Bangladesh and India enjoy warm bilateral relations, stemming from their common history. Although states are in a region rich in resources, they have failed to transform those resources into shared and productive wealth. They have failed to achieve economic integration, even though their economies are largely complementary and would benefit from economic integration. The two countries are undertaking a myriad of initiatives to deepen their economic ties. One such initiative is India’s use of lines of credit to finance development projects in Bangladesh.
The begging bowl, a historically predominant symbol of Indian diplomacy, has been replaced by LOCs to present India as a donor state. Lines of credit have become a key instrument of Indian economic diplomacy and have changed the pattern of the country’s foreign policy. Lines of credit are a financing mechanism through which the Exim Bank of India extends its support to export, equipment, goods and services projects.
A surface view makes this move positive, but India sets the loan terms. These loan conditions require critical analysis. For Bangladesh, the interest rate is 1 percent and the penalty interest rate is set at 2 percent. These loans have 20-year maturities with five-year grace periods and a 0.5 percent commitment fee. The LOC indirectly guarantees that India is privileged in the transaction since it attaches a series of controversial conditions, including the selection of Indian contractors for the proposed projects.
To improve connectivity and accelerate the overall development of Bangladesh, the two countries agreed to implement 46 projects under three line of credit agreements – signed in 2010, 2016 and 2017 – for a total amount of 7.36 billions of dollars. As of April 2021, US $ 778.3 million had been disbursed, or about 10.57% of the total funds pledged. Despite efforts to speed up the use of funds, technical hurdles and bureaucratic tangles on both sides are delaying their release.
Unlike the World Bank, Asian Development Bank, and other donor agencies which normally pay contractors through the project manager’s bank accounts, India’s LOC payments are made directly to contractors. Project managers in LOC funded projects change frequently, which has a debilitating effect on project implementation. Bangladesh should investigate the reasons why project managers change so frequently and deal with the problem quickly.
Draft designs must be approved by the Indian High Commission before being submitted to the Bangladesh Planning Commission. It takes almost a year to get final approval due to the delay from both parties. Each step of the project requires approval from the Indian Exim Bank – another lengthy bureaucratic process that escalates the delay. Sometimes the approval process is so long that the grace period expires before the successful implementation of the project. The icing on the cake is the “tied” loan which requires 75% of the materials to be purchased in India, which is inefficient and expensive.
The situation is similar with the lines of credit agreed with other countries beyond Bangladesh. According to the Indian Ministry of Foreign Affairs, more than 300 lines of credit worth US $ 30.66 billion have been extended to 64 countries under India’s economic and development assistance program. In Nepal, the Police Academy, which was due to be completed 32 years ago, is still in limbo. Several other Indian-funded LOC projects in Nepal are also pending completion, which has prompted Nepal to pivot to China.
India’s neighbors complain about its “big promises” and its “delivery deficit”. This creates a negative image that India is indifferent to its commitments and pushes South Asian countries towards China’s geostrategic orbit. India can only respond to its strategic concerns about China’s role in South Asia if it rethinks its economic diplomacy. Greater regional and economic integration is possible if India takes into account the expectations and concerns of its neighbors and keeps its promises.
Kazi Mohammad Jamshed is a Assistant professor at the Department of International Affairs, University of Dhaka.