Data story: Lines of Credit supported by India
India’s relationship with Mongolia has been in the news recently. After the Dalai Lama visited the Buddhist country, China suspended ongoing talks to grant a $4.2 billion loan and made Mongolia’s Foreign Minister apologise for permitting the visit. When Mongolia’s ambassador urged India to raise its voice against the Chinese overreaction, India’s response was as follows:
We are closely working with the Mongolian government to implement the credit line in a manner that is deemed beneficial to the friendly people of Mongolia by its leadership. We are aware of the difficult budgetary situation that Mongolia is facing due to various factors including high cost of servicing of debt raised by them in the past.
The credit line being referred to was the US $1 billion committed to Mongolia during PM Modi’s visit in May 2015. Meant to finance the ‘development of railways and related infrastructure projects’, this was the second-largest single line of credit by India since the programme started in 2003-04. This data point got me interested in this creature called Line of Credit. This post gives a basic overview of India’s Lines of Credit.
What is a Line of Credit?
A LOC is a ‘soft loan’ (not a grant) provided at concessional interest rates to developing countries and has to be repaid by the borrowing government. Besides serving the foreign policy aim of increasing India’s presence in critical geographies, LOCs are meant to promote exports of Indian goods and services — they come with the conditionality that a minimum of 75% of the contract value must be sourced from India.
One important factor to consider while looking at LOC figures is that the utilisation rates are typically low (the mean utilisation rate currently stands at 42%). There are primarily two reasons: one, demand side issues such as inadequacies of recipient nation’s importers, insecure conditions, or lack of statutory clearances by the recipient government. Two, because of supply-side issues such as incompetence of Indian exporters, customs restrictions, or lack of clearances from the Indian government.
Because a LOC is a soft loan (not a grant) and suffers from slow utilisation, regardless of the size of the amount approved as part of a LOC, it merely counts as an attempt to change the recipient country’s incentives at the margin. This means, if a country is extremely critical to India’s national interest, it would require the government to do a lot more than announce billions of dollars worth of credit lines. Especially because China can match any LOC figure that the Indian government attempts — a direct outcome of continuous economic growth.