The political and economic crisis in Sri Lanka has been attributed to a combination of factors, including the collapse of tourism due to travel restrictions, rising food and energy costs caused by the Ukrainian conflict, and a domestic political environment that supported populist economic policies over sound policymaking. The crisis led to the resignation of the prime minister and president and the appointment of a new president, Ranil Wickramasinghe. The economic crisis in Sri Lanka is not a new phenomenon and the country has relied on loans from the International Monetary Fund for some time. The COVID-19 pandemic and tax cuts introduced in 2019 have exacerbated the economic situation, leading to a significant increase in public debt. The government's reliance on Chinese loans to fund infrastructure investments and the concentration of political power in the hands of the Rajapaksa family also contributed to this crisis.

The economic crisis in Sri Lanka was not a new phenomenon. The country has been relying on loans from the International Monetary Fund (IMF) for quite some time. In fact, the current economic crisis has been succinctly summarized in the IMF's Article 14 consultation with the Sri Lanka report 2021. The report states that the program supported by the IMF from 2016 to 2019 could not resolve all of Sri Lanka's vulnerabilities because of the combination of unbalanced macroeconomic policies and a difficult external environment. As a result, the authorities embarked on an adjustment program in 2016 supported by an extended fund facility. Even before the late 2019 pandemic, Sri Lanka introduced a number of tax measures. In retrospect, it seems that these tax measures came at their most opportune moment. Various measures were becoming unsustainable due to the near absence of fiscal space, triggered by the tax measures introduced earlier. Imports of goods including food, fuel, and medicines are essential to Sri Lanka's economy. The availability of these commodities is currently restricted owing to a lack of foreign currency to manage customer queues, resulting in extended wait times. Soldiers have been stationed at gas stations, and a 36-hour curfew and national public emergency have been enforced by the government. The ruling Sri Lanka People's Front coalition lost its legislative majority, with just 104 MPs remaining out of a total of 225 as a result of defections. The 2019 tax cuts, combined with the COVID-19 pandemic's impact on revenues and expenditure measures that widened fiscal deficits to 12.8% of GDP in 2020 and 11.4% of GDP in 2021, have contributed to a significant increase in public debt, which now stands at over 100% of GDP. The timing of the tax cuts coupled with pandemic-related fiscal stimulus has proven to be a recipe for a macroeconomic disaster. Additionally, the drying-up of tourism during the pandemic has caused Sri Lanka's current account deficit to become unmanageable..Following the global financial crisis, the current account deficit increased significantly but improved until 2019. However, the pandemic caused a significant decline in the current account deficit, which is projected to reach 7.1% of the GDP by 2022. Various measures have been introduced to address this issue, such as increasing tax-free allowances from LKR 5,000,000 to LKR 3,000,000, reducing the top marginal tax rate from 24% to 18%, reducing the corporate income tax rate from 28% to 24%, and reducing the standard value-added tax rate from 15% to 8%. Additionally, the government eliminated economic service charges and nation-building taxes. Consequently, general government revenue decreased. With rising government expenditures, such tax cuts led to a significant increase in general government net borrowings, which increased from 5.3% of GDP in 2018 to 12.8% of GDP in 2020.

During the pandemic, the Sri Lankan government implemented a range of relief measures such as macroeconomic policy stimulus, increased social welfare spending, loan repayment moratoria for affected businesses, and a robust vaccination drive. These measures are commonly adopted worldwide; however, in Sri Lanka's case, the fiscal deficit became nearly unsustainable because of the lack of fiscal space caused by tax concessions introduced earlier. Additionally, two other factors contributed to the crisis that erupted in 2022: the government's increasing reliance on Chinese loans to fund infrastructure investments, and the concentration of political power in the hands of Rajapaksa family members.

China's relationship with Sri Lanka significantly strengthened during Mahinda Rajapaksa's presidency from 2005 to 2015. Chinese financial assistance totaled $12.4 billion during that time. After 2013, when Chinese President Xi Jinping launched the Belt and Road Initiative (also known as the One Belt, One Road Initiative), Sri Lanka's economic relationship with China became even more dependent. During President Xi's visit to Sri Lanka in 2014, the two countries signed a development cooperation agreement that envisioned the development of Colombo, the capital city, as a business hub and the port of Hambantota as a transshipment port, with a highway connecting them. For China, the port of Hambantota was strategically significant since Chinese imports of West Asian oil passed through the Indian Ocean, and China had concerns regarding the security of its sea lanes of communication or LOCs.

