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THE SRI LANKAN ECONOMIC CRISIS HAS AN IMPACT ON THE INDIAN
ECONOMY IN TERMS OF ITS CAUSES, EFFECTS, CURRENT ECONOMY SHOCKS
AND CONSEQUENCES- A THEORETICAL PERSPECTIVE
Dr. G. YOGANANDHAM, Professor& Head, Department of Economics, Thiruvalluvar University
(A State University) Serkkadu, Vellore District, Tamil Nadu, India- 632 115.
G. ELANCHEZHIAN
, Ph.D., Research Scholar, Department of Economics, Thiruvalluvar University
(A State University), Serkkadu, Katpadi taluk, Vellore District, Tamil Nadu, India - 632 115.
E. MOHAMMED IMRAN KAHN,
Ph.D., Research Scholar, Department of Economics, Thiruvalluvar University
(A State University), Serkkadu, Katpadi taluk, Vellore District, Tamil Nadu, India - 632 115
Abstract
Sri Lanka is currently experiencing its worst economic crisis since gaining independence
in 1948. Unprecedented rates of inflation, a nearly complete depletion of foreign exchange
reserves, and a shortage of medical supplies are some of the effects. By 2022, Sri Lanka must
pay back a $8.6 billion debt. According to the World Bank, Sri Lanka is one of the biggest
defaulters on loans worldwide. The second-highest loan defaulter globally is Lebanon. By 2021,
the poverty rate in Sri Lanka is predicted to reach 10.9 percent, or $3.20 per day. It exclusively
uses secondary sources that provide data and information relevant to the issue being investigated.
As a consequence, it is essential to look at the Sri Lankan economic crisis from a
theoretical viewpoint because it has a significant impact on the Indian economy.
A few
agricultural items can no longer be produced in Sri Lanka due to misguided development plans.
IMF bailouts have historically been the least popular option for any economy. The Easter Sunday
2019 bombings had a significant negative impact on Sri Lanka's tourism business.
In light of the COVID-19 pandemic and the conflict between Ukraine and Russia, it is
exceedingly difficult to revive this business. India might offer Sri Lanka financial assistance,
recommendations on public policy, and investments from Indian businesspeople.
This study
article focuses on the causes, impacts, shocks to the current economy, and repercussions in the
context of the information presented above. The effect of the crisis on the Indian economy
should theoretically be assessed.
Key words:
Economic Crisis, Foreign Exchange, Poverty Rate, Indian Economy, Development Plans,
IMF Bailouts, Tourism Business, COVID-19 Pandemic and Current Economy.
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THE SRI LANKAN ECONOMIC CRISIS HAS AN IMPACT ON THE INDIAN
ECONOMY IN TERMS OF ITS CAUSES, EFFECTS, CURRENT ECONOMY SHOCKS
AND CONSEQUENCES- A THEORETICAL PERSPECTIVE
Dr. G. YOGANANDHAM, Professor& Head, Department of Economics, Thiruvalluvar University
(A State University) Serkkadu, Vellore District, Tamil Nadu, India- 632 115.
G. ELANCHEZHIAN
, Ph.D., Research Scholar, Department of Economics, Thiruvalluvar University
(A State University), Serkkadu, Katpadi taluk, Vellore District, Tamil Nadu, India - 632 115.
E. MOHAMMED IMRAN KAHN,
Ph.D., Research Scholar, Department of Economics, Thiruvalluvar University
(A State University), Serkkadu, Katpadi taluk, Vellore District, Tamil Nadu, India - 632 115
Theme of the study
The term economic crisis refers to a situation where a country's economy has a sudden
decline in strength, which is typically caused by a financial crisis. The current economic situation
could manifest as stagflation, a recession, or an economic depression.
Early in 2021, Sri Lanka's
economic catastrophe got under way. The administration attributes its economic problems to the
COVID
outbreak and deadly bombings. Many observers attribute Sri Lanka's financial crisis to
President Rajapaksa's bad economic mismanagement. Here is all the information you require
regarding the problem.
Sri Lankan Prime Minister Ranil Wickremesinghe has ordered the military to take
whatever action is required to restore order. Zimbabwe currently has an inflation rate of more
than 50%. For necessary services like buses, railroads, and medical vehicles, the nation lacks fuel
supplies. Since gaining independence in 1948, Sri Lanka has experienced its worst economic
crisis. Unprecedented rates of inflation, a nearly complete depletion of foreign exchange
reserves, and a lack of medical supplies are the results. Sri Lanka owed US$8.6 billion in
repayments by 2022.
Statement of the Problem
A political and economic crisis in Sri Lanka, a 22 million-person island nation in South
Asia, is causing widespread protests and the resignation of elected officials. According to World
Bank estimates, Sri Lanka's poverty rate in 2021 was 10.9 percent at the $3.20 per day poverty
line. However, Sri Lanka's economic problems could make its poverty a big problem. With rising
debt and record-high inflation, Sri Lanka is currently going through its worst economic crisis
since the nation earned independence in 1948. One cannot understate the significance of
financial support and humanitarian relief from the international community, despite the fact that
there is still a lot of uncertainty surrounding the future of Sri Lanka's economic crisis.
