Answer: Sri Lanka is facing its worst economic crisis since the country’s independence from British colonial rule in 1948. The country has amassed $51 billion in foreign debt, inflation has soared past 17%, and its debt-to-GDP ratio has escalated from 86.9 percent in 2019 to 100.6 percent in 2020, and 105.6 percent in 2021. The reason for the present scenario can be summed up in six key economic challenges: the state of the domestic economy, Balance of Payments (BOP) crises, successive IMF loans, unwarranted agricultural reforms contributing to FOREX scarcity and soaring inflation, downfall of the tourism sector, and the country’s historical fetishism for sovereign debts. The economic crisis has turned in to a political chaos, which has repercussions on India as well. These include the following:

• Strategic involvement of China: Sri Lanka occupies an integral spot in India’s ‘Neighbourhood First’ policy and SAGAR doctrine and forms a crucial part of India’s ‘sphere of influence.” However, since 2015, China has become one of the top lenders to Sri Lanka. China’s debt trap policy may cause Sri Lanka to surrender strategically located townships and ports such as the Hambantota. Now, as the economic crisis worsens, Sri Lanka could stand to lose control of even more of its land in such strategically-located port cities.
• Adverse economic impact on India:
  • Sri Lanka handles over 30 percent of India’s container traffic and 60 percent of its trans- shipment.
  • It is also a major destination for Indian exports.
  • India is the third largest source of FDI for Sri Lanka and has a substantial investment in the island-nation in the areas of real estate, manufacturing, petroleum refining, etc.
• Rise in illegal immigration: Over the past few weeks, more than 2,000 Sri Lankans have arrived illegally in India. Any significant spike in the number of refugees can trigger the apprehensions of the state around issues of public safety and refugee resettlement and stoke conflict with the local population over the use of common resources.
• Revival of the Tamil issue: A possible return of the Tamil-Sinhalese conflict (from the days of the Sri Lankan civil war that ended in 2009 only) also has potential spill over into India.

In this context, a speedy recovery of Sri Lanka is in India’s interest. India has taken the following steps to help Sri Lanka during the economic crisis:

• India, till date, provided around $5 billion worth of assistance to Sri Lanka, of which $3.8 billion was provided in 2022 itself. As the nation was defaulting on its debt, India provided a $400- million currency swap, deferral of a $500-million loan repayment, and two lines of credit (LoC) totalling $1.5 billion.
  • The line of credit India sent contained $1 billion for importing food, medicine and essential items.
  • The rest $500 million was for importing petrol products.
• India has also provided under a credit line 44,000 metric tonnes (MT) of much-needed urea and 16,000 MT of rice (50,000 MT planned) to the island nation as a concern towards resolving food insecurity.
• More than 25 tonnes of drugs and medical supplies, valued at close to SLR 370 million, have also been donated by the government and people of India.
• India has also sent vegetables, sugar, rice and wheat as humanitarian assistance.

With other crises unfolding in India’s neighbourhood, for instance in Nepal and Pakistan, diplomatic efforts need to be stepped up to contain any second order effects on India.