Foreign Aid and India | 12 May 2025

Source: TH 

Why in News? 

US President Donald Trump's decision to impose a 90-day freeze on foreign assistance, halting United States Agency for International Development (USAID) personnel from disbursing aid globally, has sparked discussions on the role of foreign aid and its impact on India. 

What is USAID? 

• About: The USAID was established in 1961 as an independent agency to unify all US efforts in providing civilian foreign aid and development assistance. 
• Objectives: It aims to promote democratic values and contribute to a free, peaceful, and prosperous world.  
  • It also aims to advance US national security and economic prosperity through international development initiatives. 
• Coverage: It operates in over 100 countries around the world.  The top countries the USAID engages with are Ukraine, Ethiopia, Jordan, Somalia, Congo (Kinshasa), Afghanistan, Nigeria, Syria, Yemen and South Sudan. 
  •  In 2024, USAID accounted for 42% of all humanitarian aid tracked by the United Nations. 
• Key Sectors of Engagement: USAID works across multiple development sectors, including economic development, global health, education, food security, humanitarian assistance, climate change, and democracy and governance. 
• Major Flagship Programs: President’s Emergency Plan for AIDS Relief (PEPFAR) aims at preventing Human Immunodeficiency Virus (HIV) infections, and saves lives.  
  • Power Africa aims to expand access to electricity across Africa 
• USAID's Engagement in India: India's association with USAID began in 1951 with the India Emergency Food Aid Act, evolving over decades from food aid to infrastructure, capacity building, and economic reforms. 
  • As per the Ministry of Finance, USAID funded seven projects worth USD 750 million in 2023-24, focusing on agriculture and food security, water, sanitation, and hygiene (WASH), renewable energy, disaster management, and health. 
    • USAID supported Swachh Bharat Abhiyan by enabling toilet access for 3 lakh people and helping 25,000 communities become open defecation free, while also promoting WASH practices in rural areas. 
  • USAID has saved over 2 million children in India since 1990 by reducing deaths from pneumonia and diarrhoea. It supported education through the Padhe Bharat Badhe Bharat initiative and trained over 61,000 teachers.  
    • It has also strengthened rural healthcare via support for HIV/AIDS (under PEPFAR), maternal health, and disease surveillance.  
    • Programs like Feed the Future enhanced crop yields, post-harvest practices, and climate-resilient farming for smallholders. 
  • USAID supports India’s Conference of Parties (COP) 26 goals through initiatives in solar energy, forest conservation, and disaster resilience.  
    • For example, it partnered with the Ministry of Environment, Forest and Climate Change (MoEFCC) on Forest-PLUS 3.0 to restore forests, aid farmers, and assist conservationists. 

How will the Freeze on USAID Affect India? 

• Health Sector: USAID allocated USD 79.3 million to India’s health initiatives in 2024, and its suspension may slow pandemic recovery and health infrastructure progress. 
• Economic Development: USAID contributed USD 34.4 million in 2024 to support poverty alleviation and sustainable livelihoods in India. A halt in funding could slow progress in poverty reduction and disrupt livelihood programs. 
• Loss of Flexible Funding: Unlike rigid government grants, USAID aid offers flexibility for grassroots needs; its withdrawal may limit NGOs’ innovation and response to local challenges. 
• Hamper Capacity Building: Foreign funding has historically supported capacity building, skill development, and global best practices; its suspension may stall knowledge transfer and weaken NGOs' global linkages. 
• Unemployment and Project Disruptions: Many NGOs rely on foreign aid to hire trained professionals and run social development projects; its halt could cause job losses, stalled new initiatives, and incomplete programmes. 
• Weakening of Accountability Role: Foreign-aided NGOs often act as watchdogs, challenging government overreach and market excesses to protect the marginalised; reduced financial independence may weaken their voice and policy advocacy.  

How has India’s Relationship with Foreign Aid Evolved? 

