THE GOVERNMENT POLICIES AND INTERVENTION

1. CABINET APPROVES NUTRIENT BASED SUBSIDY (NBS) RATES FOR PHOSPHATIC AND POTASSIC (P&K) FERTILIZERS FOR KHARIF SEASON

THE CONTEXT: The Union Cabinet chaired has approved the proposal of the Department of Fertilizers for Nutrient Based Subsidy (NBS) rates for Phosphatic and Potassic (P&K) fertilizers for Kharif Season – 2022.

THE EXPLANATION:

Financial Implications:

Subsidy approved by Cabinet for the NBS Kharif-2022 will be Rs. 60,939.23 Crores including support for indigenous fertilizer (SSP) through freight subsidy and additional support for indigenous manufacturing and imports of DAP.

Benefits:

• The increase in the international prices of Di-ammonium phosphate (DAP) and its raw materials have been primarily absorbed by the Union Government. The Union Government has decided to provide subsidy of Rs. 2501 per bag on DAP instead of existing subsidy of Rs.1650 per bag which is a 50% increase over the last year’s subsidy rates (2021).
• The increase in the prices of DAP & its raw material is in the range of approx. 80%. It will help farmers to receive notified P&K fertilizers on subsidized, affordable and reasonable rates and support the agriculture sector.

Implementation Strategy and targets:

The subsidy on P&K fertilizers will be provided based on the NBS rates for Kharif season -2022 to ensure smooth availability of these fertilizers to the farmers at affordable prices.

Background:

• Government is making available fertilizers, namely Urea and 25 grades of P&K fertilizers to farmers at subsidized prices through fertilizer manufacturers/ importers. The subsidy on P&K fertilizers is being governed by NBS Scheme w.e.f 01.04.2010.
• In accordance with its farmer friendly approach, the Govt. is committed to ensure the availability of P&K fertilizers to the farmers at affordable prices. In view of steep increase in the international prices of fertilizers & inputs i.e. Urea, DAP, MOP and Sulphur, Government has decided to absorb the increased prices by increasing subsidy on P&K fertilizers including DAP.
• The subsidy would be released to fertilizer companies as per approved rates so that they can make available fertilizers to farmers at an affordable price than it would have been otherwise.

THE INTERNATIONAL RELATIONS

2. INDIA’S DESIGNATION BY THE USCIRF

THE CONTEXT: The 2022 Annual report of the United States Commission on International Religious Freedom (USCIRF) has recommended that India be designated a ‘Country of Particular Concern’ (CPC), i.e., the category of governments performing most poorly on religious freedom criteria.

THE EXPLANATION:

• It has also called for “targeted sanctions” on individuals and entities responsible for severe violations of religious freedom by freezing those individuals’ or entities’ assets and/or barring their entry” into the U.S.

What is the USCIRF?

• The USCIRF is an independent, bipartisan body created by the International Religious Freedom Act, 1998 (IRFA) with a mandate to monitor religious freedom violations globally and make policy recommendations to the President, the Secretary of State, and the Congress. It is a congressionally created entity and not an NGO or advocacy organisation.
• It is led by nine part-time commissioners appointed by the President and the leadership of both political parties in the House and the Senate.

What does a ‘Country of Particular Concern’ (CPC) designation mean?

• IRFA requires the USCIRF to annually identify countries that merit a CPC designation. As per IRFA, CPCs are countries whose governments either engage in or tolerate “particularly severe violations” of religious freedom, which are defined as “systematic, ongoing, egregious violations of the internationally recognized right to freedom of religion”.
• The other designation, for less serious violations, is Special Watch List (SWL).

Which other countries have been designated as CPCs?

• For 2022, based on religious freedom conditions in 2021, a total of 15 countries have been recommended for the CPC designation. They include India, Pakistan, Burma, China, Eritrea, Iran, North Korea, Pakistan, Russia, Saudi Arabia, Tajikistan, Afghanistan, Nigeria, Syria and Vietnam.
• Countries recommended for an SWL designation include Algeria, Cuba, Nicaragua, Azerbaijan, Central African Republic, Egypt, Indonesia, Iraq, Kazakhstan, Malaysia, Turkey, and Uzbekistan.

