But India has made a strong comeback in Sri Lanka, wresting significant advantage from China. And going by the grammar and tone of S Jaishankar‘s just-concluded visit to Maldives, Muizzu, too, seems to be course-correcting. So, there’s more than what meets the eye – a fresh dynamic that reflects changing geopolitical and economic realities.
Take the Maldives. In May, IMF warned the country against a ballooning Chinese debt folio. A month later, Fitch downgraded its rating on grounds of ‘increased risks associated with the country’s worsening external financing and liquidity metrics’. It assessed that weakening foreign-reserve buffers and rising external government debt ‘increase the challenges for the new government to meet its substantial upcoming external debt-servicing obligations and keep the currency peg to the US dollar’.
According to the 2023 World Bank International Debt Report, 30% of the Maldives’ external debt is with China, which exceeds $4 bn. The debt trap that Sri Lanka found itself with China, accentuated by the economic slowdown during the pandemic, has engulfed many small economies. Muizzu realised soon that he needed New Delhi’s help. Warning signs of a Lanka-type crisis were writ large. GoI obliged by easing debt repayment schedules and helping with currency swap arrangements.
Further, Muizzu’s attempt to reduce dependency on India by sourcing essential food supplies from West Asia raised prices within the Maldives. It soon became clear that India remains the most affordable option for food and essential supplies. Finally, he had to take a call on whether to forgo political credit for many India-funded public-facing projects like reaching drinking water and sanitation facilities to 28 islands. Eventually, it made sense to course-correct.
In Sri Lanka, the 2022 turmoil has so far worked to India’s political advantage. New Delhi was the first responder to Colombo’s financial crisis, helping with liquidity on crucial occasions, and then to secure an IMF package. Sri Lanka’s inflation is below 3% today, down from a staggering 67.4% in September 2022.As for the China concern, Colombo banned foreign research vessels in Lankan waters after Beijing’s aggressive intentions. While it’s likely to lift the ban next year, the broader course-correction on China is a key shift. With elections due this year, India, too, has taken fresh guard, opening conversations with all contestants.On a broader plane, therefore, a couple of points require emphasis.
- A political crisis in the neighbourhood can’t always be controlled, calibrated and averted by India.
- India can turn such a crisis into opportunity, especially in the current geopolitical context. This is also possible because of India’s own strong economic profile that has enabled it to create more economic leverage in the region.
Over the past decade, India has built deep linkages in four key areas – finance, supply chains, petroleum, and (power and road) infrastructure. These investments have now emerged as stabilising factors during a political crisis. Any political regime in the region requires India’s assurance and support because of the intricate network of dependencies that have been built into the equation.
India has added three major transmission lines into Nepal, allowing Kathmandu to now export excess electricity. A power-purchase deal was recently signed between India, Nepal and Bangladesh. New Delhi is already Kathmandu’s principal customer. Supplies from NTPC plant in Tripura and the Adani power plant in Godda, Jharkhand, to Bangladesh have started. An ambitious $1.2 bn under-sea transmission line is in the works with Sri Lanka.
India’s economic embrace, therefore, is both deepening and expanding regardless of political shifts. Any new government in Dhaka will need to immediately lend political stability to the economic interaction with India. The costs of a fallout, as Muizzu realised, are just too high.
Further, alternatives to India are riskier and costlier in the long run. Unlike China, India neither overtly weaponise its assistance nor does it pose any threat to sovereign assets of these countries. Also, India’s interests lie in building an economically prosperous neighbourhood because crisis in any of these countries easily spills into Indian territory.
Finally, the larger geopolitical context weighs in India’s favour, probably for the first time since Independence. India and the US have held differing views on the Sheikh Hasina government. But will they let that play out in a way that benefits China in Bangladesh? Given the high stakes of the India-US strategic partnership, both sides should work this out to mutual benefit as in other cases. That opportunity, too, has presented itself as a new political order seeks to find its feet in Bangladesh.
For its part, India doesn’t have a closed-door approach. Its current engagement with the Taliban regime in Afghanistan, for instance, conveys political flexibility, which is essential because unstable polities can’t be controlled. What’s important is to build economic stakes, so that every crisis is not just a source of instability but also an opportunity to build further strategic leverage.