Sri Lanka, India’s closest maritime neighbor in the Indian Ocean, has been facing its worst economic crisis since independence in 1948. The crisis, which escalated in 2022, was triggered by a combination of factors including mismanagement of public finances, mounting foreign debt, collapse of tourism during COVID-19, decline in remittances, and global shocks from the Russia-Ukraine war. The result was severe shortages of food, fuel, medicines, and foreign exchange, leading to political instability and social unrest.
For India, which shares historical, cultural, and economic ties with Sri Lanka, the crisis holds major significance. As Sri Lanka’s largest trading partner, a strategic neighbor in the Indian Ocean, and a key player in India’s security calculus, the crisis has direct and indirect consequences for India’s economy, trade, security, and diplomacy.
This article explores the background of Sri Lanka’s economic crisis, its causes, its impact on India, arguments in favor of and against India’s involvement, and the future outlook.
Understanding Sri Lanka’s Economic Crisis
Causes of the Crisis
Rising External Debt – By 2022, Sri Lanka’s external debt had reached over $50 billion, much of it owed to China and global financial markets.
Collapse of Tourism Industry – Tourism, a major revenue source, collapsed first due to the 2019 Easter bombings, and later due to the COVID-19 pandemic.
Decline in Foreign Reserves – By early 2022, Sri Lanka had less than $2 billion in reserves, insufficient for even a few weeks of imports.
Policy Missteps – A sudden ban on chemical fertilizers in 2021, aimed at making agriculture organic, backfired and caused sharp drops in crop yields.
High Import Dependence – Heavy reliance on imports for food, fuel, and medicines made shortages inevitable when reserves dried up.
Global Factors – The Ukraine war spiked global oil and food prices, worsening Sri Lanka’s crisis.
Consequences
Mass Protests in Colombo forced the resignation of President Gotabaya Rajapaksa.
Shortages of essentials like fuel, gas, and medicine led to humanitarian suffering.
IMF Bailout became inevitable, with a $3 billion package approved in 2023.
Geopolitical Attention increased, with India, China, and the US extending assistance.
Impact of Sri Lanka’s Crisis on India
India, due to geographical proximity and economic linkages, has been directly impacted by Sri Lanka’s crisis in multiple ways.
1. Trade Relations
Sri Lanka is one of India’s major trading partners in South Asia.
India’s exports to Sri Lanka include petroleum products, textiles, pharmaceuticals, and food items.
With Sri Lanka’s import capacity collapsing, Indian exporters faced disruptions, especially small businesses in Tamil Nadu and Kerala that rely on bilateral trade.
2. Humanitarian Concerns
The crisis triggered migration of Sri Lankan Tamils to Tamil Nadu, reminiscent of the 1980s civil war period.
India had to extend humanitarian aid in the form of food, fuel, and medicines worth billions of dollars.
3. Geopolitical and Strategic Security
Sri Lanka is a key player in the Indian Ocean Region (IOR), lying close to India’s southern tip.
China has been expanding its influence in Sri Lanka through debt diplomacy and infrastructure projects like Hambantota Port.
The crisis provided China an opportunity to tighten its grip, but India countered with timely financial aid, strengthening its soft power.
4. Regional Economic Stability
A crisis in South Asia’s second-largest island economy created regional instability, affecting investor confidence.
India, aspiring to lead South Asia, had to ensure stability to protect its economic interests.
5. Banking and Financial Impact
Indian banks with exposure to Sri Lankan trade faced rising non-performing assets (NPAs).
Rupee trade settlement mechanisms were explored to reduce dependence on the dollar.
6. Fisheries and Maritime Issues
Economic collapse worsened illegal fishing disputes between Tamil Nadu fishermen and Sri Lankan authorities.
Smuggling of goods and drugs increased due to porous maritime borders.
7. Tourism and Connectivity
Before the crisis, Sri Lanka was a popular tourist destination, often clubbed with Indian tourism circuits.
Decline in Sri Lanka’s tourism also reduced joint opportunities in South Asian tourism packages.
Arguments in Favor of India Supporting Sri Lanka
1. Strategic Neighborhood Diplomacy
India’s “Neighborhood First Policy” requires it to support Sri Lanka in times of need, preventing instability from spilling into India.
