Sri Lanka has been battling a grave crisis for the past several months. India’s pearl-shaped southern neighbour is facing severe economic and political misery that were in the making for a long time. The country is plagued with severe food and fuel shortage. Meanwhile, popular unrest has forced the former President and Prime Minister to flee.
The Sri Lankan crisis has brought many political questions to the fore. For example, the debate around the extent of welfare policies on an economy, or dynasty politics are now a matter of public discourse. Also, the role of China in this crisis is another highlight. In this backdrop, the crisis in the neighbourhood comes with severe challenges as well as lessons for India.
No country can afford to avoid feeling the brunt of a crisis in a neighbouring. The crisis in Sri Lanka has fanned the migration of Tamils in India, apart from posing security challenges. To understand the gist of it, we must first remember that China is one of the factors that contributed immensely to this crisis. However, at the time of the crisis, it is nowhere to be seen. India has been among the first countries that extended a line of credit to Sri Lanka.
China has been trying to encircle India under its ‘String of Pearls’ policy. It has built several military bases at geostrategic locations around India. It is achieving it’s interests through debt policy. In this, China offers huge amount of loans to low/middle income countries. Later, when unable to pay these countries are forced to agree to problematic provisions. Sri Lanka recently handed the Hambantota port to China on lease for 99 years after it was unable to pay the debt.
The crisis, thus, highlights the need for India to have more proactive policy towards the neighbouring states to tackle the China problem.
The crisis in Sri Lanka is two-fold— one at the economic level and another at the socio-political level. At the core of the crisis is the twin-deficit problem that Sri Lanka faces today. The twin-deficit crisis refers to the dangerous combination of unsustainable fiscal deficit with an unsustainable current deficit.
When the expenditure of the government exceeds its revenue, it is known as fiscal deficit. It is not necessarily bad (if the government is spending on productive forces that will give long term returns). However, a fiscal deficit becomes unsustainable if it leads to a self-perpetuating increase in debt-GDP ratio.
In the case of Sri Lanka, several wrong policy measures led the country to an unsustainable fiscal deficit problem. The Rajapaksa government introduced a spree of wrong economic measures. It spent too much on welfare schemes and also cut down taxes as a populist measure.
Sri Lankan economic policies have been dominated by socialist ideals for long. In the 1950s, Sri Lanka garnered wide attention for its welfarism. Even then, there was a division of opinion. Amartya Sen recalls in his biography how the Cambridge economist Joan Robinson was unimpressed by the economic policies in Sri Lanka. Although, Sen was not very convinced by her arguments at that time. However, she has been proven right.
The politics of freebies has creeped into India as well. Though lucrative, India should be mindful of the repercussions of such populist measures. Everything in the economy comes with a price. Thus, targeted subsidies and welfare measures should replace freebies.
The other elephant in the room for Sri Lanka is its current deficit. When the imports of a government exceeds exports, it is known as current deficit. Every country needs to maintain a forex reserve to import essential commodities. But in Sri Lanka, the forex dwindled to an alarming level. So much so, that it has become difficult for the country to import food and fuel.
The reason behind this is that Sri Lankan economy depends heavily on tourism and export. Tourism was adversely impacted due to the COVID pandemic, while the Russia-Ukraine war has lessened Sri Lankan exports of tea to Russia and import of food. To make the things worse, the Rajapaksa government announced complete ban on chemical fertilizers to promote organic farming. The government’s mismanagement led to food shortage, not to mention, anger among the farmers.
Thus, the lesson that India should take home is that diversification of sources of foreign exchange earnings is crucial. The world learnt the lesson during COVID pandemic when lockdown in China disrupted the supply chain all across the world’s. In this direction, the ‘Atmanirbhar Bharat’ scheme is a well-timed and important one. Experts suggest that India needs to become self-reliant in the field of energy and defence.
Though the crisis is economic at the surface, in it roots, it is socio-political. The entire political power was in the hands of one family—the Rajapaksas. At one point, 70% of Lanka’s economy was under their control. The central bank of Sri Lanka is also not independent, unlike the RBI in India. The Rajapaksas, who enjoyed a brute majority in the Parliament fanned sectarian politics by openly appeasing the majority Buddhist Sinhala group. This side-lined the minorities—the Tamils and the Muslims. The poisonous combination of majoritarianism and dynasty politics lie at the root of the crisis.
India is the largest democracy in the world, with robust institutions in place. However, the Sri Lankan crisis is a grim reminder of the need of an inclusive, and accountable government. Thus, the hasty passage of bills in the Indian Parliament, or the declining culture of healthy debate should be checked. Fanning of sectarian divisions in the society not only puts citizens lives and livelihood at threat, but also repels investors.
A healthy democracy ensures a fair distribution of power and opportunities. Dynasty politics runs contrary to the ideals of democracy. Although It exists in many countries to some extent. But when one family begins to decide the faith of the whole nation, as in the case of Sri Lanka, it signals towards an impending crisis. Dynasty politics is very rampant in India. The very existence of several parties would come under threat if the ruling family was subtracted from it. India should move towards a democracy where a person from the lowest strata can rise to the top.