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Sri Lanka can regain its stability if more nations unite behind it. The Sri Lankan
economic crisis has an impact on the Indian economy. This study article focuses on causes,
effects, shocks to the current economy, and consequences. It is imperative to ascertain the impact
of the crisis on the Indian economy from a theoretical perspective.
Background
In 2015, Sri Lanka was on the verge of an economic collapse. The concerns about the
economy and the new hazards were not effectively addressed by the government. Global
disapproval existed for a number of activities employed by Ravi Karunanayake's Ministry of
Finance. Sri Lanka's new government has scrapped the controversial 2019 Central Bank Bill.
The bill was intended to remove political influence from the Central Bank. The new party Sri
Lanka Podujana Peramuna rejected the law after coming to power in by-elections. After Sri
Lanka earlier this year, Lebanon is the second nation in the world to default on its national debts.
Deep economic crises that followed the accumulation of unmanageable debt by their successive
governments were common problems for both countries. Sri Lanka had to borrow 2.6 billion
dollars from the International Monetary Fund (IMF) in 2009.
The Methodology of the Article
This research is descriptive and has theoretical foundations. This research offers a
well-organized examination of theories and points of view. This kind of research involves
conceptualizing or expressing how a topic and its surroundings function, as well as investigating
or recreating the impacts of those requirements. It exclusively uses secondary sources that
contain data and information relevant to the study's problem. It is a descriptive and diagnostic
design from a theoretical standpoint. Secondary data and information are compiled from a range
of reports, including published and unpublished Materials. In addition, the libraries of the
University of Madras, Madras Institute of Development Studies, Connemara Public Library,
Vellore Central Library, and Thiruvalluvar University Library were used to conduct a thorough
review of the literature in the relevant fields.
Objective of the Research Article
This research article's main objective is to examine theoretical aspects of how the
economic crisis in Sri Lanka affects the Indian economy, paying particular attention to the
origins, impacts, shocks to the existing economy, and resulting implications. It is essential to
determine the crisis' effect on the Indian economy from a theoretical viewpoint.
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Consequences of the Economic Crisis in Sri Lanka
Imports of goods including food, fuel, and medicines are essential to Sri Lanka's
economy. The supply of these commodities is currently highly limited and rationed due to a lack
of foreign cash. To handle customers who wait in awkward queues for extended periods of time,
soldiers are stationed at gas stations. A 36-hour curfew, a national public emergency, and social
media restrictions have all been enforced by the government. The ruling Sri Lanka People's Front
Coalition lost 41 seats as a result of departures. With only 104 MPs total as of April 7, the party
had lost its legislative majority.
China and India Offer Support
Nearly $7 billion in debt payments are due from Sri Lanka, and a $1 billion bond
repayment is due in July 2022. India has offered help in a proactive manner. The Indian
government has already pledged $2.6 billion to Sri Lanka. China contributed relief in the form of
credit, loans, and shipments of grains totaling $1.5 billion.
Sri Lankan Economic Crisis's Root Causes
Many underlying factors that contributed to the crisis have not been addressed, including
inadequate financial sector regulation, excessive CEO compensation (salaries and bonuses),
stagnant real wages, rising inequality, and debt-financed consumerism. Critics claim that the
economic mismanagement of previous governments, which resulted in and maintained a twin
deficit, a budget shortfall as well as a current account deficit is what caused the crisis, the worst
in several decades. "Sri Lanka's economy has the traditional twin deficits.
Tax reductions and money creation
Budget deficits increased as a result of large tax cuts that had an impact on government
revenue and fiscal policy. Increased tax-free thresholds were one cut that led to a 33.5 percent
drop in registered taxpayers. Rating agencies cut the sovereign credit rating as a result of the
significant loss in tax revenue. The Central Bank of Sri Lanka (CBSL) issued money to pay for
government expenses. An economic collapse would result from continuing to print money, the
IMF warned. Former Finance Minister Mangala Samaraweera also opposed the tax cuts, stating
that they would send the entire nation into bankruptcy. The amount of money that would be
injected to the financial markets overall in 2022 has risen to Rs. 432.76 billion. The CBSL
purportedly printed 119.08 billion rupees on April 6, 2022, making it the greatest amount
recorded to have been printed in a single day within the same year.
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External debt
The amount of Sri Lanka's foreign debt has significantly expanded. The nation must pay
$4 billion in debt by the end of 2022, however as of April 2022, government reserves were only
$2.3 billion. Before foreign exchange problems can be solved, Treasuries auctions must
succeed. Sri Lanka's foreign reserves had fallen to US$1.9 billion by March 2022, insufficient to
cover its foreign debt obligations. Pandemic tourism restrictions reduced the country's income
even further. Sri Lanka has announced that it will default on its $51 billion external debt.
