Home / Opinion / Views /  Two ways India can help stabilize Sri Lanka

Two ways India can help stabilize Sri Lanka

A woman waves a Sri Lankan flag from inside a car as people shout slogans against Sri Lanka's President Gotabaya Rajapaksa and demand that Rajapaksa family politicians step down, during a protest (REUTERS)Premium
A woman waves a Sri Lankan flag from inside a car as people shout slogans against Sri Lanka's President Gotabaya Rajapaksa and demand that Rajapaksa family politicians step down, during a protest (REUTERS)

  • Given the competing demands on India’s limited resources, any assistance should be strategic in nature. The spending should be such that each additional buck spent gets the maximum bang, to use a shop-worn cliché.

The Ring of Fire is a 40,000-km long horse-shoe shaped geographic rim in the Pacific, notorious for its frequent earthquakes and volcanic eruptions. India now has to reckon with its own Girdle of Fire. The hasty and shambolic retreat of American forces in August 2021 has created instability in Afghanistan in the north; the imminent removal of prime minister Imran Khan revives political instability in Pakistan on the west; continuing border troubles with China on the eastern front show no signs of an early resolution; and, now, the economic and political crisis in Sri Lanka on the south has opened up a new front for India’s strategic and security concerns.

All these hot-spots hold out the potential for significant spill-overs into the Indian economy, where growth has slowed since the ill-conceived demonetization of 2016, with a financial sector that has gummed up since the collapse of IL&FS Ltd, a pandemic-induced slowdown, and, now the Russia-Ukraine conflict driving up commodities and endangering global growth. The neighbourhood rim of fire piles on additional woes.

Solutions to many of these are long-term in nature and require diplomatic chipping away. But the crisis in Sri Lanka can be addressed immediately; also, it is an emergency and, therefore, requires India’s urgent intervention on humanitarian grounds. The Indian government has already promised the island nation a $1 billion credit line comprising short-term concessional credit. It has also supplied close to 270,000 tonnes of fuel till date.

More can certainly be done. And should be done. However, given the competing demands on India’s limited resources, any assistance should be strategic in nature. The spending should be such that each additional buck spent gets the maximum bang, to use a shop-worn cliché.

The International Monetary Fund (IMF) released its 2021 Article IV consultation report on Sri Lanka in March 2022. The report is somewhat predictable, constructed with the usual IMF building blocks and advocates the time-tested formula of fiscal prudence, tax restructuring, economic reforms and debt management -- which are all logical and necessary for the revival of the Sri Lankan economy. But, what it doesn’t do is figure out how the country can get back to a revenue path, without which none of the prescriptions can be implemented. Sure, IMF may provide a line of credit to help Sri Lanka overcome its balance of payments crisis, but it still doesn’t put the economy back on a sustainable path to future growth. In short, the island nation needs revenues first before any of IMF’s recommendations can be implemented.

This is where India can play a role.

Sri Lanka, broadly, has two main revenue sources: tourism and plantation. India can provide some income support in tourism, given that it has traditionally sent the largest number of visitors to the nation. India can work with the Sri Lankan government to ensure that the tourism supply chain – most critically transport and food-related platforms in the hospitality sector, both at the large and SME levels – are well-lubricated to provide tourists with frictionless experiences. This is likely to start generating some revenues that can flow across economic and social categories. This will definitely not be enough to solve the problem, but can definitely help kick-start a crucial sector of the Sri Lankan economy.

An August 2020 article (mck.co/3x6NQg0) by three McKinsey partners strongly advocates a government role in reviving the institutional structures in tourism: “Reopening tourism-related businesses and managing their recovery in a way that is safe, attractive for tourists, and economically viable will require coordination at a level not seen before. The public sector may be best placed to oversee this process in the context of the fragmented SME ecosystem, large state-owned enterprises controlling entry points, and the increasing impact of health-related agencies. As borders start reopening and interest in leisure rebounds in some regions, governments could take the opportunity to rethink their role within tourism, thereby potentially both assisting in the sector’s recovery and strengthening it in the long term." In this case, both the Indian and Sri Lankan government will need to ratchet up their coordination significantly.

Financial re-engineering is a second assistance route available to India.

Securitization of future tourism receivables has been an acceptable tool for project finance in the tourism business. Asset securitization in the tourism business can be applied to four categories: mortgage loans, vacation ownership receivables, future revenue cash flows and project finance. Currently, the third leg is the most viable option available: securitizing future revenue flows can provide upfront finance at discounted rates to select hospitality sector players, which will enable them to re-start their businesses.

The financing can be done by financial institutions owned by the Indian government, such as India Infrastructure Finance Co. Ltd or through the National Investment and Infrastructure Fund. The key risk-mitigating factor is the fact that these institutions will be betting on Indian tourists spending in Sri Lanka while staying in the hotels or travelling around the country, whether to experience the elephant trail or the Ramayana Trail.

There is one proverbial elephant in the room: Who will accept this medium-term risk, given that revenue flows may not always live up to projections, especially if the Rajapaksa clan continues to exert its stranglehold over Sri Lanka, with 40 family members in government posts, including the cabinet? This is a tricky one and needs layers of assurances and guarantees. This is where the diplomats and bureaucrats in both New Delhi and Colombo need to put their heads together and come up with innovative, risk-mitigating solutions.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout