Impact of Sri Lankan Crisis on Indian Economy, Role of India in Sri Lankan Crisis

Background:

When Sri Lanka emerged from a 26-year long civil war in 2009, post-war gross domestic product (GDP) growth was significantly higher at 8-9% per annum until 2012.

However, its average GDP growth rate nearly halved after 2013 as global commodity prices fell, exports slowed, and imports increased.

Sri Lanka's budget deficit during the war was high and the 2008 global financial crisis drained its foreign exchange reserves, leading the country to borrow US$2.6 billion from the International Monetary Fund (IMF) in 2009.

It again approached the IMF in 2016 for a loan of US$ 1.5 billion, although the IMF's terms worsened Sri Lanka's economic situation.

Economic factors

The April 2019 Easter bombings in Colombo's churches resulted in 253 casualties, resulting in a sharp drop in tourist numbers, which also led to a decline in foreign exchange reserves.

In the year 2019, the new government of Gotabaya Rajapakse had promised lower tax rates and comprehensive SoP for farmers during its campaign.

The speedy implementation of these baseless promises compounded the problem.

The situation worsened by the COVID-19 pandemic in the year 2020

Exports of tea, rubber, spices and clothing suffered losses.

Tourism arrivals and revenue declined further.

The increase in government expenditure led to the fiscal deficit exceeding 10% in the year 2020-21 and the debt-to-GDP ratio increasing from 94% in 2019 to 119% in 2021.

The crisis in Sri Lanka is triggered by depletion of foreign exchange reserves, which have declined by 70% in the past two years to just US$ 2 billion by the end of February 2022.

Meanwhile, the country has an external debt obligation of about US $ 7 billion for the year 2022.

Steps towards organic farming

In the year 2021 all fertilizer imports were completely banned and it was declared that Sri Lanka would become 100% organic farming country overnight.

The use of organic fertilizers badly affected the food production.

As a result, the President of Sri Lanka declared an economic emergency to prevent rising food prices, depreciating currency and rapidly depleting foreign exchange reserves.

China's debt trap

Sri Lanka has borrowed considerable money from Beijing for infrastructure projects since 2005, many of which have become white elephants (no longer needed/useful).

Sri Lanka leased its Hambantota port to a Chinese company in 2017 after it was unable to repay a US$1.4 billion loan from Beijing.

China's total debt to Sri Lanka is US $ 8 billion, which is about one-sixth of its total foreign debt.

Current Political Emptiness

Why is India worried about the Sri Lanka crisis?

Challenges

financial

The share of Sri Lanka in India's total exports has come down from 2.16% in FY15 to just 1.3 per cent in FY22.

Automotive firms such as Tata Motors and TVS Motors have stopped exporting vehicle kits to Sri Lanka and halted production at their Sri Lankan assembling units due to volatile foreign exchange reserves and lack of fuel.

Refugees

Whenever a political or social crisis has arisen in Sri Lanka, India has seen a large influx of refugees from the Tamil ethnic community into India from Sinhalese lands through the Palk Strait and the Gulf of Mannar.

However, it may be difficult for India to handle such inflows and a strong policy is needed to deal with such a crisis.

The state of Tamil Nadu has already started to feel the impact of the crisis as 16 persons have been reported from Sri Lanka through illegal means.

Opportunities for India

Tea Market

India is keen on bridging the supply gap in the global tea market amid a sudden halt in supply of tea by Sri Lanka.

India can strengthen its role in new markets like Iran as well as Turkey, Iraq.

Big tea importers from Sri Lanka such as Iran, Turkey, Iraq and Russia are reportedly turning to tea gardens in India (especially tea gardens in Assam and Kolkata).

As a result, the average price of leaves produced in the traditional way in the recent auction of tea gardens held in Kolkata showed an increase of 41% over the previous year.

Apparel Market

India is now receiving several apparel orders from the United Kingdom, European Union and Latin American countries.

Companies in Tiruppur, the hub of the textile industry in Tamil Nadu, have received several orders.

Help by India in Sri Lanka crisis:

Sri Lanka has been a strategically important partner for India. India may use this opportunity to balance its diplomatic ties with Sri Lanka, seen at a distance due to Sri Lanka's closeness with China.

The supply of fertilizers by India at Sri Lanka's request to India amid disagreements between Sri Lanka and China on the issue of fertilizers is being seen as a positive development in bilateral relations.

Expanding diplomatic ties with Sri Lanka will ease India's efforts to keep the Sri Lankan archipelago away from China's 'string of pearl' policy in the Indo-Pacific region.

Support from India

India, which has followed a "Neighborhood First Policy" to strengthen ties with its neighbours, can help Sri Lanka overcome the crisis by providing it with additional assistance in getting it out of the current crisis.

Relief from International Monetary Fund

Sri Lanka has approached the IMF for a bailout. The IMF may support Sri Lanka's efforts to overcome the current economic crisis.

Possibilities of a circular economy

In the context of economic instability in Sri Lanka, import dependence can be reduced by a cyclical economy that will provide a sustainable alternative to aid recovery.