Debt trap
Debt-trap diplomacy, according to critics of Chinese foreign policy, is demonstrated by
loans to Sri Lanka. Sri Lanka's $1.1 billion loan from China was not a debt-for-asset swap, and
the country must still repay the loan. Sri Lanka's debt burden was $51 billion, with debt servicing
accounting for 95 percent of government revenue. Sri Lankan Prime Minister Mahinda
Rajapaksa has rejected the country's image as a debt trap. Chinese banks are willing to
restructure the terms of existing loans to Sri Lanka. Sri Lanka's external debt to China officially
10% of total debt. Some officials claim that after including loans to state-owned enterprises,
China's total lending was much higher. Sri Lankan academic has warned of a Chinese "strategic
trap" in the country. Sri Lanka has indicated that the lease of the Hambantota port to China is
being reconsidered. Concerns about possible military use delayed the lease for several months.
Sri Lanka's external debt is owed to international capital markets, with multilateral development
banks holding 22 percent.
Declining of foreign remittances
In February 2022, the unofficial market value of the LKR surpassed 248 to the US dollar.
As a result, foreign workers remitted funds through unofficial channels. Sri Lankan banks ran out
of foreign currency, causing foreign remittances to plummet by 61%. Mangala Cabraal, Sri
Lanka's Finance Minister, has threatened to freeze the bank accounts of those who use unofficial
money transfer methods. He has also targeted exporters by imposing exporter dollar surrender
requirements and forcibly converting dollars in the forex accounts of resident Sri Lankans
earning dollar salaries. Former CBSL Deputy Governor W.A Wijeywardana called the policies
"Cabraalnomics 2.0." The dynamic black market has caused exporters and immigrants to avoid
the formal banking system, eroding the Central Bank's power as the forex regulator.
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Tourism
The 2019 Easter bombings and the COVID-19 pandemic both had a negative impact on
Sri Lanka's tourism industry. Tourism brought in $4.4 billion and contributed 5.6 percent of GDP
in Sri Lanka in 2018, but this is expected to fall to 0.8 percent in 2020.
The Food and Agriculture Crisis
In 2021, the number of people affected by hunger worldwide will increase to 828 million.
Compounding crises in various parts of the world brought on by geopolitical, economic, and
natural factors. The conflict in Ukraine is likely to worsen conditions in 2022, as it restricts
global food supplies. More than 276 million people are severely food insecure, according to
World Food Programme (WFP). There is a real danger of multiple famines being declared in
2022 and 2023. The global food crisis is set to worsen in 2023 due to potential reductions in farm
production.
In 2020, there were 9.9 percent of people who were undernourished, up from 8.4 percent
in 2019. Sri Lanka had been able to produce enough rice to meet its own needs. The decline in
tea production alone caused $425 million in economic losses. Sri Lanka has given up on its goal
to become the first country in the world to use organic farming. A prognosis of 50% of the
maximum harvest has been issued by the Sri Lankan government as a warning that the country's
rice crop for the Yala season will fail.
The Russo-Ukraine War
The Russian invasion of Ukraine has exacerbated Sri Lanka's economic crisis. Russia is
Sri Lanka's second largest tea export market, and the country's tourism industry is heavily reliant
on these two countries, with the majority of visitors coming from Russia and Ukraine. The
Ukrainian crisis has had a significant impact on Sri Lanka's tea and tourism industries. In his
government's response to the Ukraine conflict, Sri Lankan President Mahinda Rajapaksa accused
Russia of exacerbating a global food crisis and fueling inflation.
Sri Lanka's economic crisis's root causes
Over the past two years, Sri Lanka's foreign reserves have plunged by 70%. By the end of
February 2022, foreign exchange reserves will only be worth $2 billion. An increase in Sri
Lankans seeking asylum in India following an economic crisis brought on by a lack of foreign
currency. The remaining foreign currency reserves hardly cover imports for two months. By
2022, Sri Lanka will owe nearly $7 billion in foreign debt. The greatest source of US money in
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Sri Lanka, remittances from foreign employees, fell by 22.7 percent during the pandemic. Due to
India's dependency on imports, domestic food production has drastically decreased, which has
caused a 25 percent increase in food prices. The reliance on imports for basic commodities like
sugar, medicine, fuel, pulses, and grains has a significant impact on the nation's consumption
patterns.
Ban on Fertilizer in Sri Lanka
In 2021, it was stated that Sri Lanka would immediately move to 100 percent organic
farming and that all fertiliser imports would be flatly prohibited. The sudden transition to
organic fertilisers has a detrimental effect on food production. In order to stem the rise in food
prices, the depreciation of the rupee, and the loss of foreign exchange reserves, the president of
Sri Lanka proclaimed an economic emergency. Due to the lack of foreign currency and the
sudden prohibition on artificial fertilisers and pesticides, food costs have risen.
