Impact of Sri Lanka’s Economic Crisis on India?

  • 04 April 2022
  • By MNS

An economic crisis occurs when a country’s economy suffers a major decline. We also refer to it as a genuine economic downturn. A financial crisis is almost always the catalyst for an economic downturn. Typically, GDP declines during a crisis, liquidity dries up, and property and stock market prices collapse. It’s a downward economic spiral that’s just getting worse.

Sri Lanka’s foreign debt has risen sharply since 2010, hitting 88 percent of the country’s GDP in 2019. The global recession caused by the COVID-19 pandemic intensified the issue, and by 2021, the country’s foreign debt had risen to 101 percent of its GDP, precipitating an economic crisis.

Relationship Between India And Sri Lanka

Between the two countries, there are strong racial and cultural ties. A marine boundary exists between India and Sri Lanka. India is Sri Lanka’s lone neighbor, separated by the Palk Strait; both countries are strategically located in South Asia and have aspired to establish a joint security umbrella in the Indian Ocean.

State Of The Sri Lankan Economy?

On social indicators, Sri Lanka routinely outperforms its peers. The tax-to-GDP ratio has fallen steadily since the early 1990s, from 18.4 percent in 1990-92 to 12.7 percent in 2017-19, with a low of 8.4 percent in 2020. Surprisingly, the fall in revenue began after Sri Lanka’s civil conflict finished in 2009.

Sri Lankan refugees are beginning to arrive on India’s southern coastlines. The economic crisis in Sri Lanka is now being felt in India as well. Find out how the country’s economic situation is affecting India as well.

Such Crises Affecting India’s Economy

Inflation has surpassed 17%. People are dying while waiting in lines for fuel, and schools are cancelling exams due to a lack of funds to import paper and ink. Sri Lanka is in the midst of one of its biggest economic crises since independence. The consequences are now being felt in India. People from the island nation are fleeing starvation and job losses and seeking asylum in India, which is doing everything it can to assist the neighbouring country. In the previous three months, India has given Sri Lanka $2.4 billion in financial aid, including a $400 billion RBI currency exchange, a $500 million loan delay, and a $1.5 billion credit line for importing gasoline and food.

In addition to a bailout from the International Monetary Fund, the southern neighbour has requested $2.5 billion in loans from China. The island has been plagued by daily power outages and double-digit inflation, which peaked at 17.5 percent in February. The central bank of Sri Lanka allowed the native currency to weaken by 30% in one month.

The Primary Causes And Reasons For The Crisis:

The crisis was primarily triggered by a lack of foreign exchange reserves. They’ve dropped 70% in two years, to just $2 billion at the end of February, not enough to pay two months’ worth of imports. Meanwhile, the country owes nearly $7 billion in foreign debt this year. Several causes have contributed to the FX crisis.

 “Tourism, the country’s third-largest foreign exchange earner, came to a halt after the 2019 Easter Sunday suicide attacks, which killed more than 250 people.”

As a result of the relocation, domestic food output fell dramatically, driving up food costs. After months of farmer protests, the decision was reversed, but the harm had already been done. In February, food inflation reached 25.7 percent. Indian exporters are now feeling the brunt of the crisis. Thousands of containers delivered from India to Sri Lanka, both those for domestic use and trans-shipment cargo, have been left unattended at the Colombo port because officials cannot afford to move them between terminals. As a result, some Sri Lankan cargo has stockpiled in Indian ports. Because it is a transhipment hub, India relies heavily on Colombo port for worldwide trade. The port handles over 60% of India’s trans-shipment cargo. In turn, India-related cargo makes up 70% of the port’s entire trans-shipment volume.

The Crises’ Repercussions

India is one of Sri Lanka’s most important trading partners. Sri Lanka’s largest tourism source before to the outbreak was India. India accounts for more than a quarter of all Sri Lankan imports. India is a major source of FDI in Sri Lanka. Between 2005 and 2019, India’s FDI totalled around $1.7 billion. With $139 million in FDI in 2019, India was the third largest source after China and the United Kingdom. The petroleum retail, tourism, and hotel industries, as well as manufacturing, real estate, telecommunications, banking, and financial services, are all areas where India has made significant investments. Several major Indian corporations have invested in Sri Lanka and developed a presence there. Indian Oil in Petroleum, Airtel in hospitality, Taj Hotels, Dabur, Ashok Leyland in telecom, Asian Paints, SBI, and ICICI Bank are among them.

Conclusion

While Sri Lanka is a tiny trading partner for India, it is a geopolitically significant country, and India must oppose China’s expanding economic influence. India’s annual exports to Sri Lanka totalled $4.8 billion, accounting for only 1.3 percent of the country’s overall exports. Sri Lanka only contributed 0.16 percent of India’s total imports. Any disruption in Colombo port operations, on the other hand, puts India at risk of higher expenses and traffic congestion. While development on a transhipment centre in Kerala has begun, it is in India’s short-term interests to assist Sri Lanka in overcoming its economic crisis.

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