Wary of China, India Shares Its Largesse With Neighbors

11 MINS READApr 24, 2018 | 09:00 GMT
A Buddhist temple sits near a hydroelectric grid main in southeastern Bhutan in 2013.

A Buddhist temple sits near a hydroelectric grid main in southeastern Bhutan in 2013. Home to meditating monks and Himalayan nomads, the sleepy kingdom of Bhutan has set its sights on becoming an unlikely energy powerhouse thanks to its abundant winding rivers. Hydropower plants have already harnessed the country's water flows to light up nearly every Bhutanese home, generating electricity that is sent to remote villages by cables strung through rugged mountain terrain.

  • Because of China's increasing influence with the Belt and Road Initiative, South Asia and the Indian Ocean region will account for the bulk of India's foreign aid funding.
  • Bhutan's strategic location and hydropower potential will make the small Himalayan kingdom the continuing recipient of the most Indian foreign aid.
  • As China expands its military presence around the Indian Ocean, New Delhi will prioritize funding for defense infrastructure in island countries such as Mauritius and the Seychelles.

Big changes in the neighborhood are giving the government in New Delhi more than a few sleepless nights. Buoyed by an $11 trillion economy and plans to connect Eurasia with its ambitious Belt and Road Initiative, China is showing up in areas that India has traditionally viewed as its backyard. Around South Asia and the Indian Ocean, New Delhi has long understood the imperative of preventing another neighbor from allying with a rival military power (as Pakistan has done with China), as well as the need to earn the support of regional governments to help resolve bilateral irritants and expand trade to bolster the country's $2 trillion economy.

The Big Picture

In the 2018 Annual Forecast, Stratfor highlighted the intensifying India-China rivalry in South Asia. New Delhi's foreign aid flows underscore the country's need to exert its influence in its neighborhood as it strives to remain the dominant power in South Asia.

In the face of China's intrusion, India's policymakers have reached for one of their most dependable tools to remedy the situation: foreign aid. India's foreign aid has grown in tandem with the economy, rising from $442 million in 2009 and 2010 to $1.6 billion in 2015 and 2016. But it is far from an act of altruism; a clear strategic and economic logic underpins India's spending around the region. It extends from maintaining Prime Minister Narendra Modi's "Neighborhood First" policy to countering growing Chinese influence among its South Asian neighbors — especially the buffer state of Bhutan — to exerting influence further afield by loosening the purse strings for countries such as Mauritius and the Seychelles. As China makes inroads into India's closest land neighbors and charts a course to countries off its southern coast, New Delhi will have little choice but to spread its largesse around the region even more.

Maintaining the Buffers: Bhutan and Nepal

Nepal and Bhutan, two buffer states wedged between India and China, were the earliest recipients of Indian foreign assistance in the 1950s. The pair's geostrategic significance increased dramatically in 1950, when Beijing's annexation of Tibet suddenly brought China right up to India's poorly demarcated Himalayan frontier, creating a border dispute that precipitated a short war in 1962 and that continues to vex bilateral relations to this day. Bhutan, for its part, has accounted for the lion's share of Indian foreign aid. Because Bhutan is home to just 700,000 people, India has succeeded in drawing it into its sphere of influence much more easily than Nepal, whose population is 40 times larger. Bhutan's hydropower potential also provides India with a cheap source of electricity, leading New Delhi to allocate funding toward hydroelectric projects in the country, including the Punatsangchhu 1 and 2, the Mangdechhu and the Kholongchu, although some technical problems have led to a decrease in funding in recent years.

As part of its Bhutan strategy, India has wielded its economic clout (India has a monopoly on the country's hydropower critical exports and is Bhutan's biggest trade partner) in the land of the "Dragon King" to shape the country's politics. In 2013, this led to a crisis in relations as India suddenly curtailed gas subsidies ahead of its tiny neighbor’s general election in an apparent sign of displeasure over then-Prime Minister Jigme Thinley's meeting with Chinese Premier Wen Jiabao in June 2012. But Indian-Bhutanese relations have improved under current Prime Minister Tshering Tobgay to the extent that Modi even chose Thimphu, the capital of the kingdom, for his first international visit after assuming office in 2014. At present, India has a strong incentive to continue emphasizing Bhutan in its foreign aid programs, especially after a border dispute last year between the small kingdom and China — with which Thimphu has no formal diplomatic relations.