Why does USCIRF want India to be designated as a CPC?

• The USCIRF, in its annual report, states that in 2021, “religious freedom conditions in India significantly worsened.”
• Noting that the “Indian government escalated its promotion and enforcement of policies —including those promoting a Hindu-nationalist agenda — that negatively affect Muslims, Christians, Sikhs, Dalits, and other religious minorities,” the report observed that “the government continued to systemise its ideological vision of a Hindu state at both the national and State levels through the use of both existing and new laws and structural changes hostile to the country’s religious minorities.”
• It highlighted the use of the Unlawful Activities Prevention Act (UAPA) against those documenting religious persecution and violence, detailed the creation of “hurdles against the licensure and receipt of international funding” by religious and charitable NGOs, and observed that “numerous attacks were made on religious minorities, particularly Muslims and Christians, and their neighborhoods, businesses, homes, and houses of worship”. It also criticized the spate of fresh anti-conversion legislation’s, noting that “national, State and local governments demonized and attacked the conversion of Hindus to Christianity or Islam.”
• Taking into account all these aspects, it concluded that India met the criteria of “systematic, ongoing, egregious” violations of religious freedom and therefore deserved a CPC designation.

3. INDIA APPROVES NEW EMBASSY IN LITHUANIA

THE CONTEXT: The Union Cabinet approved a proposal to open a new Indian embassy in Lithuania, the first full-fledged embassy in the Baltic region, currently at the forefront of forging a more aggressive European position against Russia over the Ukraine war. Lithuania is also at the centre of a diplomatic spat with China over the opening of a de-facto embassy by Taiwan.

THE EXPLANATION:

• The Indian government said the opening of the mission in Lithuania would help India expand its political, strategic and economic engagements with that country.
• “Opening of the Indian mission in Lithuania will help expand India’s diplomatic footprint, deepen political relations and strategic cooperation, enable the growth of bilateral trade, investment and economic engagements and facilitate stronger people-to-people contacts”.
• The government said setting up the mission will provide more sustained political outreach and help garner support for India’s foreign policy objectives.

THE ECONOMIC DEVELOPMENTS

4. INDONESIA’S PALM OIL EXPORT BAN

THE CONTEXT: Indonesia began imposing a complete ban on palm oil exports as the world’s largest producer of the commodity risked destabilising a global vegetable oil market already hitting peak prices.

THE EXPLANATION:

• The archipelago nation is facing a shortage of domestic supplies of cooking oil and soaring prices, with consumers in several cities having to wait for hours in front of distribution centres to buy the essential commodity at subsidised rates.
• Authorities in Southeast Asia’s most populous country fear the scarcity and rising costs could provoke social tensions and have moved to secure supplies of the product, which is used in a range of goods such as chocolate spreads and cosmetics.

How important is palm oil to global supply chains?

• Palm oil is the world’s most widely used vegetable oil with its global production in the year 2020 being over 73 million tonnes (MT), according to the United States Department of Agriculture (USDA).
• It is estimated to be 77 million tonnes for the current year. Made from the African oil palm, it is used as cooking oil, and in everything from cosmetics, processed foods, cakes, chocolates, spreads, soaps, shampoo, and cleaning products to bio fuel.
• Indonesia and Malaysia together account for almost 90% of the global palm oil production, with Indonesia producing the largest quantity at over 45 million tonnes in 2021.

According to data, palm oil makes up 40% of the global supply of the four most widely used edible oils: palm, soybean, rapeseed (canola), and sunflower oil. Indonesia is responsible for 60% of the global supply of palm oil. India is the biggest importer of palm oil.

• The months-long shortage has been exacerbated by poor regulation and producers who are reluctant to sell at home because high international prices have made exports more profitable.
• Jakarta plans to resume exports when the price of bulk cooking oil in local markets has fallen to 14,000 rupiah (97 cents) per litre, having rocketed 70 percent in recent weeks to 26,000 rupiah ($1.80).
• Vegetable oils are among a number of staple food items that have seen prices hit record highs in recent weeks, following Russia’s invasion of agricultural powerhouse Ukraine, according to the United Nations Food and Agriculture Organisation.