Shocks to the current economy
Foreign exchange reserves decreased as a result of the Easter bombings in Colombo in
April 2019 that left 253 people dead and severely reduced tourism. The newly elected
administration in 2019 led by Gotabaya Rajapaksa offered lower tax rates and thorough SoPs
for farmers throughout their campaign. The fast fulfillment of these pledges only made the
problem worse. The 2020 Covid-19 pandemic had an impact on the trade in clothes, rubber,
tea, spices, and tourism. The debt trap policy of China has made Sri Lanka's economy more
unstable. Lack of foreign exchange (forex) reserves, which had dropped by 70% over the
preceding two years to only USD 2 billion by the end of February 2022, was the primary
cause of the Sri Lankan Crisis. The nation will have approximately USD 7 billion in foreign
debt by 2022. Prime Minister Wickremesinghe and President Gotabaya Rajapaksa have both
shown a desire to step down in order to make space for an all-party administration, but there
is currently a political void.
Consequences of a Russian invasion of Ukraine in 2022
The Nord Stream 2 pipeline between Russia and Germany was shut down by the German
government on February 22, 2022, just before the Russian invasion, which led to a sharp increase
in natural gas prices. On February 24, Russian military forces invaded Ukraine with the goal of
toppling the country's democratically elected government and installing a Russian puppet
administration in its place. The week ending April 8 had 0.99 percent inflation in Russia,
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increasing the country's year-to-date (YTD) inflation rate to 10.83 percent, compared to 2.72
percent in 2021. Sanctions' impact on the Russian economy led to annual inflation rising to
17.89%, the highest level since 2002.
Implications of Sri Lanka's economic crisis
The Sri Lankan economy has seen its performance in the global economy decline. The
country's current account deficit has risen from US$ 0.136 billion in 2021 to US$ 1.14 billion in
2022. According to economists, internal issues including years of poor management and
corruption are to blame. The tax cuts, money creation, the Easter bombs and other factors are
thought to have kicked off the catastrophe. Only 1.3 percent of India's total exports, or $4.8
billion, were sent to Sri Lanka each year. India provided Sri Lanka with a USD 1 billion line of
credit on March 18, 2022 to aid in the country's economic recovery. The nation defaulted on the
USD 51 billion debt in May 2022 as its foreign reserves dwindled and it was unable to make
interest payments.
Lack of fuel and electricity
The usage of electricity, fuel, and cooking gas has decreased as a result of the economic
crisis. Due to a lack of cooking gas, nearly 1000 bakeries have been closed. Due to lengthy wait
times at filling stations, long lines have recently formed in front of gas stations. The production
of hydroelectricity in Sri Lanka has also been impacted. March 2022 had daily power outages
that climbed to 10 hours at the end of the month and then to 15 hours again in April.
Inflation
Inflation as of February 2022 was 17.5 percent. Food inflation was up 24.7% year over
year while non-food categories witnessed an increase of 11%. The central banks of many nations
have aggressively raised interest rates in response to the highest inflation levels in many years.
However, food inflation spiked to an all-time high of 80.1% in June, setting a new record for
inflation, forcing the central bank to hike interest rates as a matter of urgency to combat the price
increase. Long-term economic development, exchange rate, government spending, money
supply, oil prices, and interest rates are the primary factors that affect inflation in Sri Lanka.
Education
Several schools in Sri Lanka stated in March 2022 that they would postpone their
term/midyear tests indefinitely. The inability to acquire paper due to a lack of foreign reserves
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led to a nationwide paper scarcity. On March 28, 2022, it was stated that the island-wide term
test exams would take place.
Health
The supply of life-saving medications in Sri Lankan hospitals is running low. A
"catastrophic" number of deaths, according to the Sri Lankan Medical Council, are expected. A
"extraordinary humanitarian catastrophe" has been proclaimed, according to the Singapore Red
Cross Society. All hospitals in the nation, according to the Sri Lankan Medical Association, no
longer have access to imported medical equipment and essential medications. To ensure that
newborn newborns' lungs received enough oxygen, hospitals were under pressure to the point
where they chose to disinfect and reuse endotracheal tubes.
Exports
Due to the ongoing economic unrest in Sri Lanka, top textile retailers like Zara, Mango,
and H&M have shifted their attention to placing their orders in India instead of Sri Lanka. India
has also experienced a sharp rise in overseas orders for products related to tea as a result of the
worsening political and economic situation in Sri Lanka.
Sporting events and Recreation
Foreign channel broadcasting on Sri Lanka Telecom (SLT) PEO TV has been
temporarily halted and suspended. The 2022 Indian Premier League was also cancelled in the
middle due to a lack of funds. Many national sports organisations have been unable to send
teams to international sporting events, especially as the Asian and Commonwealth Games
approach. SLT PEO TV ceased and suspended foreign channel telecast operations due to
financial difficulties. The 2022 IPL season was also cancelled in the middle due to an inability to
pay host broadcaster Star Sports. Many national sports federations found themselves unable to
send teams to international competitions.
International relations
Due to a lack of foreign reserves, the Sri Lankan High Commission in Nigeria and Sri
Lankan consulates in Germany and Cyprus were temporarily closed in January 2022. [156] Due
to a lack of dollar reserves, Sri Lanka's embassies in Iraq, Norway, and its consulate in Australia
were shuttered in March 2022.
