Why India’s big push for economic cooperation in Sri Lanka may backfire

File photo of Prime Minister Ranil Wickremesinghe and former President Mahinda Rajapaksa  – Pic by Ishara S. Kodikara

By Ahilan Kadirgamar

http://thewire.in: New Delhi’s policy of hustling its smaller neighbour comes at a time when the Wickremesinghe Government’s mismanagement of the economy is apparent and will end up helping the xenophobic political forces in the country.

New Delhi’s relations with Colombo may appear to be at a high point but ironically, anti-India sentiments are on the rise in Sri Lanka. This divergence in sentiments between the Sri Lankan Government and its population is largely a consequence of moves to liberalise trade in services and investment between the two countries.

It is no secret that there was a major sigh of relief in India and the United States following the regime change in Colombo in January 2015. China’s inroads into the country with the Rajapaksa regime had polarised the region and raised the geopolitical stakes. However, Sri Lanka’s relationship China was built on an economic foundation of large investments in infrastructure. 

It also has a historical basis from the rubber rice deal during the Korean War to the massive Bandaranaike Memorial International Conference Hall in Colombo, gifted by the Chinese in the early 1970s. Nevertheless, in India’s efforts to ensure its regional dominance and counter China’s influence, there has been a singular focus on trying to lock Sri Lanka into the Indian economic orbit.

Expanding trade and financial agreements

The India-Sri Lanka Free Trade Agreement of 1998 was followed by efforts towards a Comprehensive Economic Partnership Agreement (CEPA) to liberalise trade in services and investment starting in the mid-2000s.

However, the CEPA negotiations dragged on for nearly a decade in the face of increasing opposition within Sri Lanka, particularly by the business community and certain interest groups such as the medical lobby. With the new momentum in closer bilateral ties last year, India is pushing for a new trade pact called the Economic and Technological Cooperation Agreement (ETCA). The pro-liberalisation Government of Prime Minister Ranil Wickremesinghe has been actively championing the proposed trade pact.

Meanwhile, the deterioration of the Sri Lankan economy in recent months – including a major balance of payments problem – has forced Colombo to seek support from external actors. India has boosted Sri Lanka’s foreign reserves by $ 1.1 billion with a Reserve Bank of India credit swap for six months drawn last September, followed by a further emergency credit swap in March to wade over the tough financial tide.

The credit swap is a temporary measure to increase Sri Lanka’s forex reserves, until the country receives an IMF loan. The IMF’s extended fund facility of $ 1.5 billion coupled with $ 650 million in multilateral and bilateral loans are to take effect in June this year. The Government believes these loans will create momentum for further global financial flows into the country.

The ETCA, widely perceived by the Sri Lankan public to be advantageous to India, is likely to become a trade-off for economic and political support from India to the Wickremesinghe Government. However, Wickremesinghe’s visit to Beijing last month has strengthened relations with China – a shift from the soured relations which followed the defeat of the Rajapaksa regime last year. The possibility of equity swaps, where Sri Lankan debt to China is traded for financial stakes in Sri Lankan enterprises, is now being considered. 

Sri Lanka has also initiated negotiations with China and the US on new free trade agreements. Seizing this opportunity, the IMF and the World Bank are also pushing to liberalise trade as part of a larger strategy of liberalising the Sri Lankan economy – from encouraging the privatisation of state owned enterprises to labour reforms.

Reactions to ETCA

Many of the Colombo-based neoliberal think tanks see the Wickremesinghe Government in power and the crisis facing the economy as an opportunity to accelerate liberalisation, including in trade. However, the ETCA is coming under considerable fire from a range of interest groups and political parties – from the chauvinistic remnants of the Rajapaksa regime to the ‘left’ opposition Janatha Vimukthi Peramuna.

So what fuels this tremendous reaction to the ETCA? After all, the agreement is only one part of this liberalisation push. To start with, the trade picture is not pretty. According to the Central Bank, Indian exports to Sri Lanka were $ 4,268 million while Lankan exports to India stood at just $ 643 million in 2015 – reflecting a massive trade deficit between the countries.

There have been various explanations put forward by Indian officials and pro-liberalisation advocates in Colombo on what has been gained with the previous free trade agreement, including claims that the high Indian exports to Sri Lanka are mostly independent of the free trade agreement. However, India’s eagerness for the trade pact and the stark trade deficit is difficult to miss.

In this context, the current economic crisis and the neoliberal economic policy trajectory have become the political ground for the mobilisation of forces opposed to the Government. And this campaign has zeroes in on the ETCA as the catch-all word to describe any and all impending economic woes. Political forces and middle class interest groups such as doctors and IT professionals are opposing the agreement and mobilising broader sections of society. Furthermore, these forces have assumed a xenophobic character, propagating anti-Indian sentiments.

Recent economic crisis

Much of the current economic woes in Sri Lanka have been inherited from the Rajapaksa Government’s economic development policies of construction-led growth on high interest debt. In addition, the deterioration in global economic conditions over the past year have created difficult financial conditions for Sri Lanka to roll over such debt. However, the Wickremesinghe Government needs to take part of the blame for mismanagement and certainly for its flawed economic vision.

Having come to power over a year ago, and having crossed the milestone of the Parliamentary election in August 2015, it nevertheless chose to continue on the path of further exposing the economy to international debt in its November 2015 budget. It ignored the warning bells about the increasing import bill and falling revenues, which have made the country far more susceptible to the current crisis conditions of capital flight from the emerging markets and increasing cost of capital in the global financial markets.

At the core of the Wickremesinghe Government’s economic programme is the liberalisation of trade and capital flows; the trade agreements and the IMF facility reflect this economic vision. In other words, it is counting on enticing inward capital flows despite the winds of global capital blowing in the opposite direction. 

Worryingly, even trade agreements in services and investment are known to lead to further speculative investment flows into finance, insurance and real estate, rather than traditional forms of foreign direct investment leading to the building of factories for production and exports. However, the Sri Lankan establishment has been satisfied with such fickle policies that also lead to considerable rent-seeking by the financial elite.

Opposing xenophobia and liberalisation

Trade liberalisation is always contentious for its impact on society, but it is all the more so now in the context of the global downturn and a national economic crisis. It is likely to aggravate the rising inequalities and jobless growth in Sri Lanka – by pushing for lower wages to compete in international markets – and the inflow of cheaper commodities, wiping out local production.

With the ETCA debate polarised between the free trade elite and the anti-Indian forces, there has been little informed debate including critical analysis of trade liberalisation, broader neoliberal reforms and the deteriorating global economic situation. For those bothered by xenophobia and economic marginalisation, the challenge is to oppose both the reflexive anti-Indian campaign of the nationalists and the neoliberal policies of the liberalisers.

In this context, New Delhi’s policy of hustling its smaller neighbour cannot be more ill-timed and is likely to generate a political backlash. The hubris of the Indian and Sri Lankan establishments in pushing through this trade pact may well result in losing the great opportunity that emerged last year of rebuilding Indo-Lanka relations on a broader footing.

[Ahilan Kadirgamar is a political economist and a member of the Collective for Economic Democratisation in Sri Lanka (www.economicdemocratisation.org).]