Foreign Aid – Notes



Foreign aid is economic technical or military aid by one Nation to another for the purpose of Relief and rehabilitation for economic stabilization or for mutual defense. Foreign aid term refers to transfer or resources for e.g loan, grants or technical assistance from rich to poor countries or from international institutions, international agencies like IMF, IBRD (International Bank for reconstruction and development)  IFC (international financial corporations) IDA (international development association) UNDP (United Nations for development program). external assistance is considered to be a major element for the advancement of developing countries. All governmental resources transfer from one country to another is to be called foreign aid.

Type of foreign aid

  1. Private FDI by MNCs and portfolio investment by stock for equity holding companies.
  2. Private and private development assistance from the government of foreign countries and international dance agency.

 Foreign aid feature:

  1. foreign aid is in the form of loan and grants loans are required to be repaid with interest and grants don’t have any obligation of interest payment.
  2. foreign aid may be project aid and programming aid. project aid is in the form of loan and grants for the specific project and programs aid is for the activity of sector such as agricultural education BOP.
  3. there is always a commodity aid under which the US government provide agricultural commodities under PL 480/665 free of cost.
  4. foreign aid may take a variety of physical form it may take the shape of capital goods technical assistant agriculture commodities or even military support.
  5. foreign aid may be hard or soft loans. If repayment of loan required foreign currency then its called hard loan. If repayment of loan required home currency then it is called the soft loan.
  6. foreign aid may be tied or United. Aid may be tied by source project and commodities by the US government in giving assistance under PL 480/665 and EXIM Bank United aid is a general-purpose aid.

Advantage of foreign aid:

  1. Increase in the rate of savings and investment.
  2. Technological change.
  3. Development of the heavy and basic industry.
  4. Creation of development and Employment opportunities.
  5. Removal of BOP deficit.
  6. Beneficial for labor class.

Disadvantages of foreign aid:

  1. Increase in the external debt burden.
  2. Wasteful use of foreign capital.
  3. No increase in net investment.
  4. Political pressure
  5. Adverse effect on domestic savings.

Effect/Uses of Foreign aid in India:

India has received a large amount of foreign aid for development purpose India has received three forms of foreign aid loan, grant and PL 480/665.

Assistance repayable in Rupees Dr in converted currency loan are used to help the countries in meeting the shortage of resources to carry out its Development Plan grant carry no burden of repayment on the economic aid under PL was completely supported after 1979 to prevent the misuse of assistance the leading countries and international financial institution generally preferred to give Aid for particular project. A country receiving tide or United aid. A country receiving tide aid doesn’t have the freedom to use it for any other purpose, on the other hand, a country receiving United aid, there’s always some flexibility in its utilization during the planning Period of the total external assistance India received 1/3rd  was in the form of United aid.

International institutions:

IMF:- It was created (established) on Dec 1945 with a membership of thirty countries. The IMF is an organization of 189 countries working to foster global monetary co-operation secure financial stability international trade, promote high employment and sustainable economic growth and reduce poverty around the world headquarters of IMF is in Washington DC.

The organization of IMF consist of a board of governor an executive Board of managing directors of council and staff the meeting of the board of governor take place once a year in which the detailed account of the activities of the fund is presented. The executive board is Constitution by 21 member 5 executive director are the appointees of the 5 members countries having the largest quota. (U. S, UK, Germany, France & Japan) on becoming a member of IMF a country is assigned a quota for it voting right and its drawing rights.

  1. 2% of national income.
  2. 5% of gold and dollar reserve.
  3. 10% of average annual imports.
  4. 10% of the maximum variation in export.


  1. promotion of International Monetary Co-operation
  2. Expansion & balanced growth of global trade
  3. promotion of exchange rate stability
  4. establishment of the multilateral system of payment


  1. The funds operate as a short term credit institution
  2. It reserves the currency of all the member countries
  3. The IMF is like a leading institution in foreign exchange
  4. The IMF provides machinery to the member countries for international consultation
  5. The IMF provides technical advice to the member countries on the various economic problem on the monetary and fiscal matter.

IMF & India:

India is one of the Founder members of IMF it signed the IMF agreement on 27 December 1945 India is quota was the fifth largest until 1970 After 1970 quota of Japan Canada and Italy increased more than that of Indian in November 1992 India slipped to the 13th position as the quota of Belgium increased. At present India increased the quota in IMF and reached to 8th position (the quota of India has been increased) in 2015.

WTO (headquarters Geneva):

The signing of the Final Act of the Uruguay Round by the member’s nation of GATT in 1994, paved the way for setting the WTO. The WTO agreement was signed by 104 members on 1st Jan 1995 and India became a founder member of WTO. At present, there is 162 member of WTO. The WTO is set as a permanent body and play the role in the sphere of trade in goods trade in services foreign investment and intellectual property rights.

Objectives of WTO:

  1. To improve the standard of living of people the member’s countries.
  2. To ensure full employment and board increase in effective demand for goods.
  3. To enlarge production and trade of excellent to extend the trade of services.
  4. To ensure optimum utilization of World resources.
  5. To protect the environment.
  6. To protect the concept of sustainable development.
  7. To increase the trade of services.