How will it impact India?

• India is the biggest importer of palm oil, which makes up 40% of its vegetable oil consumption, as per the USDA. India meets half of its annual need for 8.3 million tonnes of palm oil from Indonesia. In 2021, the Centre also unveiled its plan to boost India’s domestic palm oil production.
• Already grappling with record-high wholesale inflation, the late January (2021) export controls exercised by Indonesia had led to a 38% rise in the landed cost of CPO in India. The price of soybean oil, most consumed after palm, rose by 29% in the country this year; while sunflower oil, 90% of which India gets from Russia and Ukraine, stopped coming in almost completely.

THE GOVERNMENT SCHEMES AND INITIATIVES IN THE NEWS

5. J&K HYDROELECTRIC PROJECT APPROVED

THE CONTEXT: The Cabinet Committee on Economic Affairs approved the investment of Rs 4,526.12 crore for the 540 MW Kwar Hydro-electric project located on Chenab River in Jammu & Kashmir’s Kishtwar district.

THE EXPLANATION:

• This is part of the Indus basin and would be one of the at least four projects coming up in the district, including the 1,000 MWs PakalDul hydroelectric project and 624 MWs run-of-the-river Kiru hydroelectric project.
• Under the 1960 vintage Indus Water Treaty (IWT) between India and Pakistan, the two countries share the waters of six rivers in the Indus basin that flow through India towards Pakistan. Of these, India has complete rights over three eastern rivers – Sutlej, Beas and Ravi, while Pakistan has rights over the western rivers – Chenab, Jhelum, and Indus.
• India can, however, build run-of-the-river projects on the western rivers. Over the last five years, the government has been on an approval and construction spree to fully tap the potential in the Indian side of the Indus basin.
• The Kwar hydropower project will be implemented by Chenab Valley Power Projects Private Ltd (CVPPL), a joint venture company between NHPC Ltd and Jammu & Kashmir State Power Development Corporation (JKSPDC) with equity contributions of 51 percent and 49 percent respectively. The project shall generate 1,975.54 million units in a 90 percent dependable year.

 VALUE ADDITION:

THE NEWS IN NUMBERS

6. REAL ESTATE GROWTH

Around 65,000 crore, the expected growth of Indian real estate (RE) by 2040, according to a report by consultancy firm CIRIL. By 2025, the sector is expected to contribute 13% of the country’s GDP (Gross domestic product). In 2019, the size of the RE market was ₹12,000 crore. Despite fears related to the Omicron crisis, the market in 2022 looked bullish while demand is accelerating across all categories, the report added.

7. DIGITAL ADVANCEMENT

20 million of women certified to be digitally literate in India under the Pradhan Mantri Gramin Digital Saksharta Abhiyan (PMGDISHA) programme dedicated to digital literacy, according to Union Ministry of Women and Child Development of India and it aims to empower people in rural areas by training them to operate computers or digital access devices (like tablets, smartphones, etc.), send and receive e-mails, browse the internet, access government services, and undertake digital payment, among others

THE PRELIMS PRACTICE QUESTIONS

QUESTION OF THE DAY

Q1. The government of India recently approved the construction of Kwar hydro-electric project across which of the following rivers?

1. Jhelum river
2. Chenab river
3. Beas river
4. Ravi river

ANSWER FOR 27TH APRIL 2022

Answer: D

Explanation:

• Statement 1 is incorrect: After rising in 2020 for the first time since 2015, total coal power capacity under development slid last year to a record low of 457 gigawatts(GW), from 525 gigawatts.
• Statement 2 is incorrect: China-led global coal power expansion in 2021, with about 25,000 MW of new plants, followed by India with about 6,100 MW, re- ported the Global Energy Monitor which conducts an annual survey of coal power capacity under development or deployment.

