In this article we will discuss about the role of foreign aid in the development of economi­cally backward countries like India.

A portion of the flow of foreign savings (assistance) into LDCs is in the form of foreign aid. Foreign aid may take various forms: cash grants or transfers of goods or technology, with nothing given in return by the aid-receiving (developing) country.

A significant amount of industrial and commercial development in mod­ern India during recent years has been financed, directly or indirectly, by foreign aid schemes. Aid schemes may be divided into two groups—those which are primarily financial and those which are non-financial.

Financial Aid Schemes:

Financial aid schemes, as illustrated in Fig. 15, divide into two main groups. One group consists of grants which do not have to be repaid; the other consists of loans. Loans, of course, have to be repaid.

Different forms of foreign aid

If the loan has to be repaid in the currency of the country giving the loan (for example, in US dollars in the case of loans given by America), then it is said to be a hard loan. If it can be repaid in the currency of the country receiving the loan, then it is said to be a soft loan. We should appreciate that the repayment of a hard loan is a very much more difficult problem for the receiving country than the repayment of a soft loan.

Financial assistance, whether by way of a grant or loan, may be ‘free’ or ‘tied’. Completely free aid can be used for whatever purpose a country likes and can be spent when and where the receiving country wishes. With tied aid, the donor country places restrictions on what the money can be placed.

This sounds un­fair, even harsh, particu­larly as the tying of aid can increase costs of develop­ment schemes by as much as 10 or 15%. How­ever, it must be remem­bered that donor countries have their prob­lems as well.

The parlia­ments in the donor countries have a duty to their taxpayers to ensure that public money is not wasted. Also, if aid is given which is then spent in countries with which the donor country already has currency exchange difficulties, then the giving of aid will only make its problems much worse.

Non-Financial Aid Schemes:


There are four main forms of non-financial aid. The first form is in the provision of capital and consumer goods. Capital goods should, if properly employed, generate sufficient wealth to cover the cost of the loan, though this may take time.

Consumer goods are sometimes provided to alleviate some particular which has arisen such as food, clothing and temporary housing after flooding or in times of draught of war. Sometimes, however, consumer goods are supplied for less noble reasons, such as the dumping of surpluses by the donor country.

The receiving country may be glad of these, but it may already have surpluses of the same type of food itself and the dumping can ruin the market for local producers. Once they have been forced out of business, there is no longer the infrastructure of local produc­ers to supply the market once the dumping has finished.

The second form of non-financial and is in the provision of technical assistance. This takes many forms, including the loan of specialists and of highly technical equipment. It also includes the provision of special trading facilities and duty-preference schemes.


The fourth form — the provision of military aid—is not of direct rele­vance to business management. It includes training, the loan of officers and the provision of all types of military equipment.

Foreign aid that flows from one country to another is called bilateral aid. Most of such aid is project oriented, given to finance a specific project (such as irrigation project, or an educational facility such as the setting up of an engineering college or polytechnic).

A major portion of bilateral aid constitutes food aid. Such aid is pro­vided to LDCs in times of crop failure due to drought or flood or a natural disaster like earthquake. India obtained such aid from the USA under P.L. 480 and P.L. 665.

However, it is often alleged that such aid leads to agricultural dumping in LDCs and can cause considerable damage to the economies of such countries in the long rim. When food flows into an LDC like India, food prices tend to fall. This, in its turn, may and often do lead to a fall in the income of the farmers and thus discourage domestic produc­tion of food grains.

Since aid is intended to help those who need it without interfering with domestic production, it is felt that ideal food aid should go to the very poor, who do not have sufficient income to purchase food from the local market.

Since food aid does not flow directly from the donors to the needy another problem crops up. Aid is usually received by the government of an LDC and various inefficient and corrupt practices are observed. Sometimes recipient governments sell products that are intended for free distribution to the poor. It is also observed that the recipient has good intensions but it simply does not have the resources to distribute the aid.

So, the food received from foreign countries largely goes waste. This problem can be solved to some extent by relying on voluntary agencies to distribute aid. A preferable alternative seems to be relying on multilateral agencies.

Multilateral aid is provided by international organisations that receive support and cooperation from many nations. The largest and most impor­tant multilateral aid institution is the World Bank. The World Bank makes loans to LDCs at concessional rates of interest and constantly monitors and supervises projects it has financed in LDCs.

Since it is an international organisation, the World Bank is not controlled by any single country. This very fact allows it to give financial assistance and advice to LDCs in a non-political way that usually is not possible with bilateral aid.


It may be noted at the end that there are certain things which foreign aid cannot do. Experience has shown that it cannot right all social wrongs or solve every economic problem in a developing country. It cannot bring about instant progress.

Problems Connected with AID Schemes:

Identification of Projects:

The identification of the projects towards which aid should be directed involves a searching enquiry into the objectives of a project and its chances of success. It requires the establishment priorities. Unfortunately, the view of the donor country may not be the same as that of the receiving country. A very great deal of money has been wasted in the past because proposals have not been sufficiently investigated before aid was granted, and because priorities have not been correctly established.

Undue Influence on Recipient Country’s Policies:


Aid donors are often accused of trying to exercise unnecessary influence over recipient governments and the policies they undertake. A number of developing countries have made a special point over recent years of making it quite clear to the world at large that they remain—and intend to remain— ‘non-aligned’ in their attitude to world political issues.

Debt servicing:

A further problem concerns the problem of paying the interest on the capital stuns. This has risen to critical proportions over recent years, particularly as a result of the severity of the world recession.

Many governments have found that they have been simply unable to meet their commitments. The servicing of hard loans presents particularly difficult problems.