Sri Lanka’s 2022 economic collapse was its worst crisis since independence.
India, its closest neighbour, rushed in with credit, fuel and food.
Must Know
The Collapse and India’s First Response
What the crisis looked like
- Reserve CollapseSri Lanka’s usable foreign reserves fell below USD 2 billion in early 2022.
- DefaultSri Lanka missed a foreign debt payment in April 2022.
- First DefaultIt then defaulted on its sovereign debt for the first time.
- InflationAnnual inflation crossed 60 percent by September 2022.
- Daily LifeRolling blackouts, fuel queues and medicine shortages gripped daily life.
- TourismTourism earnings, a key revenue source, had collapsed during the pandemic.
Why the economy broke
- Tax CutsLarge 2019 tax cuts sharply reduced government revenue.
- Covid-19The pandemic wiped out tourism and foreign remittances.
- Fertilizer BanA 2021 chemical fertilizer ban devastated farm output.
- War ShockRussia’s invasion of Ukraine pushed up oil and food prices.
- Debt BurdenPublic debt stood near 128 percent of GDP in 2021.
- External DebtForeign debt of about USD 51 billion became unpayable.
The political upheaval
- AragalayaProtests called the Aragalaya began in March 2022.
- DemandsCrowds demanded the Rajapaksa government resign over shortages.
- StormingOn 9 July 2022 protesters stormed the Presidential Secretariat.
- ResignationGotabaya Rajapaksa fled abroad and resigned on 14 July 2022.
- SuccessionParliament elected Ranil Wickremesinghe as President on 20 July 2022.
India’s response at a glance
- Neighbourhood FirstIndia responded first under its Neighbourhood First policy.
- ScaleNew Delhi committed over USD 3.5 billion of support in 2022.
- FormsAid took the form of credit lines, swaps, fuel, food and medicine.
- IMFIndia backed Sri Lanka’s programme with the International Monetary Fund.
- PoliticsNew Delhi urged democracy, devolution and protection of Tamil rights.
Good to Know
What India Actually Did
The assistance package in detail
- USD 1 BillionA USD 1 billion credit line for essential goods came in March 2022.
- Fuel CreditA USD 500 million line for fuel followed in April 2022.
- ACU DeferralIndia deferred about USD 515 million in ACU payments in May 2022.
- FertilizerA USD 55 million credit bought fertilizer for the farming season.
- More FuelIndian Oil extended further fuel credit in June 2022.
- HumanitarianShips carried rice, milk powder, medicines and kerosene to Colombo.
Why India moved so fast
- ProximitySri Lanka sits barely thirty kilometres from India’s coast.
- StabilityCollapse could push refugees and smuggling across the Palk Strait.
- RivalryA rising Chinese footprint in the island worried New Delhi.
- PolicyNeighbourhood First and SAGAR frame India’s neighbourhood approach.
- TradeIndian firms also held stakes in Sri Lankan ports and power.
India’s political stance
- NeutralityIndia refused to take sides among Sri Lanka’s political factions.
- DemocracyNew Delhi pressed for democratic and constitutional solutions.
- ElectionsIndia welcomed early presidential elections and a fresh mandate.
- 13th AmendmentIt urged full implementation of the 13th Amendment on devolution.
- TamilsIndia sought guarantees for the rights of Sri Lankan Tamils.
China, the IMF and other players
- ChinaChina offered a yuan currency swap but disbursed far less.
- Debt TalksBeijing later joined bilateral debt treatment talks in 2023.
- IMFThe IMF approved a USD 3 billion EFF in March 2023.
- CreditorsIndia, France, Japan and China formed an official creditor committee.
Test Yourself
Great to Know
Significance, Limits and a Mains Answer
Significance of India’s role
- TimelyIndia’s aid arrived within days of Sri Lanka’s requests.
- VisibleAssistance was branded and visible on the island’s streets.
- No StringsNew Delhi attached no political conditions to its help.
- SovereigntyIndia respected Sri Lanka’s choices on its own governance.
- GoodwillThe response rebuilt trust across ethnic and political lines.
- GeopoliticsIt showed India could out-deliver China in the neighbourhood.
Limits and criticisms
- LoansMost Indian support came as loans, not grants.
- RepaymentFuture repayments could strain the bilateral relationship.
- GapAid still covered only part of Sri Lanka’s financing needs.
- SilenceCritics noted India’s muted stance on democratic backsliding.
- BalanceNew Delhi avoided underwriting Sri Lanka’s entire debt burden.
A mains answer skeleton
- OpeningBegin with Sri Lanka’s age-old friendship with India.
- CrisisSketch causes, default, protests and the government’s fall.
- AssistanceDetail India’s credit lines, swaps and humanitarian aid with figures.
- ComparisonContrast India’s response with China’s and the IMF’s.
- BalanceAdd limits and criticisms to show a balanced view.
- CloseEnd with Neighbourhood First and the road ahead.
PYQ
Previous Year Questions
2022 Mains — GS Paper II
- Mains 2022UPSC CSM 2022 GS Paper II, Q9 — View this question
- AskThe question tests knowledge of the crisis and India’s response.
- PlanOpen with friendship, then crisis, assistance, and balance.
- TipCite credit-line figures, dates and the Neighbourhood First policy.
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