1. Digital Services Act: A historic agreement READ MORE
2. SC must take a strong line on hate speech READ MORE
3. The Higher Judiciary’s Increasing Role in Protecting Interfaith Couples READ MORE

1. Is it Possible to Make India Poverty-Free by 2047? READ MORE  
2. The fragility of contemporary capitalism READ MORE

1. Climate Change Putting 4% Of Global GDP at Risk, New Study Estimates READ MORE
2. Land the size of South America will be degraded if current trends continue: UN Report READ MORE

1. Permanent bliss lies beyond our senses READ MORE
2. Bollywood industry and tobacco READ MORE
3. Roots Of Rage~II READ MORE

(Newspapers, PIB and other important sources)

Prelim and Main

1. Cabinet clears higher subsidy for non-urea fertilisers READ MORE
2. J&K hydroelectric project approved READ MORE
3. Large share of India’s threatened endemic species in Kerala, Tamil Nadu and Karnataka: Study READ MORE
4. 540 MW Kwar hydropower project in J&K READ MORE
5. India Approves New Embassy in Lithuania READ MORE
6. Russia withdraws from UN tourism body: UNWTO READ MORE
7. Unnat Bharat Abhiyan 2.0 completes four years READ MORE

Main Exam

GS Paper- 1

1. Is it Possible to Make India Poverty-Free by 2047? READ MORE  
2. The fragility of contemporary capitalism READ MORE

GS Paper- 2

POLITY AND GOVERNANCE

1. Digital Services Act: A historic agreement READ MORE
2. SC must take a strong line on hate speech READ MORE
3. The Higher Judiciary’s Increasing Role in Protecting Interfaith Couples READ MORE

SOCIAL JUSTICE AND SOCIAL ISSUES

1. Building back to avert a learning catastrophe: Governments and schools must focus on the most important priority in school education — learning recovery READ MORE

INTERNATIONAL ISSUES

1. Ride between East & West: India can play a vital global role as West’s Russia boycott disrupts key bodies like G20 READ MORE
2. India stepping up efforts READ MORE

GS Paper- 3

ECONOMIC DEVELOPMENT

1. Energy independence through hydrogen: It can help lay the foundation of a new India which aims to be a global climate leader READ MORE
2. Explained: State of (un)employment in India READ MORE
3. Tackling the inflation hydra READ MORE
4. Contrasting rules for farm, corporate loans READ MORE
5. MSME Sector needs major reforms to resolve job crisis READ MORE

ENVIRONMENT AND ECOLOGY 

1. Climate Change Putting 4% Of Global GDP at Risk, New Study Estimates READ MORE
2. Land the size of South America will be degraded if current trends continue: UN Report READ MORE

GS Paper- 4

ETHICS EXAMPLES AND CASE STUDY

1. Permanent bliss lies beyond our senses READ MORE
2. Bollywood industry and tobacco READ MORE
3. Roots Of Rage~II READ MORE

Questions for the MAIN exam

1. Hydrogen has potential to transform India’s energy ecosystem by making India net energy exporter. Examine.
2. How far do you agree with this view that to solve the unemployment crisis, India needs to think rethink of its economic model, from macroeconomic policy to industrial policy to strengthening small enterprises? Justify your view.

QUOTATIONS AND CAPTIONS

• As a leader your every action has a consequence, make sure it is one you intend.
• The most effective way to destroy people is to deny and obliterate their own understanding of their history.
• Creating a hydrogen economy is a chicken and egg problem as consumers seek lower costs which could be possible with scalability and large investments, but for those, producers seek assured demand.
• The online business model today hinges on surveillance of user behaviour to maximise the accuracy of advertisements, the main source of revenue.
• Agriculture is passing through severe distress and banks must realise that coercion is not the way to recover unpaid dues.
• Easing the regulatory environment is a pre-condition to encouraging entrepreneurial instincts of the youth.
• The long-term solution to unemployment has to involve a rethink of the economic model, from macroeconomic policy to industrial policy to strengthening small enterprises.
• To tackle any problem, one needs to both acknowledge it and estimate it accurately.
• With many states enacting laws to make conversion of religion by marriage unlawful, the Special Marriage Act may indeed prove to be a blessing-in-disguise for the interfaith couple.

