April 16, 2022
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
The situation in Sri Lanka is alarming – inflation is at a dizzying 17%, people are dying of hunger and even while waiting in serpentine queues for fuel. The government doesn’t even have money for the paper and ink needed to conduct school exams. The Sri Lankan central bank was forced to step away as the currency’s value shrank by 30% in just a month. There are have been riots in Colombo, with protestors gathering outside President Gotabaya Rajapaksa’s home demanding his resignation and the police have had to fire tear gas and water cannon to disperse them. The Sri Lankan government has very little foreign exchange to pay off the large Chinese debt it has taken on, which means it can’t even import critical everyday essentials. But what does all this mean for India?
India is the only immediate neighbour of Sri Lanka and the aftershocks of the island nation’s worst crisis since independence are being felt here too. Driven to desperation by hunger and unemployment, many are crossing the Palk Strait by boat to seek refuge in India.
India immediately extended financial assistance of $2.4 billion, including a $1.5-billion credit line for importing fuel, food and medicines, and the deferred repayment of a $500 million loan. Sri Lanka, meanwhile, also sought $2.5 billion in credit support from China.
The crisis is mainly due to a dwindling of foreign exchange reserves, which fell 70% in two years to just $2 billion in February. Sri Lanka makes very little of everyday essentials like sugar, pharmaceuticals, pulses and cereals, which means it has to buy them from other countries but the forex reserves were enough to cover only two months of imports. The government, meanwhile, has a foreign debt obligation of $7 billion this year alone. It surprised no one when it defaulted on its loan repayments.
There are various causes for the crisis. COVID-19 and the 2019 Easter Sunday bombings that killed more than 250 people led to a 70% fall in tourist arrivals. As the pandemic raged, remittances from Sri Lankans working abroad fell by 22.7%. A bad situation was made worse by some questionable decisions. The government banned chemical fertilisers last year, hoping to become the first country with a completely organic agriculture sector. It backfired badly – 90% of Lankan farmers use chemical fertilisers and the decision led to a drastic drop in food production, pushing up prices. The decision was rolled back but the damage was done. Food inflation stood at 25.7% in February and it is hurting Indian exporters too.
In fact, the impact on Indian trade goes well beyond that – thousands of cargo containers meant for onward transit are lying uncleared at Colombo Port because it doesn’t have the money to even transfer them between terminals. This is also leading to congestion at Indian ports because cargo meant for Sri Lanka is building up there. Colombo is a very important port for India – 60% of our trans-shipment cargo is handled by it. So, its inability to handle Indian cargo hurts our global trade and any disruption there makes India vulnerable to an increase in costs.
Meanwhile, Indian investments in Sri Lanka are in jeopardy. Between 2005 and 2019, India contributed $1.7 billion in foreign direct investment to Sri Lanka, making it the country’s third largest source of FDI in sectors like petroleum, retail, tourism, manufacturing, real estate and telecommunication. Among the leading Indian companies that have invested there are Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata Communications, Asian Paints, SBI and ICICI Bank.
As you can tell, there is a tremendous downside for India in this crisis. But it’s also an opportunity. India and Sri Lanka haven’t had the best relationship over the past decade and this could be the time to correct that.
Much of the damage happened during Mahinda Rajapaksa’s Presidency between 2005 and 2015 when he decided to bank on Chinese credit to tighten his grip on power. Lanka moved even more close to China in 2012 after India pointed out human rights violations during its three-decade-long civil war. Lanka responded by signing infrastructure agreements that gave China even more influence over it. These included a deal to construct the Lakvijaya Power Plant and the controversial Hambantota Port. The latter was to prove disastrous because Sri Lanka lost control of the port when it struggled to repay the Chinese loans. It was forced to hand over the port and 15,000 acres around it to Beijing on a 99-year lease. This increased Chinese naval might in the Indian Ocean, giving it a strategic military port and a huge advantage over India.
Rising Chinese influence hurts Indian interests. For example, the East Container Terminal of Colombo Port was to be offered to India and Japan, but that didn’t happen because of suspected Chinese opposition.
Sri Lanka played along because it saw for itself a prosperous future financed by Chinese loans. But the downturn has dashed those hopes and President Gotabaya Rajapaksa asked China in January to restructure debt repayments. Colombo woke up to the limits of its partnership with China and sought to rebalance its relationship with India. President Rajapaksa visited India in November 2019 followed by other Sri Lankan leaders.
Sri Lanka is now willing to look beyond China to India and therein lies the opportunity. Accordingly, Foreign Secretary Harsh Vardhan Shringla asserted that Sri Lanka is core to India’s ‘Neighbourhood First’ policy.
As next steps, India should work on its perception within the island nation and not seek economic agreements only. It needs to go beyond support in the form of food, medicine, fuel and other essentials. It should look for partnerships to boost production of medicines through Indian-made facilities in Sri Lanka.
In January, India facilitated a $400 million currency swap with Sri Lanka and deferred $500 million in loan obligations. It could now look to increase FDI there. There are opportunities also in capacity-building, human resource development, agriculture, financial services and infrastructure.
This is the time to restore our traditional influence in Sri Lanka because sustained instability there will hurt India too. If that happens, China wins again.
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