Harsh V. Pant & Aditya Gowdara Shivamurthy

The Covid-19 outbreak and Russia’s invasion of Ukraine have significantly contributed to global inflation and fuel and food shortages. These developments have exacerbated the economic and political vulnerabilities of the South Asian countries, such as fiscal deficits, meager export revenues and diversification, external debts, low foreign reserves, poor governance, and corruption.

Noting the overarching implications of these indicators on their political and economic stability, Sri Lanka, Pakistan, and most recently Bangladesh has reached out to the IMF. Pakistan and Sri Lanka are witnessing serious political unrest too; Sri Lanka’s current situation has also triggered angst within the Maldives and Bhutan and has created a strong demand for reforms.

With a devastating situation across the region, major powers have been unenthusiastic to get too involved. India — a key player in the region — has the potential and interests to provide some stability in South Asia, and so far has been at the forefront of engaging proactively with its neighbors in helping them out of the crises.

Primarily, the Sri Lankan crisis has set an angst-triggering benchmark for the rest of the region. Long ignored structural issues like low forex reserves and sources, debt accumulation, and revenue deficits, along with populism, irrational policies, and external shocks have contributed to a full-blown political and economic crisis. The country continues to face food and fuel shortages along with sky-rocketing inflation. The lack of foreign reserves has compelled the island state to declare itself “bankrupt” — complicating its potential investments and IMF bailout negotiations.

The extent of political chaos and protests have also complicated its path to stability and normalcy. What began as protests against inflation and the president has now transformed into a demand for an overall change in the country’s political structure. Political and economic stability in the island nation will likely get murkier if people do not see tangible changes in their day-to-day lives.

Similar structural issues have continued to challenge Pakistan’s economy and led to a regime change this year. The current government has tried to improve its tax collections and revenue — fueling the political and economic crisis further. With an overall debt of $129 billion, Pakistan has now reached out to the IMF for a bailout for the 24th time since 1947. The political and economic future looks brink with debts piling up, extremism continuing to be a challenge, and Pakistan losing its ability to repay its debts or even secure its investments. 

External shocks have exacerbated Nepal’s economic vulnerabilities too. Decreasing external remittances, inflation, and the increasing trade deficit have contributed to low forex reserves. This has impacted its already scarce foreign investments and has also persuaded the import-dependent country to regulate or ban the import of certain commodities, including fuel. Although not as dire as Sri Lanka and Pakistan, Nepal’s crisis is a recipe for a perfect disaster, considering the history of its political instability and governance. 

In all three cases, China’s complicity has also been critical. China’s less conditioned and easily available loans motivated these countries to continue borrowing without promoting any structural reforms, making them more economically and politically vulnerable. In addition, China’s high-rate interest loans and employing its capital goods and labor has accumulated debts rather than reaping economic benefits for the host country.

China has also hesitated to restructure or defer these loan payments and has grown more reluctant to assist where repayment seems difficult. Its investments in Pakistan have stagnated, Sri Lanka is witnessing a cold shoulder, and Nepal has not yet implemented a single BRI project, considering China’s opaqueness. Similar concerns about China’s BRI projects were raised by the Finance Minister of Bangladesh, as the region faces inflation and slow economic growth.  

These comments did not occur in a vacuum. Despite its impressive economic growth, Bangladesh is not free of structural issues and external shocks. In recent years, it has focused on export promotion, mega-infrastructure development, trade, and connectivity. But Covid-19 and Russia’s invasion have triggered additional external borrowing, trade deficit, devaluation of the currency, fuel inflation, and reduction in remittances and forex reserves. Compelling, the government to approach the IMF for pre-emptive assistance.

With the whole region in flux — India has the capability and interests to help promote economic and political stability. India has assisted Sri Lanka with $3.8bn when other major powers directly responsible for the crisis have adopted a passive approach. The fact that New Delhi helped the former despite the Rajapaksas’ lack of sensitivity to Indian interests, indicates India’s keen interest to promote stability in the region.

As India discerns its role in the multipolar world and the Indo-Pacific, it seeks to continue to play a stabilizing role in South Asia. The crisis provides an opportunity for India to further its role and promote economic and political stability in the region by facilitating assistance from multilateral and minilateral groupings. Fuel inflation also allows India to promote connectivity and energy security by initiating renewable energy projects in the region, and supplementing them with financial and technical assistance.

New Delhi’s role at this critical juncture in the South Asian economic trajectory will be key in how this region manages to find its way out of the multiple crises that seem to engulf it. India is indicating that it is willing to play the role of a friendly neighbor when other key powers have decided to look away from the challenges. 

This article was first published in Dhaka Tribune as As Turbulence Looms in South Asia, India Emerges as an Anchor on August 17, 2022.

Read more by Harsh Pant and Aditya Gowdara at IMPRI Insights:

India Must Lead Amidst South Asia’s Geopolitical Crisis| 1 August 2022

Shinzo Abe & his India Connection| 11 July 2022

The G7 is one part of India’s pursuit of a multipolar world| 6 July 2022

Afghanistan: India must make its presence felt| 19 June 2022

Europe Must Evolve with Changing Realities| 16 June 2022

Smaller States Cash In while India and China Compete | January 29, 2022

Youtube: Watch Harsh V. Pant at IMPRI #WebPolicyTalk-India and the Evolving Global Order

About the Authors

Harsh V Pant edited

Harsh V. Pant, Professor, International Relations, King’s College London; Vice President – Studies and Foreign Policy, Observer Research Foundation (ORF), New Delhi.

Aditya Gowdara Shivamurthy | People Expert | ORF

Aditya Gowdara Shivamurthy, Research assistant at Observer Research Foundation (ORF), New Delhi.