Background of Sri Lanka:
First of all, we will discuss the background of Sri Lanka. Sri Lanka is an island nation based in the Indian subcontinent. It is also known as Ceylon and is one of the closest neighbors, to India. Sri Lanka is a founding member of the SAARC Group of Nations and ranks second in terms of capita on GDP in the Indian subcontinent. Although many of us know Sri Lanka because of cricket, Sri Lanka is an agricultural powerhouse. Sri Lanka is a major exporter of tea, rubber, coconut coffee, sugar, etc.
Sri Lanka is the world's
second-largest tea exporter country. If we talk about special products, then
the product of this country is Ceylon tea very famous. Apart from this, Sri
Lanka is also a major garment exporter. Sri Lanka contributed Textiles 56% of
the total exports in the financial year 2021. Next comes the number Tea which
has a 7% market share in exports.
What is the strategic importance of Sri Lanka from the perspective of India?
When it comes to maintaining control over the Indian subcontinent, Sri Lanka is an important partner of India as this country is in many other areas such as South Asia and the Far East, It is situated at the crossroads of the shipping routes of continents of Europe and America. So from the perspective of Shipping Lines and Air Freight Services, it is important to pay money to India in on all the port sites of this country which is as follows.
Trincomalee Port in the East Colombo, Colombo Port in the West,
Hambantota Port in the South East, and South West Galle Port. Apart from this,
Sri Lanka also has its importance for maritime security and Military basis in
the Indian Ocean. It can play a huge role in controlling the area's Indian
naval security and the Indian Ocean. Therefore Sri Lanka has become a major
conflict point between India and China.
What went wrong in Sri Lanka or how did such a situation come about?
After Independence, Sri Lanka's economy was slow, but growing at the study rate. There was a significant contribution from the export of tea and coconut to the economy. In the year 1970, 93% of the exports came from agriculture. Therefore, when the prices of commodities such as tea and rubber went down, this country had to face a recession. At the same time, when the prices of these things used to come, then there was an improvement in the economy.
Slowly Sri Lanka started reducing its dependence on agriculture products and till the decade eighty’s the economy was also growing at a study rate. But when the civil war started in the country of Liberation Tigers of Tamil Eelam i.e. LTTE, the country suffered a lot. This war almost lasted for two decades. Due to this, the economy and foreign investor sentiment of this country suffered a lot. Many MNCs closed their operations in the country and started avoiding this country to do business.
The country suffered a lot of damage due to the 2004 Asian Tsunami, due to which more than 30 thousand people died and more than 5 million people lost their homes. After that, the civil war ended in the year 2006 and Sri Lanka started its journey as a complete nation, due to the civil war and tsunami, the country suffered a lot. Therefore, to cover the damage, there was a need for a lot of improvement in the country, the governments that came were not able to maintain the fiscal prudence, due to which the debt level continued to rise.
At the same time, China started investing in Sri Lanka. Now financed many infrastructure projects and later when Sri Lanka could not repay this loan, the economic control went into the hands of China. For example, Sri Lanka had taken a loan of 1.2 billion dollars from China for the Hambantota Port, but they could not repay the loan. Because of this, China took control of Hambantota Port for 99 years. Apart from this, China also started making its contribution in military contracts for the supply of defense products to the Sri Lankan Army.
Because of this Sri Lanka voted in favor of China among all youth solutions. The GDP of the last decade in Sri Lanka has fallen drastically and in the year 2019, its foreign debt was equal to 88% of its GDP. The biggest reason for this is that most successive governments implement some policies that supported the populist economy rather than the developmental economics. Along with this, the level of corruption in the country has also increased a lot. Recently the government cut the tax rate too much.
Due to this, there was a negative impact on government revenue and due to fiscal policies, the budget deficit also increased to 15% in the year 2022. In the year 2020, this number was only 5%. Apart from this, the Pandemic also had a lot of negative effects on the economy and in the year 2021, the foreign debt of the country was equal to 101% of its GDP, and tourism had a fixed contribution of 12.6 % in Sri Lankan GDP, But due to the pandemic, its foreign exchange reserves saw a decline.
There was also a significant decline in due to this, many people lost their jobs. Sri Lanka took a decision which was no less than a surprise. Sri Lanka has banned all fertilizers and pesticides to make its country the first 100% organic farming nation. This was a very wrong move, because it affect the agriculture sector and as we discussed earlier also the agriculture sector has a huge contribution from Sri Lankan exports and the result of this decision was also visible very soon.
Now the farming output has seen a decline of up to 50% till September. Due to this, there was a lot of food shortage and inflation also increased. Due to all these reasons, the foreign exchange reserve of Sri Lanka fell by two billion dollars. Its debt payments for the year 2022 have been 4 billion dollars. Thus Sri Lanka became a twin deficit economy.
