By Y P Prakash
The current state of Sri Lanka evokes memories of India’s experience in the 1990s, although India was able to rectify the situation before it escalated to a critical level akin to a Bastille-like crisis. By 1991, India found itself on the brink of sovereign default. The Gulf War exacerbated the situation by causing a decline in remittances from Indian workers abroad. India’s foreign exchange reserves plummeted significantly, reaching a worrisome level of less than $6 billion. This amount would have been sufficient to cover only approximately two weeks’ worth of the country’s import requirements.
However, India managed a remarkable recovery from the 1991 economic crisis which can be attributed to a series of transformative economic reforms. The crisis served as a wake-up call for the Indian Government to address deep-rooted structural issues and implement bold policy changes, which eventually paid off.
As a result, today, the Indian economy continues to perform well and remains the fastest growing Asian economy and one of the fastest growing in the world.
According to data released by the National Statistical Office recently, India’s economy exceeded the official forecast by growing at a rate of 7.2% in the Fiscal Year of 2023. This impressive growth was primarily propelled by the robust expansion of the agriculture, construction, and services sectors, as well as a rebound in manufacturing during the March quarter.
In the quarter ending on 31 March, the Gross Domestic Product (GDP) witnessed a notable acceleration, expanding by 6.1% compared to 4.5% in the previous three months and 4% in the corresponding quarter of the previous year.
The data further revealed that investment in fixed assets experienced strong growth of 8.92% during the March quarter, primarily due to the government’s capital expenditure. Additionally, household spending showed an uptick of 2.82%. Even government spending displayed growth of 2.29% during the quarter, considering the high base of comparison.
According to experts, the negative net exports situation has shown consistent improvement over three consecutive quarters, contributing to the growth observed in the March quarter. They also anticipate a reduction in the drag caused by negative net exports on overall GDP, as the trade balance is expected to improve in the Fiscal Year 2024.
In terms of specific sectors, the farm sector experienced a robust expansion of 5.5% when adjusted for inflation. Additionally, the manufacturing sector, which had contracted for two consecutive quarters, rebounded with a growth of 4.5% in the fourth quarter. The services sector demonstrated strong expansion, indicating that the pent-up demand, which has been fuellingconsumption after the pandemic, continues to sustain.
The construction sector witnessed notable growth of 10.4% during the quarter, while trade, hotels, transport, communication, and broadcasting services grew by 9.1%.
During a briefing after the release of the GDP figures, V. Anantha Nageswaran, the Chief Economic Adviser in India’s Finance Ministry, highlighted that private final consumption expenditure was catching up with the pre-pandemic trajectory, reaching the level it would have been had the Covid-19 pandemic not occurred.
According to Nageswaran, the recent Indian Government’s investment in infrastructure has started to attract private sector investment. This can be observed through the announcement of new projects and the cash flow projections provided by companies. Prime Minister Narendra Modi expressed in a tweet that these figures demonstrate the resilience of the Indian economy amidst global challenges. He further emphasized that this robust performance, coupled with overall optimism and strong macroeconomic indicators, showcases the promising trajectory of the economy and the determination of the Indian people.
The finance ministry released an official statement stating that pent-up demand, which was unleashed, led to the surpassing of the pre-pandemic trend trajectory in real private final consumption expenditure (PFCE). Additionally, there has been a significant increase in public sector capital expenditure (capex) over the past three years, contributing to the surpassing of the pre-pandemic trend trajectory in Gross Fixed Capital Formation (GFCF).
However, experts have raised concerns about private consumption. Rating agency Ind-Ra highlighted in their analysis that while inflation is expected to ease, the current consumption demand is heavily skewed towards goods and services consumed mainly by households belonging to the upper-income bracket in India. A broad-based consumption recovery is still a considerable distance away.
Some economists have predicted that India’s GDP growth could moderate to 6.1% in the Fiscal Year 2024 due to various factors. These factors include a slowdown in domestic discretionary demand, subdued external demand, and financial uncertainties.
Rajani Sinha, the Chief Economist at CareEdge, India, stated that the share of private consumption in GDP is expected to experience a slight decline. On the other hand, investment demand is anticipated to remain strong. However, the global growth slowdown and financial uncertainties may impact business optimism, cautioned Sinha.
Sinha also highlighted positive factors such as rising rural wages, record food grain production, and the expectation of lower food inflation in India, which are favourable for the rural demand outlook. However, the development of El-Nino conditions during the monsoon season poses a significant risk to India’s agriculture production and rural income. Experts further emphasized that inflation is projected to moderate in the Fiscal Year 2024 compared to 2023, which will benefit household budgets and consumption.
Addressing the 30-year development plan of the Colombo North Port workshop, President RanilWickremesinghe expressed his view on India’s population growth and industrialization. He mentioned that with India becoming the world’s most populous country and experiencing rapid industrialization, Sri Lanka can leverage these developments to become an air and sea hub in the region. Wickremesinghe emphasized the importance of exploring the connectivity between India and Sri Lanka and the opportunities that India’s southern neighbour would receive.
Wickremesinghe predicted that India’s population would reach 1.7 billion by 2050, with industrialization progressing rapidly in states like Gujarat, Maharashtra, and Tamil Nadu. He noted that while India’s industrialization is still in its early stages compared to China’s progress in 2010, it is expected to advance at a geometric pace rather than arithmetic. This presents potential opportunities for Sri Lanka as India’s industrialization expands to other regions in the future.
President Wickremesinghe emphasized the importance of understanding the development in India and the connectivity between India and Sri Lanka. He raised questions regarding the role of ferries and the need for more permanent structures in the northern region, which would determine the viability of ports, especially the port of Colombo. The President emphasized the need to consider the environmental impact, particularly on fishing communities, before initiating any construction projects, as the support of the local population is crucial.
In the journey to transform Sri Lanka into a hub and a developed country within the next 25 years, the President highlighted the significance of examining the developments in India, as well as the broader region encompassing Bangladesh, Iran, and the entire Makran coast. Discussions with India are ongoing regarding the development of the Trincomalee Port, taking into account the anticipated significant growth in the Bay of Bengal over the next 25 years, involving India, Bangladesh, Malaysia, and Myanmar. The President also highlighted the potential for the Trincomalee Port to serve as a hub for cruise tourism in the Bay of Bengal.
With a population of over 22 million, Sri Lanka must contemplate its future and the steps required to become a developed country. Assessing the role Sri Lanka needs to play as a hub, the President emphasized the need to consider the developments in India, Bangladesh, Iran, and the wider region.
Ranil Wickremesinghe emphasized the need to consider the developments in India, as it will determine the capacity and infrastructure requirements, such as the number of transportation units (TUs) and containers. He mentioned that there is a positive outlook for India, but its realization depends on successful implementation.
India’s path from the brink of collapse to establishing competitive exports has been a challenging and extensive journey. Similarly, the timeline for Sri Lanka to revitalize its economy remains uncertain and can only be determined with time.
To turn its economy around, Sri Lanka would need to address these issues and implement effective policies and reforms. This could involve measures such as fiscal consolidation, attracting foreign investment, diversifying the economy, improving infrastructure, promoting innovation, and fostering a favourable business environment.
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