Some of the International funding agencies have special terms for economic participation stipulating a…

Question

Some of the International funding agencies have special terms for economic participation stipulating a substantial component of the aid to be used for sourcing equipment from the leading countries. Discuss on merits of such terms and if, there exists a strong case not to accept such conditions in the Indian context.

Ghissu Editorial · Accepted Answer

Tied aid brings cheap long-term finance and frontier technology but raises costs, locks India into donor suppliers and sidelines domestic manufacturers. Japan's STEP loan for the Mumbai-Ahmedabad High-Speed Rail, at about 0.1% interest over 50 years, shows when such terms are worth accepting.

**Introduction**

Tied aid obliges the recipient to buy equipment and services from the donor country. Japan's STEP loans, requiring a Japanese prime contractor and at least 30% Japanese content, finance the Mumbai-Ahmedabad High-Speed Rail.

**Merits of Such Terms**

SKETCH: forcefield | Accepting Tied Aid
center: Accept tied aid
driving: Cheap long loans, Frontier technology, Execution skills
restraining: Costlier equipment, Technology lock-in, Lost local orders

1. **Concessional finance**: The high-speed rail loan carries about 0.1% interest over 50 years with a 15-year grace period.
2. **Technology access**: Tying brings proven systems such as Shinkansen technology that would take decades to build at home.
3. **Execution and skills**: Japanese-funded early phases of Delhi Metro built DMRC's capacity, and later coaches were made by BEML in Bengaluru.
4. **A common practice**: India's own Lines of Credit require most of the contract value to be sourced from India.

**Case for Refusing Such Conditions**

1. **Higher cost**: Without competitive bidding, OECD studies estimate costs rise by 15-30%, which led the OECD in 2001 to recommend untying aid to the poorest countries.
2. **Lock-in and lost orders**: Proprietary systems create dependence for spares, and tied purchases sideline Indian makers, against the 2017 Make in India procurement order and the proven Vande Bharat capability.
3. **Currency risk**: Debt in yen or euro grows in rupee terms when the rupee weakens, eroding much of the low-interest advantage over a 50-year tenure.

**Conclusion**

Tied aid should not be rejected outright: it suits projects where India lacks technology and terms are deeply concessional, with technology transfer and local manufacturing built in. Elsewhere, untied or domestic funds serve Atmanirbhar Bharat better.

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