How did the crisis in Sri Lanka impact India?

Hey there! Welcome back again. In this blog, we will discuss how the crisis in Sri Lanka is impacting India. Let us quickly get started and gauge the overall effect of the crisis on India.

Did you know that India and Sri Lanka have a vibrant partnership and have witnessed considerable expansion over the years? The economic tie between these two nations includes a development partnership that encompasses areas such as infrastructure, connectivity, housing, health, transportation, livelihood, education, and industrial development. In addition to being Sri Lanka’s biggest trade partner, India is also one of the largest contributors to FDI (Foreign Direct Investment) in Sri Lanka.

Several leading companies from India have invested and successfully established their presence in Sri Lanka. The investments from India are mainly in the areas of petroleum retail, tourism, manufacturing, real estate, banking & financial services, and telecommunication. On the other hand, investments by Sri Lankan companies in India are also getting an advantage from India’s dynamic economy and wide markets.

However, mounting economic pressure in neighbouring Sri Lanka, triggered by a severe shortage of foreign currency and the inability to pay for essential commodities and fuel, has deepened the crisis in the island nation. From power cuts lasting up to 13 hours to shortage of food, petroleum products, essential commodities, and a soaring double-digit inflation rate has led to a worrisome situation.

Let us deep dive and understand how the crisis in Sri Lanka has impacted India.

1. Economic challenges:
• India relies heavily on the port of Colombo for global trade. Approximately 60% of India’s transhipment cargo is handled by the port
• At present, thousands of containers sent to Sri Lanka from India have been lying uncleared at the port as the concerned authorities are unable to transfer containers between terminals.
• This, in turn, has resulted in a build-up of cargos intended for Sri Lanka at the Indian ports.
• Any disruption in operations at the Port of Colombo has a direct impact on India which leads to an increase in costs and congestion issues.
• Thus, India’s growing need for getting a transhipment hub gets another push with the Sri Lankan crisis.
• Any instability in Sri Lanka also impacts the interests of several Indian companies such as Airtel, Indian oil, Taj hotels, Dabur, Tata Communications, Asian Paints, etc that have invested in Sri Lanka.
2. Humanitarian crisis:
• India being the closest neighbour of Sri Lanka, a large-scale humanitarian crisis also impacts India.
• With the shortage of essential commodities such as food, medicines, and growing political instability, India finds itself in a position of massive responsibility to prevent the crisis through all possible aid.
• It is believed that India’s assistance at this time of need will only lead to better relations with the island nation that has been leaning more towards the Chinese camp.
• Since January 2022, when the economic crisis began in Sri Lanka, India has extended nearly $3 billion help.
• On May 22, a ship carrying 9000 metric tons of rice, 50 metric tons of milk powder, and 25 metric tons of drugs and other essential pharmaceutical supplies arrived in Colombo. This consignment is estimated to be over $5.5 million.
3. Opportunities:
• Amid the sudden halt of tea supply to the global tea market by Sri Lanka, India is all set to bridge all supply gaps.
• Sri Lanka, which is the largest exporter of tea, has now been left behind because of the sharp decline in tea production.
• This has created an opportunity for all the Indian tea exporters as they are well-positioned to capture markets significantly in countries that import orthodox tea.
• India can thus strengthen its footprint in Iran as well as other new markets such as Turkey, US, Iraq, China, and even Canada.
• Indian apparel exporters are also receiving orders from the UK and Latin American countries where Indian textiles had very little or no presence.
• Before the financial crisis, textiles and garments contributed nearly half of Sri Lanka’s exports. But the production and supply have been disrupted due to power cuts and the refugee crisis.

So, what can be inferred from this case? A country is run by its economy, and the Economy is money. Money that is not in form of debt but valuable assets, cash, and credits.

What steps would you take if you were to be the next financial risk manager?

Sri Lanka’s budget deficits were already high during wars, and the global financial crisis drained its forex reserves. Taking loans from the IMF could be avoided, which deteriorated the Lankan economy as the government spent lavishly on various projects such as Mattala Rajapaksa international airport, Hambantota port, and Colombo Port city project with high hopes of turning the island nation just like Singapore. Other devastating effects were due to the global pandemic and the ongoing war between Russia and Ukraine. Tourism faced drastic consequences followed by tea and spices production.

An extreme step with improper planning is the root cause of the downfall. This is exactly where financial risk managers come to the rescue as they are responsible for forecasting changes in the future and predicting the cost of these changes. This helps in mitigating various risks associated with such changes and helps in taking imperative decisions.

To know more about the entire process, right from risk identification to risk management, feel free to check out the FRM course. The FRM course is globally recognized and includes all aspects of risk management. If you want to get more details on the FRM course scope or FRM course duration, feel free to get in touch with our counsellors, who would be more than happy to assist you. All the best and happy learning!