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Sri Lanka’s economic crisis – Impact on India

Sri Lanka’s economic crisis – Impact on India

The Sri Lankan government declared officially in January 2021 that the country was experiencing the worst economic crisis in its 73-year history. 

Sri Lanka’s economic crisis – Impact on India

The Sri Lankan government declared officially in January 2021 that the country was experiencing the worst economic crisis in its 73-year history. On Thursday, March 18, 2022, India extended a USD 1 billion line of credit to Sri Lanka to assist the country in dealing with the economic crisis. 

The island nation's economic woes have worsened as a result of a severe shortage of foreign currency and the inability to pay for essential imports such as fuel. From power outages lasting up to 13 hours to shortages of food, petroleum products, and essential goods, as well as a 17.5 percent double-digit inflation rate, the situation in Sri Lanka is concerning, with political uncertainty fueling violence among the general public.

India, Sri Lanka's only immediate neighbor, is walking a tightrope as it comes to grips with the challenges and opportunities introduced by the Sri Lankan crisis.

What caused the crisis in Sri Lanka?

The crisis in Sri Lanka was primarily caused by a lack of foreign exchange (forex) reserves, which have fallen by 70% in the last two years to just US$2 billion by the end of February 2022. The remaining forex reserves are barely enough to cover two months of imports. Meanwhile, the country faces approximately US$7 billion in foreign debt obligations in 2022. 

The forex crisis has been exacerbated by a number of factors. Sri Lanka has suffered the most as a result of the tourism industry's collapse since the 2019 Easter Sunday suicide bombings, which resulted in a 70% drop in tourist arrivals. This was exacerbated further by pandemic-related travel restrictions. Furthermore, during the pandemic, remittances from foreign workers, Sri Lanka's main source of US dollars, fell 22.7 percent to US$5.5 billion in 2021.

Consumption patterns in the country are also heavily influenced by the country's reliance on imports of essential goods such as sugar, pharmaceuticals, fuel, pharmaceuticals, fuel, pulses, and cereals, which has exacerbated the crisis. A combination of bad policy decisions, such as the ban on fertilizers, resulted in a drastic decrease in domestic food production, driving up food prices by 25%.

What is the impact of the Sri Lankan crisis on India?

  • India's exports to Sri Lanka are declining as a result of the inability of Sri Lankan traders to pay for imports. Furthermore, many Indian exporters are concerned about stalled payments. At the same time, it provided an opportunity for India's tea and textile industries to replace Sri Lankan exporters and export their products to European and American markets. Transportation has become more expensive as a result of the fuel shortage, and there is also uncertainty. As a result, importers of Sri Lankan goods may prefer India to Sri Lanka.
  • Several Indian firms have invested in Sri Lanka in a variety of sectors, including manufacturing, tourism, hotels, and banking. The economic crisis may have a negative impact on these investors.
  • The COVID pandemic has driven many people into poverty in Sri Lanka, and the current economic crisis has exacerbated their plight. Many people are fleeing to India in search of food. India is Sri Lanka's immediate neighbor. India should provide food, shelter, and employment opportunities to Sri Lankan refugees. This could add to the burden on India's economy, which is already struggling to deal with rising inflation.
  • India is dependent on the Colombo port, which serves as a trans-shipment hub for global trade. This means that goods from India are routed through this port. The Colombo port currently handles 60% of India's trans-shipment cargo. Many Indian shipments are stuck in Colombo port due to labor shortages and disruptions in transportation facilities. This could have an impact on India's exports and raise costs if alternative routes are chosen.
  • India is sending aid and relief materials to Sri Lanka. This is working to improve relations between India and Sri Lanka.

Outcome:

Sri Lanka is experiencing its worst economic crisis since independence. The common people of Sri Lanka are suffering as a result of rising inflation. The Indian economy might suffer as a result of the spillover effect.

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