India's Foreign Aid: 2000-2017

To the west lies Nepal, which has been vital to India's strategic defense since the days of the British Raj. As in Bhutan, India's leaders have provided aid — including $1 billion in grants and loans after devastating earthquakes in 2015 — and sought to create cross-border infrastructure, such as railways, integrated border checkposts, railways and transmission lines, that leave the government in Kathmandu dependent on New Delhi. But events such as a five-month economic blockade at the Birgunj-Raxaul border crossing in 2015 and 2016 underscore that forcing Nepal into economic dependency can be a double-edged sword; the standoff inflamed anti-Indian sentiment in Kathmandu, driving Prime Minister Khadga Prasad Oli to sign agreements on fuel and transit with China. Oli eventually resigned in July 2016, but he returned to power in December 2017 as part of a communist alliance that had reportedly received support from Beijing. Earlier that year, Nepal also signed on to China's Belt and Road Initiative, deepening a growing relationship that included the first joint military exercises between the two countries. Naturally, the high Himalayas will challenge China's push into the land of Everest, but even its overtures to Kathmandu have compelled India to emphasize Nepalese infrastructure projects while easing off its demands for constitutional reforms in support of the Madhesi, a people of Indian ancestry who largely reside in southern Nepal. 

Connecting to the East: Bangladesh

The final country in South Asia's northeastern bloc is Bangladesh, whose significance rests in its position as a land bridge between the Indian mainland and its far-flung northeastern territory. Bangladesh's border with Myanmar also makes it a vital component of India's quarter-century quest to link its northeast with Myanmar, India's bridgehead into Southeast Asia. After India and Bangladesh signed a joint communique emphasizing connectivity in 2010, New Delhi extended a $1 billion line of credit to the government in Dhaka, making the country the biggest recipient of such Indian financing. As a sign of improving relations, India and Bangladesh signed a landmark boundary resolution agreement in June 2015, but progress on Indian-sponsored projects has been slow due to problems with land acquisition, project selections and a complex tendering process. Accordingly, India's Exim Bank had released only $576 million from the lines of credit by October 2017. While Modi's push east will ensure that Bangladesh remains a priority, especially in projects like the Akhaura-Agartala railway, which will foster better connectivity between Bangladesh and India's northeast, enduring problems in implementing projects suggest progress will be sluggish.

Spending for Stability: Afghanistan

Across the Arabian Sea, India has provided $15 million in its latest budget to help Iran foot the bill for its Chabahar port. Central to New Delhi's efforts, however, is not so much Iran but its poorer northeastern neighbor, Afghanistan — one of the few countries in which India's aid has generated goodwill. Although Indian funding for the country has diminished in recent years due to the completion of projects such as the Afghan-India Friendship Dam, the Zaranj-Delaram highway and the national parliament building, Afghanistan trails only Bhutan in benefiting from Indian aid over the past 17 years. Chabahar is the critical link in India's quest to circumvent its greatest foe, Pakistan, and to access the untapped export and energy markets of Central Asia. Securing access to the region's hydrocarbons, however, requires stability in Afghanistan — a goal that Indian policymakers have experienced difficulty in fostering, partly because the government in Islamabad has supported the Taliban in an effort to sever Kabul's links with New Delhi. India's development relationship with Afghanistan is also less sensitive to the whims of changing politicians, as any nationalist government in Kabul that does not feature the Taliban will maintain links with India to counterbalance Pakistan.

