What India Should Do For Sri Lanka... And Itself

While Sri Lanka needs an immediate lifeline, IMF is constructing an oxygen tent. This is the moment for India to play its hand.

<div class="paragraphs"><p>Ranil Wickremesinghe shakes hands with Narendra Modi, in New Delhi, on Oct. 5, 2016. (REUTERS/Altaf Hussain)</p></div>
Ranil Wickremesinghe shakes hands with Narendra Modi, in New Delhi, on Oct. 5, 2016. (REUTERS/Altaf Hussain)

A crisis is an opportunity – this is perhaps the oldest and wisest axiom of leadership. A couple of decades ago, China’s axis with India’s staunch regional ally, Sri Lanka, sowed the seeds of a potential crisis. China was a prickly, powerful adversary up north. Sri Lanka was a perilously close southern neighbour which could sway the strategic equilibrium in the Indian Ocean. As we will understand later, India failed to scoop an opportunity out of this looming crisis.

What India Should Do For Sri Lanka... And Itself

But today the tide has turned. China is staring at an economic crisis long brewing in its womb, i.e. its deadly debt-fuelled expansion, made worse by a strangely panicky response to Covid-19 outbreaks with complete shutdowns and disruptions. Equally, tiny Sri Lanka is collapsing, bereft of foreign exchange, fuel, food, and medicines, felled by a virus which killed tourism and a Rajapaksa clan that proved incredibly greedy and foolish.

How can India convert this double crisis into a 2X opportunity?

Often the problems of history are best tackled first by understanding one’s own blunders. This enquiry must begin with the flamboyant Mahinda Rajapaksa’s first presidential tenure in the early noughties. His ruthless army was beginning to exterminate the Tamil guerrilla fighters in the north, making Rajapaksa aggressively popular. Most political strongmen have a yen to build monuments that celebrate them to posterity. Rajapaksa’s quest fastened on to Hambantota, a sleepy hamlet in his constituency. He desired to build a massive deep-sea port there, despite warnings that it could become a ghost facility. After all, Sri Lanka was a small country of 22 million people which already had a thriving port at Colombo that could have been expanded.

So, Hambantota was nothing but an ego-driven infrastructure dud. When Rajapaksa approached the Indian government and corporate giants to partner with him in the misadventure, he was firmly elbowed out of the room. Savvy Indian investors could see through to doomsday.

India’s policymakers thought their refusal would knock sense into Rajapaksa. But they did not bargain for China’s canny ability to peer deep into the future. For the Chinese, the transaction was way beyond a viable return on investment. It was beyond mere money. It was about a geopolitical anchor in India’s neck of the Indian Ocean. Unsurprisingly, they were quick to sanction a $307 million loan on exceedingly soft terms, barely a hundred basis points or so above the global rate that had crashed after the American subprime crisis in 2008. But the catch was that Sri Lanka had to use the state-owned China Harbor Engineering for constructing the port.

<div class="paragraphs"><p>A Chinese engineer at the construction site for the deep water shipping port in Hambantota, on March 24, 2010. (REUTERS/Andrew Caballero-Reynolds)</p></div>

A Chinese engineer at the construction site for the deep water shipping port in Hambantota, on March 24, 2010. (REUTERS/Andrew Caballero-Reynolds)

Unsurprisingly again, the project ran into delays and cost overruns. Meanwhile, Rajapaksa had brutally won the civil war in 2009 and was eager to ‘commemorate’ his victory with the glorious launch of Hambantota. His impatience got the better of him during the negotiations for the second tranche of financing for the beleaguered port. In 2012, a whoppingly low 34 ships had berthed there against the 3,667 at Colombo. But Rajapaksa was desperately looking for cash to complete his showpiece. China agreed to give him another $757 million but yanked up the interest rate on even the first tranche of $307 million by a mind-numbing 600 basis points or thereabouts. Sri Lanka had just gotten itself into a debt trap.

To cut a long and sorry story short, Sri Lanka was forced to cede ownership of Hambantota and 15,000 acres of land around the port to China to settle its debt. Sri Lanka tried to circumscribe China’s stealthy ambition by ‘vetoing’ a military operation at the port. Of course, who could have predicted that Chinese submarines would visit just when Japanese Prime Minister Shinzo Abe was in town...

As China slung a lasso around Sri Lanka’s neck, India learnt a bitter lesson. The return on Chinese investment should not have been calculated merely in renminbi or rupaiya. Once you added the political payoff, it was clear the Chinese had struck a handsome deal.

Now it’s India’s turn to return the compliment. We are strenuously trying to reclaim the strategic space by dangling a $4-billion package before Lanka. Two credit lines of $1.5 billion to buy food, fertiliser, medicines, and petrol; loan deferrals and swaps of another $1 billion; eleven thousand metric tonnes of rice; plus a host of smaller bailouts. It’s an impressive attempt to win back Lanka’s goodwill in their hour of peril.

But is it enough? Can a few tweaks to our economic package trigger a big geopolitical ‘clawback’?

At this point, allow me to digress to what may appear facile, even frivolous, to the reader, but humour me. Around the end of the noughties, a fancied Indian private bank was rumoured to be in trouble after the Lehman collapse had wrecked financial institutions across the globe. This Indian bank was fearing a run by depositors which could have destroyed it.

I remember it was a Sunday, and most bank branches were closed. But serpentine queues of panicky depositors were forming outside hundreds of the bank’s ATMs. If everybody began to withdraw cash, the bank would have had to shut the counters, and its corporate credibility shattered forever.

My phone rang. The bank’s chairman was on the line. He wanted to declare on our business channel that he was opening all branches across the country, and anybody who needed cash would get it.

Raghav, I am doing this because the only way to stop the panic is to put a big box of cash outside the building, in full view of the public, and ask them to come and take whatever is due to them.

It was an audacious move, but it worked. Fear subsided, confidence returned, the queues dwindled, the bank survived that day, and later thrived!

So, what’s the lesson here for India and Lanka?

Today, Sri Lanka is desperately negotiating with IMF to get a hefty line of credit which would allow the country to discharge its liabilities and get breathing space to restructure and rescue its economy. But IMF wants a full package of stringent policies to be adopted as a ‘condition precedent’ before the cash is released. The whole process could take a potentially crippling six months.

So, while Sri Lanka needs an immediate lifeline, IMF is constructing an oxygen tent.

It’s a lethal game of chicken and egg. What should come first? Survival or sensible economics? It’s a dreadful dilemma, but also an avoidable stalemate.

This is the moment for India to play its hand and place the big box of cash in Colombo, in full world view. It could be a bridge line of direct credit or a guarantee, on reasonable terms, with flexible accommodation for temporary slippages, duly secured by a string of Lankan assets. It could be in addition to, or a full replacement for, the current piecemeal handouts, which are significant, but not a backstop. Once the IMF line is in place, and the Lankan economy begins to bank out of its stall, India’s ‘backstop financing’ could be gradually redeemed.

Yes, it would be an audacious Indian move, but the geopolitical payback could be gigantic!

Raghav Bahl is Co-Founder – The Quint Group including BQ Prime. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.