50-WORD TALK

• PM Modi targeting non-BJP states for high fuel taxes at a Covid review meeting is unfortunate. Fuel taxes have been used by all sides to bolster revenues. Union government is also guilty of managing fuel prices for electoral reasons. A national consensus is needed on fuel taxes, not public finger-pointing.
• Realising the challenges posed by the pandemic, the Government needs to take every necessary step to bring school education back on track and develop a road map for learning recovery. Governments, parents, communities and schools need to work together. It is our moral and social responsibility towards the future of this nation.

Things to Remember:

• For prelims-related news try to understand the context of the news and relate with its concepts so that it will be easier for you to answer (or eliminate) from given options.
• Whenever any international place will be in news, you should do map work (marking those areas in maps and exploring other geographical locations nearby including mountains, rivers, etc. same applies to the national places.)
• For economy-related news (banking, agriculture, etc.) you should focus on terms and how these are related to various economic aspects, for example, if inflation has been mentioned, try to relate with prevailing price rises, shortage of essential supplies, banking rates, etc.
• For main exam-related topics, you should focus on the various dimensions of the given topic, the most important topics which occur frequently and are important from the mains point of view will be covered in ED.
• Try to use the given content in your answer. Regular use of this content will bring more enrichment to your writing.

THE CONTEXT: Sri Lanka is going through an economic meltdown of a scale unseen since the country’s financial crisis of 1948. India also experienced a similar type of crisis in 1990, which it successfully managed. This article will undertake an economic comparison of both countries with special reference to the economic crisis.

WHAT IS THE SRI LANKAN ECONOMIC CRISIS?

The country’s crumbling economy is facing a shortage of foreign currency, which has led to a massive reduction in imports of essential items. Sri Lanka relies heavily on its imports. It imports petroleum, food, paper, sugar, lentils, medicines, and transportation equipment, among other essential items. The lack of foreign currency means the country does not have the money to buy (import) these commodities. Imports are so essential that the government had to cancel examinations for millions of school students because they ran out of printing paper. The situation in Sri Lanka is so critical that the government had to suspend operations at its only fuel refinery because it ran out of crude oil stocks. The economy is plagued by inflation, which hit 15.1 percent. Government data shows that food inflation has risen to 25.7 percent. According to the data available on IMF, Sri Lanka’s gross debt as a percentage of GDP accounted for 79.02% in 2016 and this has risen to 111.42% in 2022. This implies what the country owes is more than what it produces. The twin-deficit problem emerged. There is a continued protest going on in Sri Lanka demanding the resignation of the President and the Prime Minister.

A TIMELINE OF THE SRI LANKAN ECONOMIC CRISIS

NOVEMBER 2019: 

• After winning Sri Lanka’s presidential election and months ahead of a parliamentary ballot, Gotabaya Rajapaksa announced sweeping tax cuts.
• The Cabinet cut the value-added tax to eight percent from 15 percent and also abolished seven other taxes, including a two percent nation-building tax paid by businesses.
• The sweeping tax cuts led to a credit rating downgrade in 2020, leading to Sri Lanka losing access to international financial markets.
• Sri Lanka started dipping into its foreign reserves to meet its debt obligations. This resulted in foreign reserves plummeting from a healthy level of $8,864 million in June 2019 to $2,361 million in January 2022. (See Figure 1)

2020:

• The COVID-19 pandemic in March 2020 made the situation worse. Tourist inflows and tourism revenues fell further; exports of tea and rubber declined due to lower demand; and remittances, another booster to the foreign exchange reserves, also fell as Lankans across the globe lost jobs.
• The GDP declined by 3.5 percent, the Current Account Deficit touched 7.9 percent of GDP, and the fiscal deficit climbed to 11.1 percent.

APRIL 2021:

• The Lankan government on 29 April 2021 decided to ban the import of chemical fertilizers and any other agrochemicals to make the Indian Ocean nation the first in the world to practice “organic-only” agriculture. The move was aimed at reducing pressure on forex reserves.
• Agriculture experts strongly criticized the move as “ill-advised” and “unscientific”. The farming community expressed fears that such a drastic policy shift could result in a steep drop in yield.

