India rethinks global south aid amid financial challenges

Source: The post India rethinks global south aid amid financial challenges has been created, based on the article “Rephasing global development finance” published in “The Hindu” on 3rd July 2025

UPSC Syllabus Topic: GS Paper2- Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Context:India’s development cooperation with the Global South is evolving amid shifting global financial dynamics, shrinking foreign aid, and rising debt crises. With budgetary constraints and geopolitical complexities impacting traditional aid, India is reassessing its strategies and proposing a balanced, sustainable model of engagement.

For detailed information on India and Global South read this article here

India’s Expanding Development Cooperation

1. Rising Development Assistance: India’s development support has grown significantly, from around $3 billion in 2010–11 to nearly $7 billion in 2023–24. This reflects a deliberate policy effort to strengthen engagement with the Global South.
2. Key Modalities of Engagement: India uses five main instruments for cooperation: capacity building, technology transfer, market access, grants, and concessional finance. Among them, concessional Lines of Credit (LoCs) under the Indian Development and Economic Assistance Scheme (IDEAS) have been the most prominent.
3. Balanced Framework Proposal: At the third Voice of Global South Summit (VoGS) in 2024, Prime Minister Modi proposed a Global Development Compact, promoting a harmonious balance among the five modalities. India may also expand third-country partnerships to enhance reach and impact.

Reassessing Lines of Credit

1. Limitations of Credit-based Support: India has been borrowing from global capital markets and extending credit at concessional rates to partner countries, absorbing the interest rate gap. However, due to the rising global liquidity crisis and poor repayment capacities, this model has become less viable.
2. Clear Policy Signal from Finance Ministry: The 2025–26 budget clearly reflects the Ministry of Finance’s concern, signalling a shift away from LoCs as a major tool of engagement.
3. Strategic Shift Opportunity: Given the limitations in global markets, India has the opportunity to realign its engagement strategy by adopting lower-risk modalities and forming deeper, more stable partnerships.

Global Aid and Debt Crisis

1. Declining Traditional Assistance: Major ODA providers like USAID and the UK’s FCDO are facing internal budget constraints. The OECD’s DAC, which traditionally shaped development assistance norms, is losing influence.
2. Sharp Fall in ODA Flows: Global ODA is projected to fall from $214 billion in 2023 to $97 billion, a nearly 45% reduction. This contraction affects many low-income countries already facing fiscal stress.
3. Mounting Debt and Reduced Access to Funds: Several developing nations, amid ongoing crises and economic shifts, are struggling with debt and lack access to sufficient external financing, threatening development progress.
4. SDG Financing Gap: The estimated investment needed to meet the Sustainable Development Goals (SDGs) has grown from $2.5 trillion in 2015 to over $4 trillion in 2024. The pandemic and other global shocks have disrupted progress, and borrowing has become costlier and unpredictable.

Exploring Triangular Cooperation

1. Pooling Resources with Like-minded Nations: There is rising interest in triangular cooperation models, where countries jointly support development in third nations. This offers a collaborative and resilient alternative.
2. Growth of Non-DAC Flows: Development finance from 19 non-DAC countries reporting to the OECD increased from $1.1 billion in 2000 to $17.7 billion in 2022, showing their growing role.
3. Successful Collaborative Experiences: Countries such as Indonesia and Brazil have partnered with Japan and Germany to implement projects in other nations, showcasing a viable model of cooperation.

4.India’s Potential Role: India can engage in such frameworks, leveraging its development experience to create deeper and more effective partnerships.

Question for practice:

Examine how India’s approach to development cooperation with the Global South is evolving in response to global financial challenges and declining traditional aid.