The alarmist statements by several leaders of the Opposition about India facing a Sri Lanka-like economic crisis are irresponsible at best and sinister at worst. Sri Lanka is in the midst of a severe economic crisis triggered due to unsustainable external debt and a balance of payment (BOP) crisis. It has been caused due to a combination of economic mismanagement and geopolitical, natural, and man-made crises.
Sri Lanka has increasingly been relying on foreign commercial debt to fund its large fiscal deficit averaging around 6 percent of the GDP for more than a decade. The foreign debt now accounts for 119 percent of the Sri Lankan GDP. Most of Sri Lanka's external debt stock is owed to international capital markets accounting for 47 percent. About 22 percent is held by multilateral developmental banks, and about 10 percent each by China and Japan. It has a forex reserve of only $1.9 billion, while its debt payment obligation for 2022 stands at $4 billion.
The island nation is highly-dependent on imports of essential commodities and industrial goods. At the same time, it exports mainly agricultural products, and is heavily dependent on remittances from abroad to maintain its BOP. Disruptions caused because of COVID-19 in global supply chains and soaring fuel and input prices have wrecked the BOP accounts, made worse by falling exports and dwindling remittances.
While India has faced the impact of the COVID-19 pandemic and rising fuel prices, it is in no way comparable to the Sri Lankan situation. The combined state plus Centre debt is 88.4 percent of the GDP. External debt as the percentage of GDP is only 20 percent. India's BOP has remained in surplus throughout the last two years. The forex reserves now stand at $634 billion, which is equivalent to 13.2 months of merchandise imports, and is higher than India’s external debt. The combination of high foreign exchange reserves, sustained foreign direct investment, and rising export earnings present a completely different picture from the doomsday prediction. The GDP of Sri Lanka is $80 billion, while India's GDP is around $3 trillion. Forex reserves of India are at $618 billion, unlike $1.9 billion of Sri Lanka. India's annual exports are around $418 billion and rising, unlike Sri Lanka’s $15 billion.
The Prime Minister Narendra Modi-led government has put India on a path of stronger recovery by undertaking massive supply-side reforms in the last two years, coupled with increased capital expenditure on infrastructure, and capacity building for future growth. These supply-side reforms include deregulation of numerous sectors, simplification of processes, removal of legacy issues such as ‘retrospective tax’, privatisation, production-linked incentives, etc. This is unlike Sri Lanka’s recent economic trajectory, which moved away from the pro-market framework towards populist orientation. Interestingly — and the irony is not lost on anyone — it is India’s opposition parties that champion policies that mirror Colombo’s economic model in the run-up to the crisis.
Opposition-ruled states have been indulging in unrestrained populism, and freebie politics. The top five indebted states of India are all Opposition ruled: Punjab (53.3 percent), Rajasthan (39.8 percent), West Bengal (38.8 percent), Kerala (38.3 percent), and Andhra Pradesh (37.6 percent). The Opposition has been at the forefront in opposing pro-market reforms, and institutional changes to increase efficiency. It violently opposed the three farm laws, which would have modernised the agricultural sector. Instead, there is much similarity between the overnight switch to organic farming in Sri Lanka and the Luddite romanticism of India’s Opposition regarding the agricultural sector. Opposition parties, with scant regard to the high fiscal deficit due to the pandemic, are pushing for free power and water in many states.
Two shocks the Sri Lankan economy has suffered in the recent past are, one the 2019 Easter bombing by Muslim extremists, and two, the ongoing Russia-Ukraine war. The Easter bombing caused a drastic fall in the country's critical tourism sector, a problem that exacerbated by the pandemic. The Russia-Ukraine war has impact the island nation because both Russia and Ukraine are major sources of tourists, and Moscow is the second-biggest export market for Sri Lankan tea. The rise in fuel prices has also hit the Sri Lankan economy.
While the Government of India has deftly navigated the conflict to safeguard its economic and strategic interests, the Opposition has been putting pressure on it to take dogmatic positions in the war. Several Opposition members of parliaments have openly opposed the Indian stand of neutrality, and championed the pro-Ukraine cause. In contrast, the communists have supported Russia against the West. The Opposition is unmindful of the impact on the fragile economic recovery, which requires room to manoeuvre as and when needed.
Expectations are often self-fulfilling in an economy. The needless scaremongering by India’s opposition parties only serves the purpose of harming consumer and investor sentiments. It’s the Opposition that has been championing economic policies similar to the ones that pushed Sri Lank into a deep crisis.
Abhinav Praksah Singh is assistant professor, Shri Ram College of Commerce, University of Delhi, Delhi.
Views are personal and do not represent the stand of this publication.
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