2. Countering China’s Influence
China’s Belt and Road Initiative (BRI) has given Beijing strategic leverage in Sri Lanka. By extending timely aid, India reduces Sri Lanka’s over-dependence on China.
3. Economic Opportunities
Helping Sri Lanka recover could benefit Indian businesses in infrastructure, energy, and trade sectors, securing long-term economic interests.
4. Humanitarian Responsibility
As a regional leader, India has a moral obligation to assist Sri Lanka during humanitarian crises, especially considering cultural and ethnic ties.
5. Strengthening Bilateral Ties
Economic assistance can deepen trust and improve India’s long-term diplomatic relations with Sri Lanka.
6. Maritime Security
A stable Sri Lanka contributes to the security of the Indian Ocean Region, critical for India’s trade and naval strategy.
Arguments Against India’s Involvement
1. Financial Burden on India
India itself faces challenges such as fiscal deficits, unemployment, and inflation. Extending billions of dollars in aid to Sri Lanka may strain domestic resources.
2. Risk of Default
There is no guarantee that Sri Lanka will repay loans on time, which could result in financial losses for India.
3. Political Risks
Sri Lanka’s internal politics is unstable. Supporting one government might create resentment among opposition groups, reducing goodwill.
4. Dependency Culture
Continuous bailouts might encourage Sri Lanka to rely excessively on India rather than undertaking structural reforms.
5. Spillover Risks
Economic migrants from Sri Lanka may put pressure on Tamil Nadu’s resources and lead to social tensions.
6. Strategic Overstretch
India is already engaged in debt diplomacy with other South Asian neighbors like Nepal, Bangladesh, and Maldives. Supporting all struggling neighbors could overstretch India’s capacity.
India’s Response to the Crisis
India has provided over $4 billion in aid to Sri Lanka since 2022, including:
Credit lines for fuel and food imports.
Currency swaps under SAARC framework.
Humanitarian aid shipments including rice, medicine, and milk powder.
Support for IMF negotiations by assuring financing guarantees.
Additionally, India has pushed for rupee trade settlements with Sri Lanka to reduce dollar dependence, benefiting both economies.
Impact on Indian States
Tamil Nadu
Directly impacted due to ethnic Tamil ties with Sri Lanka.
Increase in refugee influx.
Fishing disputes intensified.
Kerala
Trade in spices, coir, and rubber products slowed down.
Andhra Pradesh & Karnataka
Exporters in textiles and engineering goods faced lower demand.
Long-Term Lessons for India
Need for Regional Economic Stability – India must promote stronger South Asian economic integration to prevent crises.
Importance of Balanced Foreign Policy – Countering China requires long-term strategic investments, not just emergency aid.
Learning from Policy Missteps – Sri Lanka’s fertilizer ban shows the dangers of sudden, unresearched policy shifts.
Diversification of Exports – India must reduce dependence on vulnerable economies and diversify markets.
Maritime Vigilance – Instability in Sri Lanka underlines the importance of coastal security and naval readiness.
Balanced Conclusion
The Sri Lankan economic crisis is not just a domestic tragedy for the island nation but also a wake-up call for India and South Asia. For India, the crisis has both costs and opportunities. On the one hand, it has disrupted trade, increased refugee pressures, and created risks of Chinese strategic influence in India’s backyard. On the other hand, it has given India an opportunity to demonstrate regional leadership, strengthen diplomatic ties, and counterbalance China through timely financial and humanitarian assistance.
Arguments in favor emphasize India’s moral duty, strategic interests, and economic opportunities, while arguments against point to financial burden, repayment risks, and overdependence.
In the long run, India must adopt a calibrated approach: extend necessary aid but also push for structural reforms in Sri Lanka to ensure long-term stability. India’s engagement should focus on mutual growth, maritime security, and regional integration rather than just temporary relief.
The crisis is a reminder that India’s security and prosperity are deeply linked to the stability of its neighbors. By helping Sri Lanka recover, India not only safeguards its own interests but also reinforces its role as a responsible regional leader in South Asia and the Indian Ocean Region.
