Seriousness of Srilankan Crisis and Future Prospects

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Recently,Sri Lankan parties agreed to form an all-party interim government after President Gotabaya Rajapaksa’s anticipated resignation.

Seriousness of Srilankan Crisis 

• The government owes $51 billion and is unable to make interest payments on its loans.
• Political corruption is also a problem; not only did it play a role in the country squandering its wealth, but it also complicates any financial rescue for Sri Lanka.
• Tourism, an important engine of economic growth, has sputtered because of the pandemic and concerns about safety after terror attacks in 2019. 
• Its currency has collapsed by 80%, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57%.
• It crippled by an acute shortage of foreign exchange that has left it struggling to pay for essential imports of fuel, and other essentials.
• Presently, Sri Lanka is struggling with acute food and electricity shortages, forcing the country to seek help from its neighbours. 

Major Causes 

• The roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.

• The current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy.
• The country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic.
• Credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
• The Rajapaksa government’s decision to ban all chemical fertilisers in 2021 also hit the country’s farm sector and triggered a drop in the critical rice crop.

 India’s  Assistance during  Sri Lanka in this Crisis

• The present economic crisis in Sri Lanka has pushed it closer to India for immediate relief. 
• The Indian media’s regular coverage of the crisis has led to better understanding and even created a sense of empathy in India about the plight of the neighbouring country. 
• India, as part of its ‘Neighbourhood First’ policy, has extended support to the people of Sri Lanka in the form of aid (close to $3.5 billion) to help secure Sri Lanka’s food, health and energy security by supplying it essential items such as food, medicines, fuel and kerosene.
• The latest in the series was the signing of an agreement between the Government of Sri Lanka and the Export-Import Bank of India for a $55-million short term Line of Credit to facilitate the procurement of urea for paddy crops .
• India has delivered one more consignment of 40,000 metric tonnes of diesel to Sri Lanka to help ease the acute fuel shortage in the debt-ridden island nation which is grappling with its worst economic crisis.
• India extended an additional $500 million credit line to Sri Lanka last month to help the neighbouring country import fuel as it has been struggling to pay for imports after its foreign exchange reserves plummeted sharply in recent times, causing a devaluation of its currency and spiralling inflation.
• More than 25 tons of drugs and medical supplies which were donated by the Government and people of India during the last two months are valued at close to SLR 370 million. 

Concerns /Challenges 

• Some sections of the Sinhalese still hold the view that “India has been a threat to us.
  •  This perception can be traced to history when Sri Lanka was invaded by rulers of south India who humbled the Sinhala kings. 

• The manner in which the Rajapaksa regime unilaterally scrapped in February 2021 a tripartite agreement signed in 2019 with India and Japan for the development of Colombo’s East Container Terminal was a reflection of the historical baggage, though the official reason cited was opposition from workers’ unions. 

• Another project, a collaboration between NTPC Limited and the Ceylon Electricity Board, was cancelled just when bids were to be floated for the coal-fired 500-megawatt project in Sampur in the Eastern Province (after obtaining environmental clearance). 

Future prospects 

•  Sri Lanka should expand its exports baskets and not just rely on handful products that are susceptible to global price shocks.
• Urgency in policy intervention is needed to address the unmanageable levels of debt and debt service, reducing the fiscal deficit, restoring external stability and doing away with the adverse impacts on the vulnerable citizenry.
•  There is enormous scope for collaboration between the two countries in the area of infrastructure development. 
• The economic crisis has revived talk of linking Sri Lanka’s electricity grid with that of India.
  •  If this project takes off, the first point of interconnectivity on the Indian side will most likely be in Tamil Nadu.
    •  India has cross-border energy trade with Bangladesh, Nepal, Bhutan and Myanmar.

• At an appropriate time, regular movement of people and goods should be allowed again on the traditional sea routes of Thoothukudi-Colombo and Rameshwaram-Talaimannar. 
• The apprehension in the minds of sections of the Sinhalese majority about India being a threat can be dispelled only by facilitating greater people-to-people interaction, including pilgrimages by monks and other sections of Sri Lankan society to places of Buddhist importance not only in north India but also in the south (Andhra Pradesh). 
•  India has responded with urgency to the government of Sri Lanka`s request for assistance in overcoming hardships and will enhance economic linkages between the two countries be it through infrastructure connectivity and renewable energy.

[Q] Economic ties between India and Srilanka growing in recent years are still far below their potential. Elucidate the constraints which are inhibiting this growth.