New Delhi, India

After months of opposition to his administration over the worst economic crisis in the country's history, Sri Lankan President Gotabaya Rajapaksa has resigned. Sri Lanka's parliament convened on Saturday to start the process of electing a new president. Sri Lanka used to be a middle-income economy, continuously improving on social indicators, but economic mismanagement by the government led it to collapse. 

Everything started with the tourism industry, which was severely impacted first by bombings carried out by Islamic extremists targeting hotels and churches in 2019, and then by the coronavirus outbreak the following year. Tourism revenues contributed to 5.6 per cent of the Sri Lankan GDP in 2018 but fell to just 0.8 per cent in 2020. India, as a country is also dependent on tourism, as this sector contributed 9.3 per cent to the country's GDP in 2019. The Indian tourism industry also needs to cope with the setbacks created due to the coronavirus pandemic, or the revenue source could be lost.

The Government of Sri Lanka under Rajapaksa reduced VAT to 8 per cent, reduced corporate tax from 28 per cent to 24 per cent, and abolished the Pay As You Earn (PAYE) tax and the 2 per cent “nation-building tax” which financed infrastructure development. All of these led to a 33.5 per cent decline in registered taxpayers. India is also in the process of reforming its tax structure, with the introduction of the Goods and Services Tax (GST), reduction in corporate tax rate and exemption of individual taxpayers with taxable income up to Rs 500,000  by providing a 100 per cent tax rebate. These reforms need to be implemented with caution.

In its 2014 State of the Economy Report, the Institute of Policy Studies of Sri Lanka called attention to hot money, unsettling borrowing habits, ephemeral and shallow quick fixes, and a monopoly of foreign direct investment flow into the hotel industry. When compared to 2005, Sri Lanka's foreign debt more than doubled, rising to $56.3 billion by 2020. The country's foreign debt increased from roughly 42 per cent of GDP in 2019 to 119 per cent of GDP in 2021. The nation needed to pay $4 billion in debt by the end of 2022, but as of April 2022, government foreign currency reserves were only $2.3 billion. 

According to the Reserve Bank of India's data, at the end of March 2022, India’s external debt was placed at $ 620.7 billion, recording an increase of $ 47.1 billion over its level in end-March 2021. As per a recent RBI report, five Indian states have been flagged as highly debt-ridden states. India should manage its debt-to-GDP ratio to avoid defaulting. 

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The government of Sri Lanka printed more and more money in order to deal with debt liabilities, but that led to the depreciation of the Sri Lankan rupee, leading to falling forex reserves. India should restructure debt, but at the same time also boost exports to deal with any untoward impact on forex reserves.

In April 2021, Rajapaksa announced that the country will only allow organic farming, banning chemical pesticides and fertilisers, negatively impacting the production of tea and rice. Sri Lanka used to be the second largest tea exporter in the world, but bad agriculture policies led to the downfall of the industry. In November 2021, the government abandoned the organic farming plan, but the damage was already done. This led Sri Lanka to import rice worth $450 million in 2021.

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A big lesson to learn for India from this situation is to be self-sufficient in food production. As per the data released by the Ministry of Consumer Affairs, around 1550 tonnes of food grain have been wasted during the Covid-19 pandemic in the Food Corporation of India’s godowns, due to a lack of a proper mechanism to store the food grains, and this should be avoided at all costs, especially at a time when food resources have become scarce all over the world, with the situation exacerbated by the Russia-Ukraine war. The ongoing war also contributed to the collapse of the Sri Lankan economy, as Russia is the second biggest market for Sri Lankan tea exports, and also a major source of tourism.

All these factors contributed to the fall of Sri Lanka, resulting in electricity and fuel shortages, and a rise in inflation. This placed the country at a standstill, with health services being impacted, mid-term examinations being postponed due to a shortage of paper, and also affecting the trade and diplomatic relations with other nations.

India, as a country is also dealing with a set of unique economic problems that need to be dealt with carefully in order to avoid a future crisis. Firstly, India has a reserve oil storage of 74 days, but this needs to be increased keeping in mind the ongoing fuel crisis around the world created due to the Russia-Ukraine war. Secondly, India seems to be on the brink of a power crisis with the ongoing coal shortage at a time when the country is dependent on fossil fuels for more than 60 per cent of electricity generation. Third, the Indian rupee has depreciated 5.9 per cent in 2022, which will further result in decreasing forex reserves, which have already plunged to the lowest ever value in the past 15 months. Fourth, Indian inflation soared to 7.79 per cent in April 2022, which should be avoided at all costs, as seen in Sri Lanka, where angry protestors raided government institutions to express outrage over increasing prices. Lastly, industrial production should be increased in tune with the government’s plan to produce goods worth $1 trillion by 2025, and at the same time exports should be increased to earn sufficient forex reserves to deal with debt liabilities and the ever-increasing cost of imports due to unstable global atmosphere around fuel and food.

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(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)

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