A twin deficit economy i.e. where both the fiscal deficit and the current account deficit are exists together. The condition of fiscal deficit occurs when the spending of the government is more than its revenue. In the case of a current account deficit, a country's import value exceeds its export. At present, Sri Lanka has both fiscal deficit and the current account deficit conditions.
How the current situation came to Sri Lanka due to which reasons?
Covering the government spending was a big challenge for Sri Lanka, but wanted to solve this challenge without increasing the tax and interest rates. That's why the central bank started printing money in huge amounts. The International Monetary Fund (IMF) had also advised them that they should reduce government spending. Along with this, the interest rate and tax should be increased and money should not be printed in large quantities. But the Central Bank of Sri Lanka, ignoring this too, kept printing money, due to which this economic crisis came.
Sri Lanka also faced food shortages due to a shortage in agricultural products. Apart from this, foreign exchange reserves were also depleting and due to the Russia Ukraine war, oil prices also increased. Due to this, inflation in Sri Lanka increased by more than 15% and in February 2022, food inflation increased by more than 25%. Citizens had to face fuel Shortages and power cuts due to rising inflation. Along with this, the prices of essential and specialty medicines have increased tremendously. People are facing power cuts for 10 hours, while the force has been imposed on petrol pumps as thousands of people are engaged in fuel lines.
Petrol prices have increased by 92% in the last three months and diesel prices increased by 76%. If we talk about food prices, then it has become four times after October 2021. Many people lost their jobs because of all these reasons. So many people started opposing the Governor and President Gotabaya Rajapaksa. Now the protests have increased so much that a state of emergency has been declared in the country and a complete curfew has been declared in the western part including the capital Colombo. But what we can learn from the situation in Sri Lanka, let's discuss in the next point.
What can India learn from this situation?
The sustainable foreign debt should be maintained at a stable
level. The primary focus should be on financial and economic prudence, when the
economic condition of the country is not good then a lot of new projects should
be avoided. suitable policy help keep inflation under control. And the currency
level should be kept at a sustainable level. Strategic reserves should be kept
for essential commodities such as food, medicine, and fuel. Economic
diversification should be implemented. Today Sri Lanka has to face the
situation due to the wrong policies of Sri Lanka.
Impact of Sri Lanka's financial crisis on India | Is this situation profitable for India?
So far, in the global war, many times the upheaval in the country's economy has an impact on other countries. As we have seen recently, the changes in the import-export due to the Russia-Ukraine war have increased the prices of many things, and badly affected many countries. At the same time, the loss caused to one person in many cases proves to be a profitable deal for some people and countries. Like Sri Lanka is facing the biggest economic crisis nowadays. On the other hand, this crisis in Sri Lanka is proving beneficial for India on some fronts.
Especially Tiruppur, the textile hub of Tamil Nadu, and the tea
gardens of South and Assam are benefiting tremendously from the Sri Lankan
government. In fact, according to Sri Lankan Government’s data, after tourism,
the largest contribution to Sri Lanka's GDP is the export of clothing and tea.
At present Sri Lanka is facing a fuel crisis. Because of that, along with
tourism, its exports have also been badly affected and India has benefited from
this crisis.
You must be thinking that how the clothes and tea which were being exported from Sri Lanka have been diverted towards India, which we can consider as a blessing and disguised in a way. Sri Lanka exports $5.42 billion annually in clothing and a report state that in the ongoing crisis in Sri Lanka, the manufacturing sector and clothing sector or apparel sector have been ruined.
Earlier Sri Lanka's apparel was so good that they had to import buttons. Bangladesh, Cambodia, Vietnam, Sri Lanka, and India are destinations for big global brands like Zara, Mango, and H&M. At present, Bangladesh, Cambodia, and Vietnam have huge orders and Sri Lanka is facing an economic crisis. So the only option left with the brand is to divert their textiles orders to Tiruppur in India instead of Sri Lanka. Apart from this, the Indian tea industry is also benefiting from Sri Lanka's crisis.
Sri Lanka produces orthodox tea and exports it to countries like Iraq, Iran, United Arab Emirates, Libya, Russia, and Turkey. India also produces Orthodox tea which mainly goes to the market in, Iran and Russia. Now those who like such tea leaves are in talks to buy from India from other countries. South India tea Exporters Association chairman Deepak Shah has gone to Colombo and he said that almost all the processing units of tea are currently facing power cuts of about 12 to 13 hours daily in Sri Lanka. They don't even have fuel to run their generators.
Nice post
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