How India Budgets to Become a Leading Power

The Ministry of External Affairs (MEA) remains among India’s least funded central ministries. Despite receiving its second-highest ever budgetary allocation this year (Rs. 18,050 crore, approximately US$ 2.2 billion), the last four years reflect an overall budgetary stagnation, with its total share wavering around 0.4 % of the total budget.

The MEA’s budgetary limitations reflect the risk of a growing gap between India’s declared foreign policy ambition to serve as a Vishwa Guru and its limited financial and institutional capacity

The MEA’s budgetary limitations reflect the risk of a growing gap between India’s declared foreign policy ambition to serve as a Vishwa Guru [the world’s guru] and its limited financial and institutional capacity to achieve such a role in practice. To become a leading power and pursue its strategies for an increasingly uncertain, competitive and complex international arena, the MEA requires a significant investment in its capacity to pursue Indian interests.

Commenting on the MEA’s budgetary allocation, in December 2022 the Parliament’s Standing Committee on External Affairs had noted that “we do not find such an allocation in consonance with the country’s rising aspirations and growing global stature.” It recommended the MEA budget to be doubled to 1% of the budget, or around Rs. 35,000 crore ($4.4 billion). Yet the 2023-24 budget estimates for the MEA include a feeble 4% increase. In line with the trend of recent years the budgetary actuals are likely to be revised downwards.

In its budgetary demands over the last two decades, the MEA has repeatedly articulated its capacity limitations but with very limited success. Any future budgetary effort will thus require top political sanction in order to overcome different bottlenecks, including institutional resistance from the Ministry of Finance and the popular perception that diplomacy is a lavish and dispensable affair. Unlike most other ministries, the MEA also has a positive track record of budgetary utilization, always above 96% of the revised budget estimates, including during the pandemic peak years of 2020 and 2021.

The MEA’s budget is critical for India to achieve three core foreign policy interests: 1) Economic and technical assistance to pursue interests in developing countries; 2) Training of expert decision-making cadres and adequate staffing of a growing network of diplomatic missions; and 3) Financial contributions to increase leverage at regional institutions and multilateral organizations, especially the United Nations.

1. Economic and technical assistance to pursue interests in developing countries

Much attention is usually given to the MEA’s aid budget to developing countries, which comes mostly in the form of grants and are focused on India’s “South-South” principles of development cooperation, distinct from the OECD’s Development Assistance Committee (DAC) approach. Totalling approximately Rs. 6,000 Crore ($720 million), one-third of the MEA’s budgetary allocation is dedicated to grants, training, technical and other financial support for developing countries. Around half of this goes to India’s land and maritime neighbours in South Asia, where support for infrastructure projects in the energy and transportation sectors are aimed at deepening regional connectivity.

This financial assistance is not just about altruism: every Indian rupee of the MEA budget that goes to the region is part of strategic decision-making to return maximum dividends, as the current External Affairs Minister S. Jaishankar explained in 2018:

“Every one of our neighbours today is pressuring us to invest in power, power transmission, supply diesel, build roads, getting railways in, [so] there is a connectivity demand [for India] in the neighbourhood … They expect us to do it. It is in our interest to do it. … We should not look for reciprocity, I think neighbours need to be handled generously in order to create a larger region which is in our interest. When I invest in a neighbour I am also investing in myself.”

As in preceding years, Bhutan continues to receive the lion share of this regional budget, with Rs. 2,400 crore ($300 m) in this year’s budget. This is indicative of India’s efforts to develop the hydropower sector there in order to develop a power market together with Nepal and Bangladesh and lower electricity prices for consumers in India and the sub-region. The massive budgetary support for Bhutan – approximately ten times of total Indian aid for all of Africa (Rs. 250 crore) – shows how India has embraced the idea of regional economic interdependence as a strategic objective.

The massive budgetary support for Bhutan – approximately ten times of total Indian aid for all of Africa (Rs. 250 cr) – shows how India has embraced the idea of regional economic interdependence as a strategic objective.

