Sri Lanka is witnessing the worst ever crisis in its history so far. The Nation is also on the brink of a financial breakdown and a potential civil war. Anger against President Gotabaya Rajapaksa is brewing as the deepening economic crisis led 22 million people spiraling into violence late on Thursday, as hundreds of protesters clashed with police for several hours.
The country has been left with almost negligible foreign currency to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13-15 hours. Sri Lankans are also facing food shortages and soaring inflation after the country steeply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) to get emergency financial assistance.
The root of the Sri Lankan Crisis
The root of the Sri Lanka crisis lies in various reasons. The biggest one is the economic mismanagement by successive governments that created a twin deficit situation. In this situation, a nation experiences a budget shortfall alongside a larger current account deficit.
In simple words, we can say that a Twin deficit is a scenario where a country’s national expenditure exceeds its national income, and its production of tradable goods and services is inadequate.
In the past decade, the Sri Lankan government has borrowed huge sums of money from foreign lenders, especially China to fund its public services and infrastructure development. This borrowing spree has coincided with a series of natural disasters and man-made complexity such as a government ban on chemical fertilizers that decimated farmers and harvests.
Another major reason was the deep tax cuts promised by Rajapaksa during a 2019 election campaign that was enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy. Sri Lanka’s lucrative tourism industry and foreign workers’ remittances were diminished by the COVID pandemic.
This led to severe financial issues, which led to successive credit downgrades by credit rating agencies, which ultimately locked Sri Lanka out of international capital markets. It affected Sri Lanka’s debt management program, which was highly dependent on foreign capital markets. It in turn derailed the foreign exchange reserves, as it is entirely wiped out in the last two years.
The country is also facing a severe shortage of crops and edible items because the Rajapaksa government has already banned the usage of chemical fertilizers in 2021. It was the step that severely hit its farm sector and triggered a drop in the critical rice crop.
Are we going to witness a Sri Lankan type of crisis in Delhi and Punjab?
A few weeks back, a few senior bureaucrats have come calling on PM Modi to warn of a fate like Sri Lanka, or Greece, if not for the whole country, certainly for certain states bent on distributing freebies they cannot afford.
We have a couple of States, that are profligate with promises of free to win elections. This is something of a winning formula for the Aam Aadmi Party (AAP), as they were able to retain Delhi and recently won Punjab, all due to this formula of freebies.
AAP has mustered a winnable formula by mixing freebies for the masses, with a heavy push of minority appeasement politics to garner votes. However, the politics of freebies is highly unsustainable. Both Delhi and Punjab are in dreadful financial condition, and it is highly unlikely that AAP will be able to fulfill its promises.
Delhi has already been driven to the point of destitution by AAP’s consecutive terms. They have delivered only on free 200 ltr water and electricity bill waiver till 200 units. However, If you talk about infrastructure development, water supply, construction of schools and colleges, buses, hospitals, and roads, then you will find negligible or no improvement at all.
Due to subsidies on electricity, water, and free DTC bus service, Delhi Governments Discoms, Delhi Jal Board, and DTC have been running into massive losses, and this is bound to impact their ability to provide service to the end-users in the time to come.
On the other hand, Punjab is already sitting on massive Debt, which can not even be serviced from the state’s revenues. Arvind Kejriwal made some extravagant promises but now they don’t have money to fulfill them. Punjab already has the highest Debt-to-GDP ratio, and its Discoms and other departments are making massive losses.
Bhagwant Mann has already come calling on Prime Minister Modi to ask for Rs 50,000 crore as the first tranche of a special Rs 100,000 crore package for the border state of Punjab. However, they didn’t get any assurance from the Center.
Now the law and order situation in Punjab is worsening, and this will make it more difficult for the AAP government to attract the private sector to improve the revenues. Due to Farmer protests and recent Khalistan led violence, industrialists are moving away from Punjab,
Hence, we can say the day is not too far from when the AAP government in both Delhi and Punjab will create a Sri Lanka type of crisis.