The Geopolitics of India’s Foreign Assistance for 2026-27

India’s allocations of “Aid to Countries” in its annual budget are a good indication of its foreign policy priorities as well as which countries it is interested in cultivating, at least in the coming year.

The trajectory of India’s foreign aid in the 2026–27 budget should surprise no one. New Delhi is doing what regional powers always do — stretching limited funds where they buy the most influence.

The latest numbers in the 2026–27 budget estimates show that the total allocation for “Aid to Countries” is about $637 million.

To no one’s surprise, Bhutan remains the single largest recipient of Indian aid. Assistance for Bhutan has risen from $235 million in 2025-26 revised estimates to about $249.7 million in the latest budget. Aid to Nepal and Sri Lanka has risen as well. Nepal’s allocation has risen from $76.3 million to $87.3 million, while aid to Sri Lanka has increased from about $32.7 million to $43.6 million. This, too, should not come as a surprise, as India wants to at least try to compete with China in both these countries. With the increased funding, New Delhi is attempting to remain a visible development partner in Nepal and Sri Lanka, where domestic politics, elite bargaining, and external competition often intersect.

The allocation for the Maldives has dropped slightly — from about $65 million to about $60 million.

The reduction in assistance for Bangladesh is more striking, falling from $131 million to about $65 million, but this was expected. India’s ties with Bangladesh have deteriorated rapidly in the wake of the 2024 political transition in Dhaka, when Bangladeshi Prime Minister Sheikh Hasina was ousted from power. She has been living in India since, and the Narendra Modi government has ignored a note verbale from Bangladesh’s interim government requesting the extradition of the former prime minister. Bangladesh has found Hasina guilty of crimes against humanity and has sentenced her to death.

Aid to Myanmar has been reduced from $38 million to $33 million, likely due to the internal conflict in the country, which makes operating project cycles difficult.

A notable omission in the 2026-27 cycle is allocation for Chabahar Port in Iran. India has not allocated funds for the port, which has been a flagship Indian project that promised Central Asian connectivity. Chabahar has been a symbol of India’s strategic reach, but budgeted funding dropped from about $43.6 million in 2025-26 to zero in the latest budget. The cutting of funds to Chabahar was to be expected as snapping ties with Iran was essential for clinching a trade deal with the United States. It was reported weeks ago that India was winding down its operations there.

India has also allocated $2.8 million in aid to Mongolia, $2 million to Seychelles, and $60 million to Mauritius. Aid for Mongolia is mainly focused on scholarships, training, and small projects. This sustains goodwill and gives New Delhi a diplomatic foothold in a country between China and Russia. Working with Seychelles, located at key Indian Ocean sea lanes, is important for maritime surveillance and naval access. On the other hand, India has cultural ties to Mauritius, a country with a large Indian-origin population, and the island is located strategically, leading India to deploy larger grants there.

The allocation for aid for other countries in the 2026-27 budget indicates that Indian assistance is grounded on strategic priorities rather than the development needs of the recipient nation. This approach is not new.

India’s foreign aid program goes back to the 1940s. Ever since, India’s assistance to other nations has gone up and down periodically. The Ministry of External Affairs set up a bilateral foreign assistance program, the Indian Technical and Economic Cooperation (ITEC) program, in 1964. India ramped up its foreign aid significantly through the 2000s and into the mid-2010s.

Allocations over the past decade have been more volatile. Foreign aid spending fell 26.5 percent in 2015-16 and again in 2016-17 amid demonetization and GST shocks. It dropped 26 percent in 2021-22 due to the COVID pandemic. Again, this is to be expected given the economic crises the world over, when most governments have become frugal.

This brings us to a core puzzle: why does India, with its own enormous development needs, spend scarce fiscal space on foreign assistance? Realist thinkers have long argued that foreign aid forms part of foreign policy, even when donors often posit their actions in the language of ethics and morals. According to realists, India gives aid because aid buys access, and the ability to influence agendas in the recipient’s policy ecosystem. Aid can create dependence on India that can outlast election cycles. Aid also supports India’s commercial and connectivity interests by building infrastructure and institutions that make trade and investment easier.

India is also compelled to increase aid to its neighbors because of the China factor. Almost all of India’s neighbors are in Beijing’s Belt and Road Initiative. Colombo, Kathmandu, and Male have leveraged Chinese interest to raise their bargaining power vis-à-vis Beijing and Delhi, and hedge against overdependence on India.

What, then, do India’s 2026–27 neighbor allocations mean for the region? For Bhutan, the continued dominance of India’s support provides stability but reinforces deep interdependence. For Nepal, the increase offers opportunity but also risk. Increased aid can be channeled into priorities that match national plans, but a lot would depend on domestic politics. Elections are only weeks away.

Colombo, just recovering from sovereign debt default and Cyclone Ditwah, needs all the support it can get, but Indian aid can also intensify debates about sovereignty and alignment. For the Maldives and Myanmar, the cuts do not signal abandonment. They probably reflect project cycles, absorptive capacity, or a strategic choice to shift emphasis to other instruments.

But in the case of Bangladesh, aid reductions carry symbolic weight – given India’s closeness to the Hasina government – and probably encourages further hedging behavior.

The abandonment of Chabahar, taken with India’s decision not to use Russian oil, is probably the most significant development. India seems to be willing to pause or deprioritize a connectivity project that it has earlier marketed as a strategically important one when external pressure raises expected costs. India’s neighbors must realize that while India is willing to pay for influence in its immediate neighborhood, it has no appetite to be exposed to the escalation dynamics of the U.S.

Ultimately, if India wants this strategy to work, it must match allocation with execution. India’s historical challenge is not the size of its outlays. It is the speed and reliability of delivery. In the past, India has announced ambitious projects, but the execution has often been slow.  In a region that increasingly benchmarks everything against China’s tempo, India’s aid will only buy influence when it also buys confidence.