The Sri Lankan government was overthrown following months of protests over high inflation, fuel and food shortages, and long power outages. Since its liberation from British colonial power in 1948, the island nation has been experiencing its worst economic crisis, and new dynamics are currently evolving there. The economy was already in trouble before Covid-19, and it is now in a fast decline. Mahinda Rajapaksa’s resignation as prime minister in May 2022 made way for Ranil Wickremesinghe to be named as the new leader of the government. Ranil Wickremesinghe, the country’s prime minister, said the economy had “collapsed,” leaving the nation unable to pay for necessities. According to experts, there are a variety of causes for the problem in Sri Lanka, including the COVID pandemic, deadly bombings in 2019 and President Rajapaksa’s weak economic management.
Sri Lanka’s economy is deteriorating quickly. Its inflation rate is currently over 21%. In the recent past, there have been frequent power outages and shortages of necessities including food, fuel, and life-saving medications. Over $50 billion in debt is owed by Sri Lanka where it has slightly over $2 billion in foreign reserves. The nation’s increasing external debts have severely undermined the domestic economy structurally, as have increases in government spending to implement COVID-19 alleviation measures. The G7 group of countries – Canada, France, Germany, Italy, Japan, UK, and US, have stated they support Sri Lanka’s efforts to lower debt repayment obligations. India has contributed at least $1.9 billion, and the World Bank has agreed to give Sri Lanka $600 million. The problems in Sri Lanka would consequently affect different geographical areas, trade systems, and global value chains (GVCs).
Due to their free trade agreement, Sri Lanka and India are vital trading partners. The economic relationship between these two nations includes a development cooperation that addresses infrastructure, connectivity, housing, health, transportation, education, and industrial development. The following industries saw investments from India totalling 1.7 billion dollars in Sri Lanka between 2005 and 2019: retail petroleum, tourism, manufacturing, real estate, banking & financial services, and telecommunication. Successful investments were made by renowned Indian companies, who have now established themselves in Sri Lanka.
Negative Effect on Indian Economy:
- Instability in Sri Lanka might have an impact on Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata Communications, Asian Paints, and other companies, according to an India Briefing note by Dezan Shira & Associates. Sri Lanka’s contribution to India’s overall exports, which was 2.16 percent in FY15, dropped to barely 1.30 percent in the first ten months of FY22. The 6.7 billion dollars in exports from India to Sri Lanka for the years 2014–15 is no longer present. It was 4.49 billion dollars as of January 2022 in FY22.
- A financial daily reported in April that due to Sri Lanka’s unstable foreign exchange reserves and fuel shortages, automakers including Tata Motors, Mahindra & Mahindra, Ashok Leyland, and TVS Motors had stopped exporting vehicle kits to the country and halted production at their assembly plants there. ITC claims that its first international hotel venture has failed. Prior to the epidemic, building on the $300 million project in Colombo was hampered by the 2019 terror attacks.
- For international trade, India mainly relies on the Colombo port which manages over 60% of India’s transhipment freight. Thousands of containers that were delivered from India to Sri Lanka are currently sitting uncleared at the port because the relevant authorities are unable to move containers between terminals. This has led to an accumulation of cargoes bound for Sri Lanka in Indian ports.
Positive Effect on Indian Economy:
- But there is also a bright side. Foreign buyers of the Tea are calling Indian planters and exporters in droves because Sri Lanka has been the world’s top exporter of orthodox tea. According to reports, significant importers from Iran, Turkey, Iraq, and Russia are travelling to Kolkata and the Assam tea estates. As a result, compared to comparable sales last year, the average price for orthodox leaf increased up to 41% in recent Kolkata auctions.
- Additionally, Sri Lanka’s apparel industry is suffering from a gasoline shortage. The US International Trade Administration estimates that the export of apparel makes up roughly 44% of all exports from the nation. India is now receiving a large number of apparel orders from UK, EU, and Latin American nations. Numerous orders have been given to businesses in Tirupur, the centre of Tamil Nadu’s textile sector.
Even though some of India’s enterprises are affected and others strive to fill the void left by the crisis in Sri Lanka, India’s support in this hour of need will strengthen ties with the island country, which has always been under strong Chinese influence.