The MEA’s aid budget also includes significant amounts for Afghanistan (Rs. 200 crore, or $25 m), where Indian diplomacy has been able to continue several of its developmental and humanitarian projects despite not recognizing the new Taliban-led regime. Yet there is limited utility to read too much into country-wise trends: a decrease in this year’s allocation should not be interpreted as a commensurate decrease in political importance of that country for India compared to last year’s budget. In fact, a reduction can actually signal the successful completion of long-delayed and poorly implemented legacy projects dating back to the 1990s and 2000s.

This is the case with Myanmar, with a decreased budget allocation of Rs. 400 crore ($50 million), after a budgetary effort in recent years that completed most of the Kaladan multi-modal transit corridor and accelerated work on the India-Myanmar-Thailand highway. Both these infrastructure projects are part of India’s Act East policy and one of the reasons why India has remained engaged with the military regime after the 2021 coup.

Similarly, Indian assistance to Nepal has increased from Rs. 425 crore to 550 crore ($60 million) in this budget, after peaking at Rs. 750 crore in 2021-22. This reflects a successful trend of India completing much-delayed legacy projects in Nepal, including the Postal Highway in the Terai border region, as well as inaugurating new infrastructure in record time, before schedule, such as South Asia’s first cross-border petroleum products pipeline. This year’s increase signals India’s effort to implement new projects, including in the hydropower sector after the withdrawal of Chinese investments, new power transmission lines, a new railway line to connect with Kathmandu, and new border management infrastructure that mirrors the Integrated Check Posts (ICPs) on the Indian side.

Another interesting trend that is often missed in these MEA country-wise aid budget figures is the gradual shift from grants to lines of credit, whose financial effort mostly fall under the Ministry of Finance. The absorption of concessional interest rates by the Exim Bank is not always reflected in the MEA’s country-specific aid budget. Bangladesh, for example, has only been allotted Rs. 200 crore in this year’s budget but is one of the largest recipients of India’s lines of credit, including the first one in the defence sector.

There is also a broader trend of the MEA’s aid budget shifting away from large, grant-financed infrastructure projects in neighbouring countries, and towards smaller, more effective High Impact Community Development Projects (HICDP).

There is also a broader trend of the MEA’s aid budget shifting away from large, grant-financed infrastructure projects in neighbouring countries, and towards smaller, more effective High Impact Community Development Projects (HICDP), such as in the education sector in Nepal or more recently also with great success in the Maldives.

Finally, the MEA budget also includes several line items to respond first to its neighbours in cases of humanitarian disasters or other emergencies. For Sri Lanka, in particular, parallel to India’s total financial effort in 2022 estimated at around $4 billion, the MEA doubled its aid budget this year.

These resources are also important for India to expand its influence in these neighbouring countries, improve public perceptions and build leverage in various domains, including political and security cooperation. This may be one of the reasons why the MEA budget includes a massive line item of Rs. 4,162 crore ($500 million) of “special diplomatic expenditure” which is opaquely referred to as “expenditure on discretionary expenditure”.

2. Training of expert decision-making cadres and adequate staffing of a growing network of diplomatic missions

The MEA’s budget is also important to allocate adequate resources to endow the IFS with the adequate human resources to protect and pursue India’s regional and global interests. The picture on training reflects a positive trend. In its 2017 review of the IFS, the parliamentary Standing Committee on External Affairs had expressed its “grave concern” at the budgetary capacity gap, noting that the MEA’s “training budget of the Ministry is already meagre and underutilization of this existing budget further undermines capacity addition at the Ministry.”

This year’s allocation of Rs. 21 crore ($2.5 million) to training is in line with a significant effort to maximize resources for training, including at the IFS probationer and mid-career levels and joint training with other civil and military services that will help bridge persistent organizational decision-making silos and accelerate coordinated decision-making. The training budget has now been wavering around Rs. 21-25 crore since having been almost doubled in 2019-20 for the first time since the 2000s.

Greater budgetary allocation is also required for an urgent expansion of the IFS, which is among the world’s most understaffed diplomatic services.

Besides the positive trend in training, greater budgetary allocation is also required for an urgent expansion of the IFS, which is among the world’s most understaffed diplomatic services, with around 1,000 IFS “A” officers representing India’s interest at the MEA headquarters in New Delhi, across Indian’s regional states, and at approximately 200 Indian missions overseas, including various multilateral agencies. India has approximately as many diplomats as Portugal or New Zealand, and far less than China or the United States. The intake of recent IFS batches increased since the 2000s but has stagnated at around 30-40 officers in recent years.