• Early Dependence: Post-Independence, India sought aid to bridge development gaps and reduce poverty, with most assistance coming from Western nations, especially between 1955 and 1965. 
• Decline in Official Aid (Post-1970s): From the 1970s, India focused on self-reliance through policies like the Green Revolution and industrialization. This led to a steady decline in Official Development Assistance (ODA). 
  • The Foreign Contributions Regulation Act, 1976 (FCRA) imposed restrictions on foreign aid to NGOs, reflecting the government’s suspicion of foreign aid as a potential source of foreign influence in domestic affairs. 
• Shift Towards FDI and Global Cooperation (Post-1990): : Liberalization shifted India’s focus to Foreign Direct Investment (FDI) and economic growth. 
  • FDI grew at a Compounded Annual Growth Rate (CAGR) of 19.05% pre-liberalization and 24.28% post-liberalization, indicating liberalization’s positive impact on FDI. Since 1991, FDI inflows in India have increased by over 165 times. 
  • India continues to receive foreign aid for targeted sectors like health, education, and rural development, especially through NGOs. 
  • India prioritized global partnerships in trade, climate, and technology over foreign aid, focusing on sustainable development. 
• Transition from From Aid Recipient to Donor ( Post 2020s): India allocated USD 6,750 crore in the 2025 Budget as aid to developing countries, mainly in Asia and Africa.  
  • It uses aid strategically to counter regional powers like China, as seen in the USD100 million credit to Maldives (2022), and accepts bilateral aid only from key partners to safeguard sovereignty. 
  • India focuses on capacity building through programmes like Indian Technical and Economic Cooperation Programme, and plays a key humanitarian role, exemplified by Vaccine Maitri, which sent Covid-19 vaccines to 95 nations. 

What are India’s Concerns with Foreign Aid? 

• Sovereignty and Policy Interference: Foreign funds often come with policy prescriptions (e.g., patent reforms, environmental regulations) that may conflict with India’s domestic priorities. 
  • Donors like USAID or World Bank may push structural adjustment programs, impacting subsidy regimes (e.g., farm laws, food security). 
• Threat to Internal Security: The FCRA was tightened in 2020 to curb misuse by NGOs, amid concerns over foreign-funded groups like Greenpeace and Amnesty fueling protests (e.g., anti-Kudankulam, farm laws) and the risk of funding separatist or anti-national activities (e.g., Khalistan groups). 
• Diplomatic Leverage: Foreign aid can influence India’s geopolitical stance (e.g., Russia-Ukraine war, Quad vs. BRI), and over-reliance on Western aid may affect India’s strategic autonomy in Global South forums. 
• Cultural Imperialism: Foreign-funded NGOs may promote ideologies (e.g., LGBTQ+, evangelicalism) conflicting with Indian traditions, while aid programs may prioritize donor interests (e.g., climate adaptation over poverty alleviation). 
• Lack of Transparency and Accountability: Absence of standardized reporting mechanisms has led to public mistrust and inefficiencies in aid utilization. 

How can India Balance Foreign Aid with Progress? 

• Prioritize Strategic Partnerships: Ensure that foreign aid aligns with national priorities such as climate resilience, health, and rural development by focusing it on areas where it complements and fills critical gaps, rather than replacing domestic efforts. 
  • Prefer untied aid (e.g., Japan’s Official Development Assistance for metro projects). 
• Geopolitical Neutrality: Maintain strategic autonomy by accepting aid without compromising foreign policy sovereignty, while balancing engagement across multiple donors and institutions. 
• Strengthen South-South Cooperation: Strengthen the Development Partnership Administration (DPA) under India’s MEA for more structured engagement. 
  • The Indian  government allocated Rs 6,750 crore in the 2025 Union Budget for overseas development via Lines of Credit, Concessional Finance Scheme, and Grant-in-Aid projects. 
• Transparency & Accountability: India should monitor aid effectiveness through audit mechanisms (e.g., CAG reports on World Bank-funded schemes) and public dashboards for real-time tracking. 

Conclusion 

India must use foreign aid strategically complementing domestic goals without compromising sovereignty. Strengthening transparency, building local capacity, and fostering South-South cooperation are key. A balanced approach will ensure aid serves India’s progress, not dependence.