While the initiative appeared to be a bold, visionary endeavor with the potential to transform Sri Lanka's economy into a high-growth one, there were two primary concerns associated with how the project evolved. The first was the substantial debt Sri Lanka took to fund these projects, which sharply increased the country's dependence on China. The second is the environmental damage caused by these investments. However, it should be noted that high levels of Chinese debt were not a major contributor to the present crisis. Out of Sri Lanka's total debt of $38.6 billion, China's share was only 10%, which is the same as its level of indebtedness to Japan and less than that of other creditors, such as sovereign bondholders and the Asian Development Bank.

It appears that the issue at hand is not the level of debt that Sri Lanka owes to China but rather China's failure to provide assistance to Sri Lanka since early 2022. This refusal to provide assistance is surprising, especially given the close relationship that the two Rajapaksas, who held the positions of president and prime minister, developed with the Chinese government. The reluctance to bail out Sri Lanka could be attributed to the fact that China has realized that continued support would be throwing good money after bad. Some have even argued that the Chinese policy in Sri Lanka is similar to that of colonial powers, with the aim of defaulting loans to take control of its assets in the country.

The Chinese authorities' solutions to Sri Lanka's economic problems are evident in the nation's official media, which has emphasized the need for the International Monetary Fund (IMF) and other international institutions to assist countries like Sri Lanka to overcome their economic challenges. The Global Times, a newspaper often used by the Chinese government to express its official viewpoints on global issues, has advocated for professional financial organizations such as the IMF and World Bank to take responsibility for resolving the crisis through effective cooperation with all parties involved. Sri Lanka's democratic institutions and traditions were significantly affected by the 2 ½ decade-long civil war between the Sinhalese-led government and the minority Tamil community, represented by the LTTE. Following the government's victory, the country swiftly moved towards authoritarianism, with democratically elected governments primarily focusing on safeguarding majority interests and suppressing dissent.

The Rajapaksa family's dominance in Sri Lankan politics since 2005 was largely due to its crucial role in defeating LTTE during the civil war in 2009. President Mahinda Rajapaksa, who led the war effort, gave his two brothers, Gotabaya and Basil Rajapaksa, important positions in the government. Gotabaya was appointed as the defence minister, while Basil served as the minister in charge of the economy. Despite his government's unpopularity, Mahinda lost power in 2015 to President Sirisena, another Sinhala-dominated party. However, the Rajapaksa family's influence did not wane, as it returned to power in 2019 following corruption scandals and the Easter Sunday terrorist bombings, which highlighted issues of national security. In the November 2019 presidential election, Gotabaya Rajapaksa was elected as president, and in August 2020, Sri Lanka Podujana Peramuna, a new party formed by the Rajapaksa family, won a majority in parliamentary elections with 60% of the vote. Mahinda Rajapaksa was appointed as the prime minister.

The family exerted near-total control over state institutions, resulting in a significant policy impact. Family members and their associates were appointed to government positions. Bureaucrats who opposed the government's policies were either dismissed or resigned during the protest. The ban on chemical fertilizers, implemented without consulting farmers or providing sufficient organic alternatives, has negatively affected agricultural output. This pattern of disregarding expert advice, which is common among authoritarian and populist governments, has also occurred in Sri Lanka.

Sri Lanka’s economic crisis: Impact on India

The COVID-19 pandemic has plunged numerous individuals in Sri Lanka into poverty and the present economic crisis has exacerbated their dire circumstances. As a result, many individuals migrate to India in search of refuge to escape hunger. India must provide food, shelter, and employment opportunities for refugees from Sri Lanka. However, this could place an additional burden on the Indian economy, which is already facing rising inflation. Additionally, India's exports to Sri Lanka are dwindling because traders in Sri Lanka are unable to pay for imports. In addition, many Indian exporters are anxious about stalled payments. However, this has also presented an opportunity for the tea and textile industries in India to supply Sri Lankan exporters and export their products to European and American countries. Despite the fuel shortage, transportation costs have increased, and there is uncertainty as to when the ongoing political and economic situation in Sri Lanka will stabilize. Therefore, importers of Sri Lankan products may prefer India to Sri Lanka.

Third, numerous Indian companies have invested in Sri Lanka across various sectors including manufacturing, tourism, hospitality, and banking. However, an ongoing economic crisis may negatively affect these companies.

