{"id":195976,"date":"2022-07-16T18:42:45","date_gmt":"2022-07-16T13:12:45","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=195976"},"modified":"2022-07-16T18:43:23","modified_gmt":"2022-07-16T13:13:23","slug":"learn-these-lanka-lessons","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/learn-these-lanka-lessons\/","title":{"rendered":"Learn These Lanka Lessons"},"content":{"rendered":"\n<p><strong>Source<\/strong>: The post is based on an article \u201cLearn These Lanka Lessons\u201d published in the Times of India on 16<sup>th<\/sup> July 2022.<\/p>\n<p><strong>Syllabus<\/strong>: GS 2 Indian Economy; Issues and Challenges pertaining to growth and development<\/p>\n<p><strong>Relevance<\/strong>: Lesson\u2019s to be learn from the Sri Lanka\u2019s Crisis<\/p>\n<p><strong>News<\/strong>: In recent months, Sri Lanka has run out of fuel, millions are going hungry, the healthcare system is near collapse, inflation is soaring, the currency has crashed, and the debt-laden economy is bankrupt.<\/p>\n<h5><strong>What are the causes of Sri Lanka\u2019s Crisis?<\/strong><\/h5>\n<p>At the heart of Sri Lanka\u2019s crisis is the <strong>twin deficit problem<\/strong> which is related to unsustainable <strong>fiscal<\/strong> and <strong>current account deficits<\/strong>.<\/p>\n<p>In fact, India\u2019s <strong>own balance of payments crisis<\/strong> of 1991 and near crisis in 2013 were the result of India\u2019s spiralling twin deficits.<\/p>\n<h5><strong>Sri Lanka\u2019s fiscal problems<\/strong>:<\/h5>\n<p>First, in the recent past, the government <strong>reduced the value added tax by half<\/strong> and abolished the capital gains tax. It eroded an already narrow tax base.<\/p>\n<p>Second, there was a massive <strong>expenditure outgo<\/strong> on subsidies.<\/p>\n<p><strong><span style=\"text-decoration: underline;\">Other causes<\/span><br \/>\n<\/strong><\/p>\n<p>The <strong>Central Bank of Sri Lanka (CBSL)<\/strong> deferred monetary tightening even as inflation soared and the currency also plummeted. This happened ostensibly under pressure from the government.<\/p>\n<p>Sri Lanka has avoided taking IMF assistance and tried to find an alternative. A stigma attached to IMF assistance still persists in Asia. However, taking alternative help proved to be costly and time-consuming for the Sri Lankan government.<\/p>\n<ul>\n<li><strong>Read more<\/strong>: Click <strong><a href=\"https:\/\/forumias.com\/blog\/saving-sri-lanka\/\">here<\/a><\/strong><\/li>\n<\/ul>\n<h5><strong>Why is it unlikely to have a similar crisis in India in the coming future?<\/strong><\/h5>\n<p>There are <strong>big differences<\/strong> between the <strong>external situation<\/strong> of India then and now.<\/p>\n<p><em><strong>First<\/strong><\/em>, at that time, there was a pressure built up in the <strong>exchange rate<\/strong>. Today, the <strong>exchange rate<\/strong> is tracking <strong>fundamentals<\/strong> more closely.<\/p>\n<p><em><strong>Second<\/strong><\/em>, at that time, India\u2019s <strong>macro situation<\/strong> was fragile because of year-on-year high fiscal and current account deficits. Today there is more credibility on the fiscal front and the expected CAD of over 3% this year will hopefully be a one off.<\/p>\n<p><em><strong>Third<\/strong><\/em>, India\u2019s <strong>war-chest of reserves<\/strong> are at a very good position at $600 billion. India lacked such a level of reserves at that time.<\/p>\n<h5><strong>What are the lessons that can be learned from the Sri Lanka\u2019s Crisis?\u00a0<\/strong><\/h5>\n<p>The countries should diversify sources of <strong>foreign exchange earnings<\/strong> to avoid becoming hostage to problems in one sector or one geography.<\/p>\n<p><strong>Careful borrowing<\/strong>: Although, at present, the countries are forced to borrow <strong>bilateral loans<\/strong> due to dwindling <strong>multilateral sources of debt<\/strong>, the governments should borrow from countries that follow the <strong>Paris Club norms of responsible lending<\/strong>.<\/p>\n<p>The governments shouldn\u2019t <strong>float sovereign dollar bonds because <\/strong>the commercial entities within an economy already borrow in foreign currency. It is dangerous because a government can inflate away its domestic debt by printing money. But it cannot print dollars.<\/p>\n<p>Sri Lanka\u2019s crisis is also a reminder of the importance of <strong>timing of public policies<\/strong>. For example, it was a good step that the Sri Lankan government decided to encourage <strong>organic farming<\/strong>, but it should have been preceded by a campaign to educate farmers. Moreover, it should&#8217;ve been implemented after building buffer stocks to insure against possible production declines in the initial years.<\/p>\n<p>Emerging and developing countries are at the mercy of a global order which has been shaped by advanced economic policies and priorities. Therefore, these countries should build their own <strong>safety-nets<\/strong> and do responsible <strong>economic management<\/strong> in order to protect themselves and prevent being hostage to <strong>vote bank politics.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Source: The post is based on an article \u201cLearn These Lanka Lessons\u201d published in the Times of India on 16th July 2022. Syllabus: GS 2 Indian Economy; Issues and Challenges pertaining to growth and development Relevance: Lesson\u2019s to be learn from the Sri Lanka\u2019s Crisis News: In recent months, Sri Lanka has run out of&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/learn-these-lanka-lessons\/\">Continue reading <span class=\"screen-reader-text\">Learn These Lanka Lessons<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10496],"class_list":["post-195976","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-times-of-india","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":1700778894,"cached_date":1704817611},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/195976","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=195976"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/195976\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=195976"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=195976"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=195976"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}