International Monetary Fund
Seven billion dollars are owed by Sri Lanka to international creditors, including $1
billion in sovereign bonds. Sri Lanka's foreign reserves decreased to $2.36 billion as of February
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2022. The official exchange rate of the rupee to the US dollar dropped to a record-breaking low
of Rs. 229.99. The World Bank has agreed to offer financial assistance totaling US$600 million,
with the first phase's US$400 million disbursement scheduled for soon. Sri Lanka is in talks with
India about a US$1.5 billion bridge loan and has made approaches to China, Japan, and the
Asian Development Bank for additional financial support.
Reactions
A petition to the parliament was submitted by 38 organisations that represent exporters,
importers, manufacturers, the shipping and logistics industry, and the tourism industry. Ali
Sabry, a former justice minister, advocated for political stability. IMF, World Bank, and Asian
Development Bank-style international organisations must intervene right away to save Sri Lanka,
or they must impose a moratorium. The biggest risk Sri Lanka will confront, according to former
World Bank executive Shanta Devarajan, is societal instability and turbulence. He emphasised
that in order to prevent the collapse of the economy, it is also possible to start a cash transfer
programme with the goal of aiding the poor.
People protesting
Political parties and non-partisan organisations protested the government's poor handling
of the economy. Demonstrations over power outages that lasted more than 12 hours every day.
Candlelight demonstrations were also going on on the Kandy-Colombo Road, which
demonstrators had barricaded. Sri Lankan President Mahinda Rajapaksa was removed from
President's House on July 9. On July 11, military sources in Sri Lanka said that the President was
aboard a Navy ship. Later on in the day, the Speaker of the Parliament said that he was still
present in the nation.
Foreign support
India committed a total of US$2.415 billion to help Sri Lanka overcome its financial
difficulties. India provided a $1 billion credit line to Sri Lanka as a lifeline. After India and Sri
Lanka formally signed into a loan arrangement, the credit line was opened. In Sri Lanka, Tamil
political parties opposed aid that would only go to Tamils and demanded that aid go to all ethnic
and religious groups. M. K. Stalin, the chief minister of Tamil Nadu, had techniques for
distributing necessities including rice, cereal, and life-saving medicines. 40,000 tonnes of rice
have already begun to be loaded by Indian dealers for quick delivery to Sri Lanka. There were
administrative challenges with some of the shipments. As part of a relief effort, the Singaporean
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government declared that it will contribute $100,000 in seed money. Zhao Lijian, a
spokeswoman for the Chinese Foreign Ministry, stated in June 2020 that China would give Sri
Lanka emergency relief worth 500 million yuan ($74.2 million).
Government responses
At first, the Rajapaksa administration denied that there was ever a crisis and declined to
request help from the IMF. Additionally, Moody's rating downgrades were attacked by CBSL
Governor Cabraal as being unjustified, incorrect, and careless. While acknowledging the crises'
existence by March 2022, the government denied any culpability.
Monetary policy
The Sri Lankan GDP shrank by 1.6 percent annually from January to March. Food,
medication, and gasoline are among the necessities that are difficult for the island nation to
afford. China, India, and Japan are expected to attend a donor meeting that Sri Lanka plans to
host. The Bank Monetary Policy Board has raised the interest rate on the standing loan facility
by 100 basis points to 15%. For the purpose of enhancing public finances and lowering public
debt, the IMF has recommended for harsher fiscal reforms. Sri Lanka is urging the IMF to
approve an extended loan programme worth $3 billion. Sri Lanka plans to host a donor
conference with participation from China, India, and Japan. The Central Bank of Sri Lanka hiked
both the Standing Lending Facility Rate and the Standing Deposit Facility Rate by 700 basis
points.
Fiscal policy
The government can influence the economy by short-term raising or lowering economic
activity. When the economy is weak, fiscal policy can help maintain private sector incomes and
aggregate demand. The so-called "automatic fiscal stabilisers" are a key stabilising component of
fiscal policy. Fiscal hegemony, large deficits and national debt has characterised Sri Lanka's
macroeconomic environment. The government's main medium-term fiscal goals include, but are
not limited to, keeping the fiscal deficit to 4% of GDP and the debt to GDP ratio to roughly
75.5%.
Fiscal Planning for the Middle Term
The fiscal operations of government are framed by the Fiscal Management
(Responsibility) Act, No. 3 of 2003, which provides a legal framework to phase out fiscal
deficits and associated debt to support the broad-based development objectives in the
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Medium Term Macro Fiscal Framework (MTMFF). The government's main medium-term
fiscal goals include, but are not limited to, keeping the fiscal deficit to 4% of GDP and the
debt to GDP ratio to roughly 75.5 percent by 2025. The MTMFF outlines the following as
the government's top priorities for 2021–2025:
Achieving economic growth of at least 6.0 percent.
Keeping the unemployment rate below 4%.
Maintaining an inflation rate of no more than 5%.