India must take all necessary steps to ensure a peaceful transition of power in Colombo. The situation in Sri Lanka could significantly impede the normal operation of Colombo Port, which would negatively impact India and potentially cause a large number of Sri Lankans to flee to India. China is the largest single lender and source of foreign direct investment (FDI) in Sri Lanka. With just over $2 billion in foreign exchange reserves, Sri Lanka has an external debt of more than $50 billion. New Delhi must take necessary actions to limit China's growing influence in the region. Sri Lanka's foreign reserves decreased by 70% in two years, dropping to just $2 billion. This year, the nation owes approximately $7 billion in foreign debt. Remittances from foreign employees decreased by 22.7% in the previous year. More than a fifth of Sri Lanka's imports came from India. Experts are analyzing the economic, sociological, and geopolitical consequences of Sri Lanka's economic crisis on India, as it worsens and escalates into civil unrest and political instability on the island nation. An appropriate diplomatic approach will determine India's geopolitical dominance in the region, as it navigates the uncertain waters in its relations with Sri Lanka. Growing economic problems in Sri Lanka's neighboring country, caused by a severe foreign currency shortage and the inability to pay for basic imports such as petrol, have exacerbated the island nation's situation. The situation in Sri Lanka is concerning, with political unrest leading to widespread violence. Power outages that can last up to 13 h, shortages of food, petroleum products, and necessities, and a skyrocketing double-digit inflation rate of 17.5% are all present. India, which is Sri Lanka's sole direct neighbor, is walking a tightrope, as it deals with the challenges and difficulties that this crisis in Sri Lanka has brought.

Sri Lanka has been facing its most severe political crisis for many years, and India has stepped in to help by providing 44,000 MT of urea, as well as other essential supplies such as fuel, food, and medicine. As Sri Lanka's only direct neighbor, India has a significant responsibility to address potential humanitarian disasters that could arise from the ongoing crisis. With food and medicine in short supply and political unrest escalating, India is well positioned to offer all available assistance to help stabilize the situation. The strong partnership between India and Sri Lanka has been a cornerstone of their bilateral relationship, with total Indian investment exceeding USD 3.5 billion and grants alone amounting to approximately USD 570 million. Recently, India provided Sri Lanka with a substantial humanitarian assistance package worth more than Rs 2 billion as the island nation grapples with a severe economic crisis.

The Indian economy experienced the most significant impact of the economic crisis in Sri Lanka through the Colombo port, which is one of the country's most critical ports from a strategic perspective. By handling more than 30% of India's container traffic and 60% of its transhipment, Colombo Port plays a vital role in the Indian economy. Any disruption in the services provided by the Colombo Port would have severe consequences for India, as they cannot afford to move containers between terminals. As a result, thousands of containers transported from India to Sri Lanka are currently unregistered at the port, along with multiple transshipments, leading to an accumulation of goods bound for Sri Lanka at Indian ports. This situation has resulted in higher costs and congestion issues at Indian ports, and India is developing its own transhipment hub in Kerala to address this situation. However, it may have been too late to mitigate the impact of the crisis.

The escalating power of China and the Chinese Communist Party is an alarming aspect of the Sri Lankan economic crisis that India finds particularly distressing. China is now Sri Lanka's largest creditor, accounting for the majority of foreign direct investment in the country. Despite falling victim to China's debt-trap diplomacy, Sri Lanka did not obtain sufficient income or jobs from Chinese investment. As a result, the government was compelled to declare bankruptcy and surrender important townships and strategically located ports such as Hambantota Port. A similar fate may befall in Colombo Port City given the current circumstances. This would be particularly disastrous for India, considering the CCP's power, its impact on global trade, and its influence on security in the South China Sea and Indo-Pacific.

India has invested in various sectors, such as real estate, manufacturing, tourism, hotels, telecommunications, banking, and financial services, in the island country. The current situation in Sri Lanka is already impacting these investments, and is predicted to worsen in the coming days. A significant amount is at stake, as demonstrated by $1.7 billion in FDI from India to Sri Lanka between 2005 and 2019. It is argued that India should intervene in the present crisis to protect its neighbors and interests. In Sri Lanka, political parties compete for power in all-party coalitions. Both Prime Minister Ranil Wickremesinghe and President Gotabaya Rajapaksa promised to resign, which sparked widespread antigovernment sentiment. The nation is finding it increasingly difficult to import basic necessities because of dwindling foreign exchange reserves. The value of the Sri Lankan rupee has fallen by over 80%, food prices have increased by over 50%, and tourism has decreased sharply.

