UK aid to India taking steps to improve poverty focus, but some investments pose major reputational risks

18 Apr 2024

• Aid watchdog finds FCDO has started work to ensure aid to India goes where it is most needed, and on mobilising climate finance following last year’s review.
• But ICAI raises questions over some investments made by the UK’s development finance institution BII, including in social media sites and a cosmetics company.
• Report comes after BII pledged to the International Development Committee that it would improve its investments’ links to poverty reduction.

The UK has taken steps to improve aid to India’s focus on poverty reduction but there are serious concerns over the suitability of some investments made by its development finance institution, British International Investment (BII), the Independent Commission for Aid Impact (ICAI) reports today (Thursday 21 April).

The watchdog found recent taxpayer-aided funding from BII going to an Indian fund that invested in a cosmetics company and social media platforms, including one where ICAI discovered content featuring glorification of Hamas’s attacks on Israel, abuse of women and offers of sexual services.

The investment in the fund was made two months after BII’s chief  , in April 2023, had reassured Parliament’s International Development Committee that, following concerns about an investment in a cosmetic surgery clinic, future investments in India would only be made if there was a “compelling argument” on inclusion and sustainability.

While ICAI said BII had taken steps to improve its poverty focus, producing a new India country strategy in July 2023 with convincing links to poverty reduction, this did not yet seem to be shaping investments sufficiently, and the watchdog raised major concerns about the organisation’s oversight and due diligence.

ICAI Chief Commissioner Dr Tamsyn Barton, who led the review, said:

“Given how difficult it is to moderate large social media platforms to remove harmful content, we have to question why BII chose to invest in the India Quotient Fund and did not consider the reputational risk. How is this an appropriate investment for UK aid, which must have poverty reduction as its goal? It is just not clear why use of capital from UK taxpayers is justified for investments in social media sites.

“While we have seen some positive progress in response to other recommendations on UK aid to India, including on tackling climate change and engaging with civil society groups, we are clear that to be effective the portfolio must be coherent and take into account the needs of poor and marginalised people so that they get the benefit of India’s economic growth.”

In recent years, the UK has transitioned away from funding traditional poverty-focused aid projects in India, but still provides substantial aid in the form of development investment, research partnerships and other activities that support the relationship between the two countries.

This includes £1 billion between 2016 and 2021 invested by BII, a public limited company owned by the Foreign, Commonwealth and Development Office (FCDO). During the period 2017 to 2021 the UK government provided £2.8 billion of aid capital to BII which it uses along with its existing assets to invest in businesses and programmes in low- and lower-middle-income countries, looking to generate enough returns to ensure operational sustainability. 28% of its portfolio was invested in India at the time of ICAI’s review.

In its 2023 review of UK aid to India, ICAI concluded that BII did not convincingly link its investments to poverty reduction. It recommended that BII seek to improve ‘additionality’ – that is, ensuring that development investments funded by the aid budget offer benefits beyond that available from private finance.

The latest report, following up on the 2013 recommendations, found that in 2023 BII invested $8 million in India Quotient Fund IV, a fund that on BII’s website states it invests in “Agri-tech, Fin-tech, SaaS [software as a service] for SMBs [small and medium-sized businesses]”.

However, ICAI found that several businesses that BII invested in through India Quotient Fund IV are not mentioned. These include a cosmetics company, three social media sites and a debt collection business.

On one of the social media sites, ShareChat, ICAI found content featuring abuse of women, offers of sexual services, and glorification of Hamas’s attacks on Israel. While BII had provided content moderation training and processes for ShareChat, it is extremely difficult to identify, remove and prevent all harmful material. Investment in social media sites where harmful content can easily be posted opens BII up to reputational risk, especially given its mandate and relationship to the UK government, ICAI said.

It added that other investments from the same fund that do not receive direct investment from BII, but that create reputational risk “by association”, include dating sites.

ICAI’s 2023 review also recommended the development of theories of change to guide aid to India, ensuring it goes where it is most needed and supports inclusive economic growth. FCDO’s India team had made some progress on this work, but the watchdog noted it needed further development.

There was also some encouraging progress on climate finance, with a £1 billion UK guarantee to the World Bank to support clean energy investment and India’s climate transition, and investments from BII in electric vehicles.

The watchdog also found BII had taken steps to start implementing its recommendation on mobilising private finance to tackle climate change, with the creation of a new ‘investor desk’.

ICAI also welcomed FCDO’s commitment to supporting Indian civil society groups in areas such as court reform, LGBT+ rights and digital media, with some well-designed, impactful projects.