NOVEMBER 2021:

• Facing protests and seeing a drop in agricultural output, the government said that it would partially lift the ban.
• However, the damage was done. The ban had led to a reduction in yield, which went down by 25 percent.
• Tea cultivation, which is one of the mainstays of the economy, was also badly hit. The output of pepper, cinnamon, and vegetables went down by 30 percent.
• This forced the government to rely on rice and other staples even more from foreign countries.

MARCH 2022:

• The situation became even direr by the end of March as a critical lack of foreign currency left the island nation unable to pay for vital imports, leading to dire shortages in everything from life-saving medicines to cement.
• On 30 March, the island nation announced 13-hour daily power cuts nationwide. The country had been under severe electricity rationing since the start of the month.

APRIL 2022:

• The plunge into darkness and the severe food shortages led to people getting furious and that anger spilled onto the streets on 1 April when demonstrators tried to storm the president’s home.
• The crowd turned violent, setting two military buses, a police jeep, two patrol motorcycles, and a three-wheeler ablaze. They also threw bricks at officers. Following the violence, a 36-hour curfew was imposed.
• A state of emergency was declared, giving security forces sweeping powers.
• The crisis deepened after Sri Lanka’s Cabinet resigned en masse from their positions.
• Trading on Sri Lanka’s stock exchange is being shut down. Additionally, Sri Lanka’s central bank governor announced his resignation.
• The embattled president loses his parliamentary majority as former allies urge him to quit. He lifts the state of emergency.
• The country’s central bank hiked interest rates by a record 700 basis points in a bid to halt the free fall of the Sri Lankan rupee, which has plunged more than 35 percent in a month.
• The country announces it is defaulting on its entire external debt of $51bn as a “last resort” after running out of foreign exchange to import desperately needed goods.

SRI LANKA’S FOREIGN DEBT

AN ANALYSIS OF THE SRI LANKAN ECONOMIC CRISIS?

Sri Lanka has suffered a serious balance of payments (BOP) crisis since early 2020. With the global spread of COVID19, Sri Lanka has lost about US $ 4 billion in annual foreign currency inflows from the tourism industry. Even before it, the Easter Day bombing had already subdued the tourist arrivals. The country’s credit rating is steadily declining due to the negative effects of COVID19 on the economy, reckless changes in economic policies such as tax cuts, and the government’s stubborn stance of not seeking support from the International Monetary Fund (IMF). Due to these developments, Sri Lanka was unable to borrow from the international capital markets through the issuance of international government bonds (ISBs). Since April 2019, this country has not issued a single ISB

Sri Lanka’s foreign exchange inflows have declined significantly. In 2020, the government imposed strict import restrictions, including the suspension of car imports, to curb the outflow of foreign currency. The outflow of foreign exchange to imports has decreased, but the obligation to repay external debt remains unchanged. This means that Sri Lanka’s external funding gap (lack of foreign currency inflows to cover foreign currency outflows) continued to widen without the opportunity to issue an ISB. In the absence of sufficient foreign exchange inflows, the government continued to deplete its foreign exchange reserves to pay off existing loans. The Sri Lankan government also tinkered with the exchange rate which led to the black marketing of this scarce resource. The usual response to this kind of serious BOP crisis is to seek the help of the IMF. In fact, the very reason the IMF was created was to help countries deal with the BOP crisis. However, the Sri Lankan government has stubbornly refused to seek the help of the IMF or restructure its debt and instead is looking to China and India. Sri Lanka also announced a default on all of its $51 billion external debt as a last resort.

HOW INDIA HAS RESPONDED TO THE SRI LANKAN ECONOMIC CRISIS?

WHAT WAS INDIA’S BALANCE OF PAYMENT CRISIS?

The BOP problem began to surface in the last years of the Rajiv Gandhi administration, where fiscal expansion led to an increase in the current account deficit. Successive governments could not take decisive actions. The situation was in jeopardy when Saddam Hussein invaded Kuwait in August 1990 and oil prices soared. The market has lost confidence in the government’s ability to deal with the situation. Foreign banks stopped making new loans while claiming to repay the old ones. The influx of NRI funds has become negative. Negotiations were not very successful, as the IMF lends only to countries that are willing to make the difficult decisions needed to balance the BOP. Foreign exchange reserves were plummeting and India was at risk of defaulting. The inflation was also skyrocketing. The import cover was only sufficient to last for two weeks. The country was going through a twin-deficit crisis.

