Sri Lanka's economic situation two years ago mirrored the severity of India's 1991 crisis, necessitating swift and effective action to restore stability and normalcy. However, the situation has since improved tremendously, reflecting significant progress in recovery and stability.
by Bhabani Sonowal
I am delighted to witness our immediate neighbour, Sri Lanka, recovering from its economic challenges with the steadfast support of longstanding allies. The International Monetary Fund (IMF), World Bank, and various financial agencies have mobilised swiftly to assist Sri Lanka in emerging from its economic quagmire. The resilience of Sri Lankans, who have shown remarkable patience and maintained cleanliness in their towns, is commendable.
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| Indian External Affairs Minister, Dr. S. Jaishankar, President Ranil Wickremasinghe, and Foreign Minister Ali Sabry during the media briefing in Colombo on 20 January 2023 [Photo: Government of Sri Lanka] |
India has been instrumental in rejuvenating Sri Lanka’s economy and supporting the daily lives of its people. During External Affairs Minister Dr. S. Jaishankar’s visit in October 2023, the Indian High Commission in Colombo released a statement underscoring India’s active role in the 23rd Council of Ministers (COM) and the 25th Committee of Senior Officials of the Indian Ocean Rim Association (IORA) meetings held in Colombo. Dr. Jaishankar, leading the Indian delegation, reaffirmed India’s dedication to regional cooperation and development, reflecting Mahatma Gandhi’s belief that “the best way to find yourself is to lose yourself in the service of others.”
India’s contributions have extended beyond diplomatic meetings to significant bilateral cooperation. Recent diplomatic engagements have led to formal agreements enhancing the Indian Housing Project, marked by an increase in funding and the introduction of new housing units. The unveiling of a joint logo celebrating 75 years of diplomatic relations between the two countries further underscores the depth of this partnership. Additionally, a Joint Venture Shareholders Agreement on Dairy Development has been established to bolster Sri Lanka’s self-sufficiency in dairy, drawing on India’s expertise in this sector. This support exemplifies the spirit of true friendship and solidarity between nations in times of need.
Sri Lanka has been closely observing India’s handling of its economic crisis in the early 1990s as a case study. At that time, India faced a severe economic downturn characterised by rising unemployment, soaring prices, and widespread public discontent. Despite these challenges, India underwent a remarkable economic transformation under the strategic leadership of Prime Minister P.V. Narasimha Rao. Rao, though not an economic expert, recognised the necessity of skilled advisors and empowered them to implement critical reforms. His approach, including candidly acknowledging his limitations and seeking advice from experts such as Pranab Mukherjee and Jairam Ramesh, was instrumental in navigating the crisis.
In contrast, Sri Lanka is grappling with its own severe economic issues, exacerbated by events such as the 2019 Easter bombings, imprudent tax cuts, and the COVID-19 pandemic. These factors have severely depleted the nation’s foreign exchange reserves, leading to restrictions on essential imports and deepening the economic crisis. The current situation in Sri Lanka, while challenging, is not unique. Historical examples of economic recovery, such as India’s 1991 reforms, offer valuable lessons. Re-evaluating and adapting proven strategies from other countries’ past crises may provide Sri Lanka with effective approaches to address its ongoing economic challenges.
India, as Sri Lanka’s immediate neighbour, has consistently extended support in times of need and remains a crucial ally. The history of assistance between the two nations suggests that Sri Lanka might benefit from adopting strategies similar to those used by India to overcome its 1991 economic crisis. Despite India’s robust economic performance since independence, it faced a severe crisis in 1991, with the risk of default looming large. The Economic Survey of 1991-92 highlighted that by mid-1991, India’s balance of payments crisis had eroded confidence in the government’s financial management, making default a serious concern. As the renowned economist Amartya Sen noted, “Economic development is not just about economic growth; it is also about the enhancement of human capabilities.”
The roots of the 1991 crisis lay in excessive external borrowing, which had drained foreign exchange reserves to the point where they could barely cover two weeks of import bills. The New Economic Policy revealed that government expenditure far exceeded income, and foreign debt was soaring. To address the crisis, India urgently secured a $2.2 billion emergency loan from the IMF, pledging gold reserves as collateral. Although this move faced criticism, it was crucial in stabilising the immediate financial situation and laying the groundwork for India’s economic reforms. Sri Lanka could gain insights from these strategies as it navigates its own economic challenges.
Political instability significantly exacerbated India’s balance of payments crisis. The period from 1989 to May 1991 saw three coalition governments and three different Prime Ministers, causing delays in addressing the crisis and eroding investor confidence. To remedy this situation, P.V. Narasimha Rao was appointed Prime Minister, and Dr. Manmohan Singh, a respected economist, was chosen as Finance Minister. The need for a stable and efficient government was crucial for implementing corrective measures, as Rao famously stated, “The future belongs to those who prepare for it today.”
Dr. Manmohan Singh aimed to reintegrate India into the global economy and liberalise the market through a series of economic reforms. In his budget speech, Singh emphasised the urgency of reform, stating, “The government and the economy can no longer operate beyond their means and must embrace market forces.” Unlike leaders in more stable political environments, Rao faced considerable challenges and dissent within his own party. Despite these hurdles, Rao’s government became the first minority government in Indian history to complete its term, ultimately transforming India’s economic landscape and achieving a remarkable turnaround.
Extraordinary times necessitate extraordinary measures, and this was certainly true for India during its 1991 economic crisis. To meet the IMF’s bailout conditions, Dr. Manmohan Singh meticulously planned and proposed a comprehensive economic restructuring. His reform package included both long-term structural measures and short-term stabilisation efforts. Long-term reforms aimed to enhance economic efficiency and international competitiveness by addressing rigidities in various sectors and encouraging foreign direct investment. Short-term measures focused on immediate solutions to the balance of payments crisis, including controlling inflation and implementing necessary tax, foreign exchange, and trade reforms.
Sri Lanka’s economic situation two years ago mirrored the severity of India’s 1991 crisis, necessitating swift and effective action to restore stability and normalcy. However, the situation has since improved tremendously, reflecting significant progress in recovery and stability. While progress has been made in recent years, political unity and commitment are crucial for sustained recovery. The challenges faced by Sri Lanka are akin to those India encountered in 1991. It is imperative for all stakeholders, including leaders and citizens, to engage in collective and constructive decision-making, setting aside political motives to ensure the nation’s recovery and future prosperity. As Winston Churchill once said, “To each, there comes in their lifetime a special moment when they are figuratively fitted to execute a particular task, uniquely their own.” Now is such a moment for Sri Lanka.
Dr. Bhabani Sonowal is an Assistant Professor at the School of Law, Bennett University (The Times Group) in India. She holds a Ph.D. from the Indian Institute of Technology, Kharagpur (2019) and an LL.M. from the PG Department of Law, Gauhati University, Assam (2014). Her research focuses on victims' rights, victimology, and criminal procedures.
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