Covid only added the Fuel but Sri Lanka’s Economy was always on Fire.

With an economy that goes crashing down within a matter of days and a sudden burden
of the debt that they had so far been oblivious to, it is correct to say that discussing Sri
Lanka’s deteriorating economy is essential.

Sri Lanka is currently undergoing a dual crisis i.e. debt and foreign exchange crisis. This has
led to an acute shortage of many basic commodities. While COVID may seem to be the
primary culprit, the truth is it only sped up the process.

The economy was already crumbling. Yes, the international travel restrictions due to
COVID have negatively impacted the tourism-based economy, and the reduced export
of tea and spices has led to a severe economic crunch. However, I would like to focus
on the 3 main reasons that have severely caused an impact on Sri Lanka’s Economy.

Foreign Debt

The first reason is the crippling foreign debt that has amounted over the past
decade. For example, China has lent $5 billion for massive infrastructure projects. But these
projects yielded almost no returns.

Agricultural Reforms

Secondly, the whimsical agricultural reforms have caused a fall of 30% in agriculture
production rate. Consequently, unable to sustain its population, there has been
increased dependence on imports to sustain its population, weakening its currency
against the dollar and lowering its foreign reserves.

Tax Regime

Finally, the third reason is the most condemned action i.e the undisciplined tax regime.
Despite the instructions of the IMF(International Monetary Fund), the President went out of his way to contradict the suggestion and reduce taxes to promote the party and political agenda.
The steep drop in the number of taxpayers forced Sri Lanka to take yet another loan
from IMF, despite already owing it $2.6 billion.

IMPACT ON INDIA

This crisis impacts India deeper than the surface and we must ponder its relevance in
the Indian Context.
Firstly, as a neighboring country, it is of utmost concern that the economy of Sri Lanka
has plunged, especially after Pakistan’s economy has already failed. For the same
reason, India might have to tackle a refugee crisis as many present in North Sri Lanka
will look to flee to Tamil Nadu. Secondly, India too, is owed a lot of foreign debt. Lastly,
It is important to contrast and deliberate on India’s economy and if it’s heading towards
the same spiral.
India must take away lessons for its own economy as well to ensure that we soon don’t
find ourselves in the same position as Sri Lanka.

LESSONS FOR INDIA

Firstly, the structural problems in the economy of the nations must be recognized. A
major takeaway is that no country can sustain its population or develop human
resources by completely moving away from its primary sector like agriculture in the case
of Sri Lanka.
Secondly, countries are at a loss if they solely and majorly depend on sectors that are
heavily based on foreign income like tourism.
The third lesson for India is to not get overflown with the agenda of winning elections
and implement policies just for the sake of winning elections.
In India, a majority of our population is still swayed by immoral factors like freebies,
distribution of money and liquor etc. While in the short term, people might be happy,
this is not sustainable in the long term and will lead to the downfall of the economy.

We should also keep in mind and ensure that massive infrastructure investment projects
are accurately assessed and the estimate of the money to be invested is rationally and
cautiously calculated. The foreign investment should also come from countries with
whom India has genial foreign relations.

Lastly, Sri Lanka has taught us the importance of diversification. Excessive dependence
on a few sectors and commodities has put a lot of pressure and finally negatively
impacted the economy. Therefore, diversification is important for India.

From how situations have arisen, there is an immediate need for a model economy that
promotes sustainable consumption and self-reliant production, and is also free from the
control of international banks like the IMF and the World Bank.

The final takeaway is that the crisis was not just due to the spike of Covid, it was the
making in the past decade. Sri Lanka overlooked many major mistakes that have led to
the downfall and crisis there today.
In the end, Covid only added the fuel but Sri Lanka’s economy was always on
fire.

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