Expert Speak Raisina Debates
Published on May 02, 2022
As financial crises brew in India's neighbouring nations, India should engage in new economic initiatives with these states to prevent the worsening of such crises.
Why India needs an economic action plan for friendly neighbours

Addressing the G-20 Finance Ministers and Central Bank Governors (FMCBG) meeting in Washington, India’s Finance Minister, Nirmala Sitharaman, called for ‘pro-active collective efforts towards protecting economies’. She spoke in the same vein on specifics in her meeting with the IMF Managing Director, Kristalina Georgieva, when she called for fast-tracking the funding programme for the economically unstable Sri Lankan neighbour, which is also threatening the political stability in the island nation.

Apart from Sri Lanka, Nepal, too, is facing a possible forex crisis. Once a ‘basket case’ but now a middle-level economy that has lent money to Sri Lanka recently, Bangladesh too has flagged concerns, though not to the same levels as the other two. Smaller nations like Bhutan and Maldives have similar challenges that have yet to reach a crisis stage.

As the Sri Lankan experience shows, there are more critical domestic factors that were allowed to grow roots and branches over decades.

The COVID-19 lockdowns and the pandemic management and associated high spending are the two main causes for the economic stress faced by many nations, including India at times. As the Sri Lankan experience shows, there are more critical domestic factors that were allowed to grow roots and branches over decades. These are legacy issues, to which every government, like the incumbent leadership of President Gotabaya Rajapaksas in Sri Lanka, has added its own share of woes.

Like the rest of the world, none of them provided for a pandemic-like situation in the 21st century just as they could not have provided for natural disasters like the Indian Ocean tsunami (2004) and the Nepal earthquake (2015). With national aspirations growing leaps and bounds thanks to the social media exposure of urban and rural population alike, Third World South Asian nations have gone on a debt-driven high spending, when jobless growth, added to the fundamentals, did not support a repayment scheme.

Nothing explains the situation better than Sri Lanka. If the previous Government of National Unity (2015-19) condemned the predecessor regime of war-winning President Mahinda Rajapaksa, now Prime Minister, for resorting to unsustainable borrowings from China for the controversial Hambantota port and Mattala airport projects, they too borrowed heavily from China, for similar infrastructural projects. This was also amongst the unsaid Indian concerns when originally approached for funding the Hambantota project, beginning with Mahinda’s predecessor and one-time party boss, President Chandrika Bandaranaike-Kumaratunga.

Small is not beautiful

What is true for Sri Lanka remains true for most other Indian neighbours, including non-viable loans from China. What India knew, but the respective nations did not acknowledge, was that they did not have the ‘size’ required to ensure the medium and long-term well-being of their people and stability of their economies. It is here that India’s geographic size, population, and economy, matter.

The realisation of such home truths should now force the nation to rethink the China-funded Colombo Port City (CPC) financial Special Economic Zone (SEZ).

For instance, the Maldives with an estimated population of 580,000, does not have either the financial or even the human resources to secure the nation’s 90,000 square kilometres of territorial waters. If truth be told boldly in the midst of engulfing economic crisis in the region, none of India’s neighbours is economically viable entities if the aspirational demands of their social media generations are to be met by a ‘welfare economic model’ with a democratic electoral scheme.

It is foolhardy to expect any of these nations to live in eternal poverty, as used to be the case until 30-40 years back, as regional underdogs. It is even more impractical for these nations to create a prosperous economic model like that of Singapore or Dubai, which Sri Lanka had hoped to be. Alongside were the unimaginative China-funded projects, which led to ‘jobless growth’ in the past decade. The realisation of such home truths should now force the nation to rethink the China-funded Colombo Port City (CPC) financial Special Economic Zone (SEZ).

Self-sustainable and more

The question thus arises: What needs to be done to make these economies work? Whilst massive haircuts in investments and social sector spending reads good, the socio-political cost and resultant regional instability could be unpredictable. Already, there are signs of the same. The real cure lies in figuring out ways to let the economy grow and become self-sustainable.

After the US sanctions on Iran, both nations wanted to pay for their oil imports in Indian rupee, which New Delhi itself had opted for at the time.