The economic downturn in Sri Lanka exacerbated by the Covid-19 pandemic, has had ripple effects on Indian companies, particularly those in the automotive industry. The ongoing crisis in Sri Lanka prompted us to evaluate the country’s overall impact on India. ITC's $300 million hotel project in Sri Lanka, which was originally set to open in 2019, was postponed as a result of the 2019 terror attacks and subsequent pandemic. Additionally, Sri Lanka's unstable foreign exchange reserves and fuel shortages have caused automobile companies to cease exporting vehicle kits to the country since April. The ongoing unrest in Sri Lanka may also impact Indian companies such as Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata Communications, Asian Paints, and the State Bank of India. The percentage of Sri Lankan exports to India decreased from 2.16 percent in FY15 to a mere 1.3 percent. Furthermore, Sri Lanka's apparel industry suffers from fuel shortages. Recent auctions in Kolkata saw that the average price for orthodox tea leaves increased by up to 41 percent compared with the previous year. Significant Sri Lankan importers from Iran, Turkey, Iraq, and Russia have reportedly visited India's tea farms. In response to the crisis, India received a large number of garment orders from the UK, EU, and Latin American nations, and numerous orders were placed with businesses in Tirupur, the center of Tamil Nadu's textile sector. However, Sri Lanka remains a crucial strategic ally for India.

Sri Lanka is strategically important to India. Owing to its close proximity to China, this presents an opportunity for India to rebalance its diplomatic relations with Sri Lanka. The delivery of fertilizer to Sri Lanka at its request is seen as a positive move in bilateral relations as the dispute between Sri Lanka and China over the fertilizer issue escalated. Strengthening diplomatic ties with Sri Lanka would enable India to prevent China from using the Sri Lankan Archipelago as a "string of pearls" in the Indo-Pacific. It is important for India to provide assistance to Sri Lanka with care, considering the perception of its assistance. In the western province, Ranil Wickremesinghe declared a state of emergency and imposed a curfew. The country owes more than $ 51 billion (£ 39 billion) to foreign lenders, particularly China. The G7 nations supported Sri Lanka's efforts to reduce debt repayment obligations. India has provided at least $1.9 billion, and the World Bank has agreed to give Sri Lanka $600 million. The IMF considers a potential loan of $3 billion (£2.5 billion). Sri Lanka requested low-cost oil supply from Russia and Qatar. Currently, Sri Lanka imports $3 billion (£2.3 billion) more than exports. At the end of 2019, Sri Lanka had £5.8 billion foreign exchange reserves.

To ensure effective crisis management, it is crucial to establish solid political consensus in Sri Lanka. Reducing the militarization of governance is also important. It is necessary to prioritize the needs of the vulnerable and poor to help them recover without sustaining long-term harm. To achieve this, the following measures should be implemented: enhancing agricultural production, increasing nonagricultural job opportunities, fortifying reform implementation, and rejuvenating the tourism sector.

The state of Sri Lanka's economy can be characterized as a two-front deficit because its national expenditure exceeds its national income and its import obligations surpass its export revenues. This dire financial situation has been compounded by a significant amount of debt accumulated over the years, record-breaking inflation, shortage of foreign currency, and contraction of critical sectors of the economy. The pandemic, Russia-Ukraine conflict, and poor governance have all contributed to the country's unparalleled economic crisis, which has sparked a great deal of political unrest. Without external assistance, Sri Lanka may not be able to recover from this crisis. To address this situation, the country sought loans from China, India, and the Asian Development Bank.

Regarding Sri Lanka's economic turmoil, implementing a circular economy could decrease the country's reliance on imports and offer a feasible solution for recovery. Massive protests that occurred in March rocked Sri Lanka. Economic measures such as substantial tax reductions and debt payments have exacerbated the situation. A series of policy mistakes, intensified by external factors, overshadowed Sri Lanka's recent success in several areas. Sri Lanka's strained current account balance contributed to the BOP crisis. This situation worsened when Sri Lanka did not seek assistance from the IMF. IMF bailouts have historically been the least desirable option for any economy. Confronted with the financial crisis, Sri Lanka's options were limited. Sri Lanka's shortsighted development policies have hindered the country's capacity to produce agricultural goods.

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