Raising the revenue to GDP ratio to over 14% in 2025
Putting the Budget on a sound foot by rationalising wasteful spending
Limiting the budget deficit to less than 4% of GDP
By 2025 and beyond, achieving primary surplus
Achieving a 75.5 percent reduction in the government debt to GDP ratio by 2025
Make sure the interest rate is under 10%.
Maintain the rupee's stable exchange rate.
The government has released details of its 2021–2025 budget policy. Recurrent spending is
expected to be rationalised from 14.2% of GDP in 2021 to at least 12.3% by 2025. The impact of
COVID-19
continues to be a significant obstacle to the fiscal strategy's execution.
Economic challenges
It should be mentioned that given its role as a transshipment hub, India depends heavily
on the Port of Colombo for international trade. The port manages 60 percent of India's
transshipment goods. In turn, 70% of the port's overall transshipment volume is made up of
cargo related to India. However, because the authorities cannot afford to move the containers
between terminals, thousands of containers transported from India to Sri Lanka, including those
for its own consumption as well as trans-shipment cargo, are currently lying uncleared at the
port. As a result, there has been a buildup of goods bound for Sri Lanka in Indian ports.
India is exposed to rising expenses and traffic problems if the Port of Colombo's
operations are disrupted. While construction on Kerala's transshipment hub has started, it is in
India's best interest to assist Sri Lanka in overcoming its current economic crisis. The percentage
of Sri Lankan exports to India has decreased, from 2.16 percent in FY15 to just 1.3% in FY22.
Due to Sri Lanka's fluctuating foreign exchange reserves and fuel shortages, automakers
including Tata Motors and
TVS
Motors stopped exporting vehicle kits to the country and halted
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production at their assembly plants there. India is another one of the major countries that invest
heavily in Sri Lanka through FDI. India's FDI reached a total of around US$1.7 billion from
2005 to 2019. After China and the UK, India was Sri Lanka's third-largest source of FDI in 2019
at US$139 million. The majority of India's investments are in the retail of petroleum products,
tourism, hotels, manufacturing, real estate, telecommunications, banking, and financial services.
Any disturbance in Sri Lanka could have an effect on large Indian firms having investments
there, including Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata Communications,
Asian Paints, State Bank of India, etc.
Humanitarian crisis
India is Sri Lanka's only direct neighbour, therefore any potential major humanitarian
disaster might have an effect there as well. With the lack of food, medication, and escalating
political unrest, India is in a position of great responsibility to stop the situation with all available
assistance.
Refugee crisis
India might find itself in a situation where it has a moral obligation to help its
neighbour. While India has already sent support by giving a line of credit for life-saving
medicines, food, and gasoline, it could just not be enough. The situation in Sri Lanka will
inevitably lead to a refugee and humanitarian crisis. If the crisis persists in its current form, a
sizable number of people may be forced to leave Sri Lanka in search of safety in India. Every
time there has been a political or social upheaval in Sri Lanka, there has been a significant
influx of ethnic Tamil migrants into India via the Palk Strait and the Gulf of Munnar. However,
India may struggle to manage such an influx and will require a strong policy to manage the
situation. With the reported unlawful entry of 16 people from Sri Lanka, the crisis' effects have
already begun to be seen in the state of Tamil Nadu.
Opportunities
India may expand its presence in Iran as well as in brand-new markets like Turkey, Iraq,
the US, China, and Canada. Nearly half of Sri Lanka's exports were textiles and apparel. Experts
say India can take advantage of this chance to balance its diplomatic relations with Sri Lanka. Sri
Lanka's tourism industry was hit hard by a series of bomb attacks in 2019. The Rajapaksa
administration's plan to ban chemical fertilisers affected farmers' harvests. Sri Lankan
government has been heavily borrowing money to pay for public services. India might expand its
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presence in Iran as well as Turkey and Iraq. India is eager to fill in any supply shortages created
by Sri Lanka's abrupt decision to stop exporting tea. Price increases for fuel and other items have
a significant impact on the life of typical Sri Lankans.
Sri Lankan Economic Crisis' Impact on the Indian Economy
India needs to take all necessary steps to ensure a peaceful transfer of power in
Colombo. The Sri Lankan situation could seriously impede the Colombo Port's ability to
operate normally. India would suffer as a result of this and a large number of Sri Lankans
may flee to India. China is the largest single lender and source of foreign direct investment in
Sri Lanka. With just over $2 billion in foreign exchange reserves, Sri Lanka has an external
debt of more than $50 billion. New Delhi should take necessary actions to contain China's
expanding influence in the area. Sri Lanka's foreign reserves have fallen 70% in two years, to
just $2 billion. This year, the nation owes around $7 billion in foreign debt. Remittances from
foreign employees fell 22.7 percent last year. Over a fifth of Sri Lanka's imports come from
India.