Aiding Kin: Sri Lanka

Lying off the southern coast of India, Sri Lanka sits next to key shipping lanes in the Indian Ocean. Because Sri Lanka's ethnic Tamils have ethno-linguistic links or direct family connections to the Tamil minority in India's south, the community provides a natural inroad for New Delhi on the island. For this reason, India has directed much of its aid to projects supporting the group, including investments in the agriculture and engineering building at Jaffna University in the mostly Tamil north and funding for a hospital in the central town of Dickoya, which is home to many Tamil tea estate workers. And as it has elsewhere around the Indian Ocean, New Delhi has invested in fortifying Sri Lanka's coastal surveillance radar system, part of a 32-installation network that includes Mauritius and the Maldives. Despite the 2015 election of Maithripala Sirisena as president, who stands to benefit New Delhi by opposing Chinese-funded infrastructure projects, India has not delivered more aid in subsequent years due to problems in acquiring land for the third phase of a housing project for Tamils in the north. India, however, is likely to redouble its efforts to engage with Sri Lanka, especially after Colombo's growing debt forced Sirisena to sell a majority stake in the Hambantota port to a Chinese state-owned firm last year under a 99-year lease for $1.1 billion. Naturally, the deal has heightened India's concerns about a future Chinese naval presence in the region.


India and Selected Areas Receiving Its Foreign Aid

Treading Carefully: The Maldives

The Maldives is another island nation strategically located near key Indian shipping lanes. India's traditional dominance in the Maldives began to weaken after the country moved toward democracy in 2008, eventually paving the way for Yameen Abdul Gayoom to take office as president in 2013. Although pro-Indian President Mohamed Nasheed, a predecessor of Yameen, opened the Chinese embassy in the capital Male, Yameen strongly strengthened the relationship with China, signing a free trade agreement with Beijing and agreeing to join the Belt and Road Initiative. Political volatility in the country has affected foreign aid flows over the past several years, and India is likely to withhold future funds due to Yameen's refusal to implement a Feb. 1 Supreme Court order to permit the exiled Nasheed to return home. But because it is a small nation along India's periphery, the Maldives cannot afford to alienate India entirely, even as the lessons from the Nepalese economic blockade suggest that India will maintain a hands-off approach toward Male. 

Heading for the Horizon: The Indian Ocean

Apart from India's clear strategic and economic reasons for funding projects to its north and northeast, it has also turned its gaze far in the other direction. In recent years, New Delhi has begun offering aid to Mauritius and the Seychelles as part of a policy to secure its $2 trillion economy, which is increasingly dependent upon maritime trade, at a time when China has been expanding its naval presence in the ocean. In March 2015, Modi outlined his sweeping vision for the region during a visit to Mauritius as part of a tour that included stops in the Seychelles and Sri Lanka. Unsurprisingly, the funding that began the following year for the two island nations included defense-oriented projects. In Mauritius, India's latest $53 million tranche of foreign aid is helping fund Project Trident, the headquarters of the Mauritius National Coast Guard. And in 2015, India also sold the country a Barracuda, a 1,300-metric-ton vessel, to patrol the island's 2.3 million-square-kilometer (888,000-square-mile) exclusive economic zone.


Apart from India's clear strategic and economic reasons for funding projects to its north and northeast, it has also turned its gaze far in the other direction.

Crucial maritime defense projects also form part of India's $46 million in foreign aid to the Seychelles. In addition to financing the manufacture of a Dornier aircraft for the archipelago, India is allocating funding for improvements to the country's coastal surveillance radar system. The Seychelles, however, has thrown a few wrenches into India's plans. President Danny Faure recently announced that he would not proceed with India's proposal to renovate an airstrip, upgrade a jetty and build housing for the Seychelles Coast Guard on Assumption Island as part of a 20-year lease that allows Indian troops stationed there to monitor the Mozambique Channel for piracy.

As New Delhi's and Beijing's dependency upon sea-based trade grows, India's navy will focus on asserting its presence in the Indian Ocean to protect its sphere of influence — likely entailing a closer defense partnership with the United States as part of its strategy to promote freedom of navigation through the South China Sea. 

India's economy has enjoyed growth figures in excess of 7 percent a year, which should stand it in good stead as it dishes out foreign aid and provides funding for defense-oriented projects at a time when China is bullish about regional expansion. Still, New Delhi lacks Beijing's prowess at executing foreign aid projects; China's fusion of state and corporation enables it to marshal its funds in a way India cannot. But that won't preclude New Delhi from trying, as the world's second most populous country tries to keep up with the first.


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