Banking Sector Reforms

India’s Soft Loans to neighbours up to $15 billion

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Soft Loans

Mains level : India's soft loan diplomacy as against China's debt trap diplomacy

The volume of India’s soft loans to neighboring countries has increased from about $3 billion to almost $15 billion in the last eight years.

What are Soft Loans?

  • A soft loan is a loan with no interest or a below-market rate of interest.
  • Also known as “soft financing” or “concessional funding,” soft loans have lenient terms such as-
  1. Namesake interest rate
  2. Extended grace periods in which only interest or service charges are due
  3. Interest holidays
  4. Long tenure up to 50 years
  • Soft loans are often made by multinational development banks such as the Asian Development Fund affiliates of the World Bank etc.

Why are soft loans popular?

  • Diplomatic tool: Soft loans are often offered not only as a way to support developing nations but also to form economic and political ties with them.
  • Economic benefit: Nations exchange credit in return of some important resources.
  • Geopolitics: Soft loans have been an important diplomatic tool to sustain political influence in the neighborhood and beyond as well as counter the growing Chinese presence, especially in Africa.

Pros and cons of Soft Loans

  • Pro: Breaks for Business– Soft loans offer favorable business opportunities.
  • Con: Shaky Returns– The length of time it may take to repay a soft loan could mean the lender is tied to the borrower for an extended number of years.

Did India take any soft loan?

  • For instance, in 2015, Japan offered a soft loan to India to cover 80% of the cost for a $15 billion fund a bullet train project at a less than 1% interest rate.
  • This was done with the caveat that India would purchase 30% of the equipment for the project from Japanese companies.
  • By the time the countries signed a formal agreement, Japan’s commitment increased to 85% of the cost, in the form of soft loans, for a then-estimated $19 billion project cost.

Using soft loans as a diplomatic tool

  • The amount of development assistance India has offered to other nations in 2019-20 was more than twice what it had extended in 2011-12.
  • However, such loans have usually gone to countries in Asia, Africa and Latin America that are lower down the economic strength ladder.
  • India has extended a total of $27.8 billion in lines of credit since 2002-03.

Conclusion

  • Extending development assistance is nothing new for India and about half of the foreign ministry’s budget is made up of grants and loans to foreign governments, especially India’s neighbours.
  • For a country that for long had to rely on international loans to meet key development goals, India understands the diplomatic value of providing a helping hand.

 

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

0 Comments
Inline Feedbacks
View all comments