WHAT WAS INDIA’S RESPONSE TO THE CRISIS?

POLITICAL INITIATIVES:

• A Congress-led coalition under P.V. Narasimha Rao was sworn in and its first priority was to deal with the BOP crisis.
• It took strong action, including devaluation and reducing the fiscal deficit, but did not limit itself to dealing with the BOP. It also took up the other challenge of slow growth.

NEGOTIATION WITH IMF:

• The new government, with Manmohan Singh as finance minister, continued negotiations with the IMF to get loans that would tide over the immediate problem.
• The bank recommended and pushed through reforms focused on five key areas of investment and trade regimes, the financial sector, taxation, and public enterprises.
• They effectively ended four decades of central planning, significantly shifted resource allocation decisions from the public sector to the private sector and markets, and started integrating the country into the world economy.

STRUCTURAL ADJUSTMENT:

• It began with a devaluation of the rupee in two stages, on 1 July and 3 July 1991. This was accompanied by a major liberalization of trade policy.
• Almost all intermediate and capital goods, which earlier needed an import licence, were allowed to be freely imported against Exim scrips issued to exporters at 30-40% of export earnings.
• The Exim scrips were freely tradable and the premium on them was an additional incentive for exporters.
• This introduced a market mechanism for limiting imports to a sustainable level.
• Tax reforms covering both direct and indirect taxes laid out by the Chelliah committee were implemented over three years.
• Foreign capital inflows in the form of portfolio flows were liberalized in steps so is the approach toward a floating exchange rate.

A COMPARATIVE ANALYSIS BETWEEN SRI LANKAN AND INDIAN ECONOMIC CRISIS

There are many similarities between both countries with respect to the nature and causes of the crisis although they differ in their response mechanisms: Let us discuss them in detail.

IS INDIA LIKELY TO EXPERIENCE A CRISIS SIMILAR TO THAT OF SRI LANKA?

In light of the recent Sri Lankan economic crisis, there are views that India’s debt to GDP ratio figures is in line with that of Sri Lanka and that a similar economic crisis awaits India. Sri Lanka’s total debt to GDP is certainly high, over 100%, but India’s total debt to GDP is not as high as Sri Lanka. From 2016-17 to 2020-21, India’s total public debt accounted for approximately 50% of GDP. The country’s debt position is much lower than Sri Lanka’s. But including all state debt, the debt position does not provide for a rosy picture (See Figure 2). Unlike Sri Lanka, where half of the debt is external, India’s total external debt to GDP is just under 3%, significantly lower than Sri Lanka. Also, the foreign exchange reserve totaling around $600 Billion provides a cushion to external and internal shocks.

DEBT POSITIONS OF INDIA AND SRI LANKA

ARE THERE ANY ECONOMIC LESSONS FOR INDIA FROM THE SRI LANKAN CRISIS?

SRI LANKA AND INDIA COMPARISON

THE WAY FORWARD

THE CONCLUSION: Sri Lanka is encountering an unprecedented economic crisis, and the country’s relations with China and India have also taken an interesting turn. So far, Sri Lanka has been trying to balance both countries and reap benefits from the geopolitical interests of China and India, as both countries have strategic interests in Sri Lanka. This was Sri Lanka’s strategy to avoid seeking IMF assistance and carry out economic reforms. However, this is a dangerous game to play for a country that is facing a severe economic crisis. In situations like these, vulnerable countries, Sri Lanka in this case, do not have much bargaining power. Thus, Lanka can learn from the Indian experience of the 1990s and it needs to approach the IMF for assistance and undertake much-needed economic reforms as India did without sacrificing national interest.

Questions:

1. Critically analyze the ongoing economic crisis in Sri Lanka. What according to you can be the possible strategies to overcome it?
2. “Although there are similarities between the ongoing Sri Lankan economic crisis and the Balance of Payment crisis India experienced in 1990, what differentiates them is the effectiveness of the response mechanisms of both the countries” Explain.