Impact of Sri Lankan Crisis on Indian Economy
Experts analyse the economic, sociological, and geopolitical effects of Sri Lanka's
economic crisis on India as it worsens, further escalating into civil unrest and political instability
on the island nation. The appropriate diplomatic approach will determine India's geopolitical
dominance in the area as it negotiates uncertain waters in its relations with Sri Lanka. Growing
economic problems in Sri Lanka's neighbouring country, brought on by a severe foreign
currency shortage and the inability to pay for basic imports like petrol, have exacerbated the
island nation's situation. The situation in Sri Lanka is worrying, with political unrest feeding
widespread violence. Power outages that can last up to 13 hours, shortages of food, petroleum
products, and necessities, and a skyrocketing double-digit inflation rate of 17.5 percent are all
there. The sole direct neighbour of Sri Lanka, India, is walking a fine line as it deals with the
chances and difficulties that this crisis in Sri Lanka has brought.
India aiding Sri Lanka
India will provide US$2.4 billion in financial support to Sri Lanka. The aid will include a
US$400 billion currency swap and US$1.5 billion credit line for fuel, food, and medicine. India
has already shipped 40,000 tonnes of fuel to the island country. India has adhered to the
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Neighborhood First policy to strengthen ties with its neighbors. India can go above and beyond
to assist Sri Lanka in realizing its full potential. Businesses in India can create supply chains that
link the economies of Sri Lanka and India for a variety of products and services.
The Sri Lankan problem is being handled since it would affect India
Sri Lanka is experiencing its worst political crisis in decades. India provided the island
nation with 44,000 MT of urgently required urea as well as other essential supplies including
fuel, food, and medicine. India is Sri Lanka's only direct neighbour, therefore any potential major
humanitarian disaster might have an effect there as well. With the lack of food, medication, and
escalating political unrest, India is in a position of great responsibility to stop the situation with
all available assistance. Sri Lanka is one of India's main development partners, and over the
years, this connection has served as a crucial tenet of bilateral ties between the two nations. The
total investment by the GOI is in excess of USD 3.5 billion, with grants alone totaling about
USD 570 million. India gave Sri Lanka a substantial humanitarian assistance package worth
more than Rs 2 billion on Sunday, as the island nation struggles with a severe economic crisis.
Colombo Port
The impact of the economic crisis in Sri Lanka on the Indian economy is felt most
acutely in the Colombo port. Colombo port city is one of India's most crucial ports from a
strategic perspective. It handles more than 30% of the country's container traffic and 60% of its
transhipment. India would suffer if the Colombo port's services were interrupted. Since they
cannot afford to move the containers between terminals, thousands of containers transported
from India to Sri Lanka are currently lying unregistered at the port along with multiple
transshipments. As a result, there has been an accumulation of goods bound for Sri Lanka at
Indian ports. At Indian ports, this will lead to higher costs and congestion issues. India has begun
to develop its own transhipment hub in Kerala to address the situation, but it might already be
too late.
Chinese influence
The growing influence of China and the Chinese Communist Party has been one of the
factors of the Sri Lankan economic crisis that India finds to be the most alarming. China is
currently Sri Lanka's top creditor, and it also accounts for the majority of foreign direct
investment there. Sri Lanka failed to obtain sufficient income or jobs from Chinese investments
as a result of falling prey to the Chinese debt-trap diplomacy. As a result, the government of Sri
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Lanka was compelled to declare bankruptcy and give over its important townships and
strategically positioned ports, such Hambantota Port. A similar destiny is likely to befall
Colombo Port City given the current predicament. Given the CCP's power, its effects on global
trade, and its effects on security in the South China Sea and the Indo-Pacific, this will be
especially disastrous for India.
Investments
In the island country, India has investments in a variety of sectors, including real estate,
manufacturing, tourism, hotels, telecommunication, banking, and financial services. They are
already being impacted by Sri Lanka's present situation, which is predicted to get worse over the
next few days. There is a lot at risk, as seen by the $1.7 billion in FDIS from India to Sri Lanka
between 2005 and 2019. It argues that India should step up and intervene in the present turmoil
to protect its neighbor and its interests. In Sri Lanka, political groups are vying for power in an
all-party coalition. Both Ranil Wickremesinghe, the prime minister, and president Gotabaya
Rajapaksa promised to step down. Political unrest has been sparked by the widespread anti-
government sentiment in Sri Lanka. As its foreign exchange reserves steadily diminish, the
nation is finding it harder and harder to import the necessities of life. The value of the Sri Lankan
rupee has fallen by more than 80%, food prices have increased by more than 50%, and tourism
has drastically decreased.
Sri Lanka's Economic Crisis has an Impact on Indian Businesses
The economy of Sri Lanka has fallen into a free decline as a result of Covid-19. Indian
firms, including the auto industry, are suffering some spillover effects of the Lanka crisis. We
make an effort to evaluate the crisis's overall impact on India. Due to the 2019 terror attacks and
subsequent epidemic, ITC's $300 million hotel project in Sri Lanka has been postponed. Due to
Sri Lanka's unstable foreign exchange reserves and fuel shortages, automobile companies ceased
exporting vehicle kits there in April. Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata
Communications, Asian Paints, and State Bank of India may all be impacted by the unrest in Sri
Lanka.