There have been positive developments to correct this gap, including the induction of new technologies that have led to a record expansion of passport services and e-visa system, lateral entry at the mid-career level, the hiring of expert consultants and also the deputation of military officers and other officers on special duty (OSDs) to various MEA divisions. Inter-ministerial coordination on foreign and security policies has also improved, including through a rapidly expanding, more diverse and empowered National Security Council Secretariat.

Yet there is still a manifest lack of expert resources, for example at the MEA’s Development Partnership Administration (DPA) which requires more budgetary capacity to attract technical experts from specialized government ministries and services to support project conceptualization and implementation abroad. As a Parliament standing committee report of 2017 notes, there is a need to “bring in more officers [to the MEA] with experience in the field of project management to suitably execute and man these [overseas] projects on a long-term basis.” Given that the MEA’s budgetary allocation for its Secretariat has doubled this year (Rs. 1,518 crore, or $180 million), this provides an opportunity to improve institutional capacity.

The MEA’s capacity gap is also apparent at the Joint Secretary-level for territorial divisions. These joint secretaries oversee the entire gamut of bilateral relations that have expanded and intensified in recent years, especially after Prime Minister Modi’s record number of overseas visits and formidable intensity of political engagements. The MEA’s Joint Secretary for Central Europe, for example, is the single nodal point of contact for the governments of 30 countries and to liaise with their diplomatic missions in New Delhi.

The gap also risks increasing as India opens new diplomatic missions and seeks to staff them appropriately. Since 2018, the Cabinet has sanctioned the opening of 23 new diplomatic missions, 18 of which in African countries. But 48 UN member states still don’t have an Indian representation, which is important for India’s ambitions to mobilize support for its quest to reform the United Nations.

The diplomatic network in the neighbourhood has also been expanding as part of India’s efforts to engage sub-national stakeholders beyond capital cities: over the last 20 years, India has opened or reopened thirteen new consulates in seven of its neighbouring countries, including in Hambantota and Jaffna (Sri Lanka), Sylhet and Khulna (Bangladesh), Sittwe (Myanmar) and Addu (Maldives, not yet operationalized).

This year’s allocation in establishment expenditure on embassies and missions overseas (Rs. 3,529 crore, $427 million) accounts for almost 20% of the total MEA budget but may require further expansion as India operationalizes and expands its diplomatic network abroad.

3. Financial contributions to increase leverage at regional institutions and multilateral organizations, especially the United Nations

In line with its top-most diplomatic priority this year, the budget has reportedly allocated Rs. 990 Crore ($120 million) for the MEA to organize the G20 Presidency, though it is yet unclear under what budget item. This reflects India’s significant financial effort to ensure that its diplomatic outreach succeeds in reshaping the G20 and its ambition to “give voice” to the developing countries.  This year’s budget also makes continued contributions to various other multilateral and regional organizations, including a total allocation of Rs. 29 crore ($3.5 million) to the SAARC and BIMSTEC secretariats.

Of particular concern is the 50% reduction in the MEA’s budget allocated to the United Nations (UN), at Rs. 200 crore ($25 million). This means that India’s financial contribution to the entire UN system is even less than what it has been allocating to a soft power project like the Nalanda International University, in Bihar (Rs. 250 crore this year). This limited budget is poised to hinder India’s ambition and efforts to increase its influence at the UN, where its funding is outmatched by contributions from China and several other middle powers to the regular budget, as well as that of the various UN specialized agencies and peacekeeping operations.

Financing a rising global profile

In her budget address this year, India’s Finance Minister referred to India’s “rising global profile” as a result of a variety of domestic successes, including an emerging digital public infrastructure, the massive Covid vaccination drive and investment in frontier areas such as achieving the climate related goals, mission LiFE, and the National Hydrogen Mission.

None of these can be pursued without regional and global partnerships in an increasingly interdependent world. To sustain and further improve its global profile as a leading power, India will have to expand its budget to capacitate the MEA.

While the views expressed here are solely ours, we are grateful to several expert reviewers for their valuable feedback and to Nitika Nayar for her excellent research inputs.