‘Advantage New Delhi’ in Sri Lanka’s India lifeline

Source: This post is based on the article “‘Advantage New Delhi’ in Sri Lanka’s India lifeline” published in The Hindu on 22nd July 2022.

Syllabus: GS 2 – India and its neighbourhood- relations.

Relevance: India-Sri Lanka relations.

News: The situation in Sri Lanka gives India an opportunity to take the lead in the foreign aid game in its neighbourhood.

What are the Economic challenges faced by Sri Lanka?

This is Sri Lanka’s worst economic crisis since its independence in 1948. a) The Sri Lankan economy is experiencing stagflation after the debt default and a shortage of dollars, b) Inflation has spiralled to over 50%, translating into higher food and fuel prices, c) Sri Lanka is also facing challenges in getting foreign aid.

At this level, the economy could contract by at least 6% in 2022. Sri Lanka would require financing that falls between $20 billion to $25 billion over the next three years to ensure essential imports of food, medicine and fuel for its people and help in stabilising the economy.

How did India help Sri Lanka to avert its economic challenges?

India was the first responder to Sri Lanka’s calls for foreign aid to help tackle its crippling debt and economic crisis. In the first six months of 2022, Indian aid worth $3.8 billion has flowed to Sri Lanka through loans, swaps and grants. This is India’s largest bilateral aid programme in recent times.

Why does India need to help Sri Lanka to manage its economic challenges?

There are questions by some that why taxpayers should be used to bail out another country’s failed economy. But this is wrong because

a) Stabilising Sri Lanka’s economy could prove to be a major win for India’s ‘neighbourhood-first’ policy, b) Once the Sri Lankan economy stabilises, India can deepen its trade and investment linkages with Sri Lanka. This can exceed the current humanitarian aid relationship, c) Stable Sri Lanka could spur regional integration and prosperity and d) Unstable Sri Lanka also poses security risks to India and lead to a flood of refugees across the Palk Strait.

How China’s dilemma to help Sri Lanka will help India?

1) China has emerged as a major partner for Sri Lanka, especially for infrastructure projects. However, many of them are under scrutiny for their ‘debt trap’ narrative, 2) China worries that unilaterally restructuring Sri Lanka’s debt would set a new precedent in its lending practices. This might facilitate similarly distressed countries seeking debt relief from China, and 3) China being a G2 economy and wanting to challenge the U.S., does not want its reputation to be spoiled by bailing out a floundering economy.

All this provides an opportunity for India to upscale its aid and cement its first mover advantage over China.

What does Sri Lanka need to do to overcome the economic challenges?

a) Quickly concluding talks on an IMF programme which will increase taxes and utility prices to raise revenue and increase interest rates to control inflation while preserving social welfare expenditures to protect the poor, b) Implement structural reforms to make the economy more open to trade and investment and allow market forces to determine resource allocation, c) Restore the rule of law and enforce strong anti-corruption policies, d) Reset foreign policy towards a more neutral direction and away from the pro-China stance.