The percentage of Sri Lankan exports to India has decreased from 2.16 percent in FY15
to merely 1.3 percent. Sri Lanka's apparel industry is suffering from a fuel shortage as well. At
recent Kolkata auctions, the average price for orthodox leaf experienced a surge of up to 41
percent compared to equivalent sales previous year. India's tea farms are reportedly being visited
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by significant Sri Lankan importers from Iran, Turkey, Iraq, and Russia. India is now receiving a
large number of garment orders from the UK, EU, and Latin American nations. Numerous orders
have been given to businesses in Tirupur, the center of Tamil Nadu's textile sector. For India, Sri
Lanka has been a crucial strategic ally.
Indian interests in maintaining Sri Lanka's economy
Sri Lanka has been a crucial ally for India from a strategic standpoint. Due to Sri Lanka's
close proximity to China, India can take advantage of this chance to rebalance its diplomatic
relations with Sri Lanka. India delivering fertiliser to Sri Lanka at the latter's request is
considered as a positive move in the bilateral relations as the dispute between Sri Lanka and
China on the fertiliser issue grew more heated. Expanding diplomatic ties with Sri Lanka will
make it easier for India to prevent China from using the Sri Lankan archipelago as a "string of
pearls" in the Indo-Pacific. If India is able to support Sri Lankans, it should do so with care,
keeping in mind that how India presents its assistance also important.
Strategy to solve the crisis
In the western province, Ranil Wickremesinghe proclaimed an emergency and imposed a
curfew. The nation owes foreign lenders, particularly China, more than $51 billion (£39 billion).
The G7 nations support Sri Lanka's efforts to lower debt repayment obligations. India has
contributed at least $1.9 billion, and the World Bank has agreed to give Sri Lanka $600 million.
IMF is debating a potential loan of $3 billion (£2.5 billion). Sri Lanka has requested low-cost oil
supplies from Russia and Qatar. Currently, Sri Lanka imports $3 billion (£2.3 billion) yearly
more than it exports. Sri Lanka had £5.8 billion in foreign exchange reserves at the end of 2019.
Bringing Democracy into Practice the Right Way
A strong political consensus is necessary in Sri Lanka for better crisis management. The
militarization of governance can be reduced. Considerations are necessary to assist the
vulnerable and poor in getting back on their feet without suffering long-term damage. The steps
comprise increasing agricultural output, increasing non-agricultural employment opportunities,
strengthening reform implementation, and revitalizing the tourism sector.
International Monetary Fund bailout
Sri Lanka has requested a bailout from the IMF. Sri Lanka's efforts to get out of the
current economic crisis can be assisted by the IMF. While defending financial stability,
protecting the weak and needy, and accelerating structural reforms to remove corruption risks
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and unleash Sri Lanka's growth potential, the IMF can restore macroeconomic stability and
debt sustainability.
Conclusion
With national expenditures surpassing national income and import obligations exceeding
export revenues, Sri Lanka became a textbook example of a two-front deficit economy. Debt in
the billions from years of accumulated borrowings, record inflation, a lack of foreign currency,
crucial sectors contracting and made worse by the pandemic, the Russia-Ukraine conflict, and
poor governance all contributed to Sri Lanka's unprecedented economic crisis, which in turn
caused a great deal of political unrest. It is obvious that without assistance, the nation may not be
able to pull itself together. To get through the crisis, it has applied for loans from China, India,
and the Asian Development Bank.
Regarding Sri Lanka's economic unrest, the circular economy can help to reduce the
country's reliance on imports and provide a viable alternative to support recovery. Large-scale
protests that broke out in March shook Sri Lanka. As a result of economic measures such as
significant tax cuts and debt payments, the situation deteriorated. A string of policy errors made
worse by outside influences have eclipsed Sri Lanka's recent victories on a few fronts. Sri
Lanka's issues with its current account balance contributed to the BOP crisis. Things got worse
when the IMF wasn't asked for any help. IMF bailouts have historically been the least preferable
option for any economy. When faced with a financial crisis, Sri Lanka's options were
constrained. Shortsighted development policies in Sri Lanka have made the country less able to
produce several agricultural goods.
Sri Lanka's tourism industry was severely harmed by the Easter Sunday 2019 bombings,
which claimed over 250 lives. The COVID-19 pandemic and the conflict between Ukraine and
Russia make it extremely difficult to revive this industry. Exogenous shocks have a terrible
impact on emerging economies, notably those in South Asian nations. Lack of resources and
prejudiced policies have frequently led to economic catastrophes, especially in the Global South.
A certain degree of insulation between nations is necessary to avert a regional economic
collapse. According to UN experts, Sri Lanka's debt crisis has had a big impact on human rights.
In May, Sri Lanka stopped paying the interest on its $51 billion foreign debt. India could offer
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Sri Lanka financial assistance, policy recommendations, and investments from Indian
businesspeople. Sri Lanka's government should take the necessary steps to ensure the country's
economic recovery. India should not permit the Chinese to seize control of expanding areas of
Sri Lankan territory. Overall, relations between Sri Lanka and India cannot be strained.
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