To cut the long story short, any revival initiative in the region has to be India-centric: For economic and not political reasons. That being the case, Pakistan and Taliban-controlled Afghanistan have to be kept out, especially the latter, at least for now. The region cannot have another politically dead-locked SAARC-like experience again. Nor can BIMSTEC work as the South/Southeast Asia hybrid that lacks the required regional and economic focus and speed.

New Delhi can consider a new economic and monetary union of friendly South Asian nations, with clarity of concepts and action plan(s). For a long time, Sri Lanka and Maldives had called for a SAARC monetary union and a common currency. After the US sanctions on Iran, both nations wanted to pay for their oil imports in Indian rupee, which New Delhi itself had opted for at the time.

Initiatives and institutions

It is easier said than done, both in terms of initiatives and institutions. First and foremost, India needs to decide whether it wants to be a part of this at all. Then comes the question if it wants to have a formal/informal regional forum, or would it be happy continuing to do bilateral business but formatted against a regional template of some kind—if only to avoid ‘small-nation cartelisation’, which was a bane of SAARC.

There is a need and scope for cross-nation investments amongst these nations in multiple sectors, through an opening-up process. India, for its part, would have to open up its labour markets too. However, such initiatives have to be preceded/accompanied by upskilling. Sri Lanka, for instance, sought to achieve it in the post-war period but failed after Indian IT majors and agronomists withdrew their proposals, citing adverse political reaction in southern Tamil Nadu, where they all had business interests. That situation has changed since.

Successive Sri Lankan governments have not acted on the 2012 post-war agreement for setting up an Indian pharma SEZ in eastern Trincomalee, which in hindsight would have checked against the present shortage of imported medicines, induced by the unending forex crisis.

India has the market to absorb the products/produce of manufacturing, agriculture, and services sectors from regional nations. However, learning from the lesser-acknowledged fallouts of the bilateral Free Trade Agreement (FTA) of 1998, nations should work around situations as it had happened when opening up the Indian market to Sri Lankan rubber, tea, and coconut oil created a socio-political storm in the south Indian states of Tamil Nadu, Karnataka, and Kerala.

Successive Sri Lankan governments have not acted on the 2012 post-war agreement for setting up an Indian pharma SEZ in eastern Trincomalee, which in hindsight would have checked against the present shortage of imported medicines, induced by the unending forex crisis. It would have also meant that those medicines would have been available at a fraction of the imported prices even while creating jobs for the locals.

The Sri Lankans, too, have had similar grouses, particularly in their traders and investors having to deal with multiple Indian agencies at two levels, at the Centre and in the respective states. Some of their experiences and more so imaginary apprehensions aborted successive attempts at upgrading bilateral FTA into more comprehensive CEPA (2008) and ECTA (2016) under different governments in Colombo. Incidentally, from the Indian side, the ECTA negotiations were conducted when minister Nirmala Sitharaman was holding the commerce portfolio.

Caught in the cross-fire

India’s initiatives will not end with planning for a formal or an informal economic-cum-monetary union centred on select neighbourhood nations, or with deciding on the format, namely, bilateral or multi-national. The domestic political dynamics in each of these nations has an element of anti-India rhetoric built into the scheme, and that has the potential to derail current efforts on a different day, sooner or later.

Some of their experiences and more so imaginary apprehensions aborted successive attempts at upgrading bilateral FTA into more comprehensive CEPA (2008) and ECTA (2016) under different governments in Colombo.

It is more pronounced in Maldives just now, where former President Abdulla Yameen-centric Opposition combine’s ‘India Out’ campaign has made international headlines. Even in the midst of the peaking economic crisis in Sri Lanka, different parties in the Opposition ranks had motivated questions about India-funded projects. The situation is no different in Nepal and Bhutan too. In Bangladesh, India still has to plan for the medium and long term, beyond the friendly incumbent regime of Prime Minister Sheikh Hasina.

New Delhi cannot plan for an unsteady economic relationship with neighbourhood nations, nor can it wish away those neighbourhood problems as non-existent, for reasons that are not always economic. It is this unsteady nature of bilateral economic relations, owing to unsure domestic political conditions, that will remain a continuing cause for Indian concerns in the coming years and decades than making funds, projects, and jobs available, for neighbours in their nations and on Indian soil.

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