  1. To implement rules & provisions related to trade policy review mechanisms.
  2. To produce a platform to member countries to determine future ways associated with trade and tariff.
  3. To supply colleges for implementation Administration and operation of three-cornered and bilateral agreement of the word trade.
  4. To administrate the rules & process related to dispute settlement.
  5. to make sure the optimum use of world resource.
  6. To assist international organizations such as IMF and IBRD in the making of global economic policies.

WTO agreement:

  1. Agreement on agriculture.
  2. Agreement on trade in textile and clothing.
  3. Agreement on market access.
  4. Agreement on TRIMS ( trade-related investment measure)
  5. Agreement on TRIPs ( trade-related investment measure)
  6. Agreement on service.
  7. Dispute settlement body.

India’s commitment to WTO:

  1. Tariff restriction (regulations)
  2. Quantitative restriction
  3. Trade-related intellectual property rights (TRIM)
  4. TRIMs (trade-related investment measure)
  5. GATS (General Agreements On Trade in Services )
  6. Custom valuation.

World Bank (headquarters – Washington DC)

The world bank is an international financial institution that provides loan to developing countries for capital programs. The IBRD is popularly known as the World Bank. It was established in Dec. 1945 at the United Nations momentary & financial conference in Brenton woods. It started working in June 1996 members countries repay the share amount to world bank:

  1. A pair of assigned share area unit repaid in the gold dollar.
  2. Each member country is liberal to repay eighteen of its capital share in its own currency.
  3. The remaining 80% share is deposited by members countries only on demand by world bank

World Bank affiliate: IDS, IFC

  1. To provide long-run capital to member countries for economic reconstruction & development.
  2. To induce long-run capital investment for assuring BOP equilibrium and balanced development of international trade.
  3. To produce guarantee for loans granted to tiny and huge units and different comes.
  4. To ensure the implementation of development projects.
  5. To promote capital investment in members countries.


  1. World Bank provides various technical service to the member countries.
  2. Bank can grant loans to member countries up to 20% of its share in the paid-up capital.
  3. Quantities of loan interest rate and terms and conditions are determined by the bank itself.
  4. Bank grants loan for a particular project.
  5. The debtor nation has to pay either in reserve currencies or in the currency in which the loan was sanctioned.
  6. Bank also provides loan to private investors belonging to member countries.

Also Read: CRPC

World Bank & India:

The world bank supports India with an integrated package of financing, advisory service, and knowledge. A key feature of the strategy is the significant shift in support towards law income and special category states, where many of India’s poor and disadvantaged live. The world bank supports India in many sectors like education, vocational training programs, rural livelihood programs rural water supply, and sanitation, tuberculosis, health, rural roads, etc.
The World bank partnership strategy for India|Bharat|Asian country|Asian nation} can facilitate India lay the muse for achieving quicker substance and a lot of inclusive growth in government twelfth 5 years set up International Bank for Reconstruction and Development finding in India was $ 5.2 billion.

FDI (Foreign direct investment):

FDI means direct investment by foreign capitalist and business institution in other country FDI is an important way for a country to accelerate its economic growth an investment can be in the form of setting up of a new plan or through purchase of a company where the shareholder gives foreign quantity control over the business of a company of foreign company will originate its business in the Republic of India in 2 ways:

  1. By setting up a company under the Companies Act
  2. By sitting up a corporate unity like project office or branch office

FDI is prohibited in some sector such as retail trading gambling and betting lottery Business business of Chit Fund. The Government of India has increased FDI in follow unit from 26 % to 49% in Insurance sector in 2014 it also lost make in India on September 2014 under which FDI policy for 25th sector was liberalized. in April 2015 FDI inflow in India increased by 48% and it grows up to 9th position and India become top destination for FDI 2013 15th 2014 ninth 2015 top destination there are two rules for FDI to enter in India.

  1. Automatic:- the most sector FDI is permitted through automatic route FDI in such sector does not require any prior approval and only requires notifications of RBI on automatic route FDI is allowed up to 100% in sectors & investment must be notified to the RBI regional office within 30 days.
  2. Government:- In government route, there are limited activities and they require prior government approval proposal of FDI are considered by FIPB( foreign investment promotion board). Now functions under the dept. Of economic affair and decision are conveyed in most cases within 6-8 weeks FIPB recommendation must be cleared by the ministry of finance for FDI proposal or equivalent to Rs 50 billion and by the cabinet committee of economic affairs for FDI proposal.

The department of commercial policy and promotion Ministry of Commerce and business Government of the Republic of India create a policy on FDI through press note press realize that area unit notified by the RBI.

  1. FEMA:- foreign exchange management act.
  2. Infrastructure – 100% FDI automatic route
  3. Automatic – increased by 89% between 2k14-15
  4. 100% FDI permitted of automotive route pharmaceutical.
  5. Service – 26% to 49% in 2k14
  6. Railway – 100%


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