UPSC Mains 2014 GS Paper 2 Q18: model answer
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.
What the question wants
Discuss the merits of aid conditions that require buying equipment from donor countries, and whether India has strong grounds to refuse them.
How to structure it
Merits + case against in India's context: why donors tie, why recipients object, India's position.
- Tied aid
- Merits
- Demerits
- India's context
- Verdict
How to think it through
Tied aid means the loan must be spent on the donor's goods and contractors. The OECD estimates tying raises costs by 15–30%. India once took tied aid; today it is a donor itself and can bargain. Japanese STEP loans for metro and bullet trains are the live example.
Model answer
When India's Mumbai–Ahmedabad high-speed rail was financed by Japan, the loan carried an interest rate of about 0.1% over 50 years, but under Japan's Special Terms for Economic Partnership (STEP), a large share of goods and services must come from Japanese firms. Cheap money came with strings.
What tied aid is
Aid or concessional loans that require the recipient to buy equipment, consultancy or services from the donor country.
Merits
- Lower interest and long tenures, making large infrastructure possible.
- Technology transfer and proven equipment, as in Delhi Metro's early lines.
Demerits
- Higher costs: the OECD has estimated that tying raises project costs by about 15–30%.
- Less competition and no choice of cheaper suppliers.
- Weak local industry: domestic firms are shut out, against Make in India.
- Dependence on the donor for spares and maintenance.
India's context
- India is now the world's fourth-largest economy and an aid giver to its neighbours, so its bargaining power is high.
- Domestic capacity in rail coaches, metro rolling stock and defence is rising; tied terms can delay it.
- But for frontier technology such as high-speed rail, partial tying may be a fair price.
Verdict
There is a strong case to refuse fully tied aid where Indian industry can compete, and to negotiate local content clauses and technology transfer where it cannot. Untied multilateral finance and India's own capital markets should be the default.
Draw: A scale: low interest and technology on one side; higher costs and dependence on the other, with 'local content clause' as the balancing weight.
Keywords, cases and data to drop in
tied aid, STEP loans (JICA), OECD DAC untying recommendation 2001, cost premium 15–30%, local content, 2003 bilateral aid policy, Make in India, technology transfer.
Where most answers lose marks
- Writing only against tied aid. 'Discuss on merits' needs both sides.
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Question text as printed in the official UPSC Civil Services (Main) question paper. The model answer is original Battle IAS work; use it to learn structure, not to memorise.
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