It is in India’s interest to assist crisis-hit neighbours

AS turmoil continues in Bangladesh despite the formation of an interim government, India stands out as the sole bright spot in South Asia on the economic front. Our eastern neighbour has faced an economic downturn in recent years, while Sri Lanka in the south has been recovering from the political and economic crises that erupted two years ago. Pakistan is also struggling to deal with inflation and the burden of international debt, and its GDP growth remains below 3 per cent.

In sharp contrast, India recorded robust economic growth of nearly 8 per cent in the last fiscal, and inflation has moderated to a five-year low of 3.5 per cent. Interestingly, both Sri Lanka and Bangladesh seemed to be doing better than their big brother neighbour in terms of development indices at one point. Faulty policies stalled growth and engulfed them in political upheavals that forced their heads of government to flee to safety abroad.

In the case of Bangladesh, which is in the eye of a storm, it was described as an economic miracle until recently. This was surprising for a nation considered to be a basket case for many decades since its creation in 1971. After Sheikh Hasina had assumed power in 2009, a drive was launched to accelerate the pace of development. Investment was made in infrastructure, while focus was laid on industry and services. The result was a sustained growth rate of over 6 per cent for roughly a decade.

This led to a rapid rise in per capita income levels. At one point, India’s per capita GDP was significantly higher than that of Bangladesh. But it had fallen behind by 2020. Other development parameters also improved, with infant mortality rates lower than those in India and Pakistan. And its life expectancy became the highest in the South Asian region.

There were inherent flaws, however, in the economic strategy adopted by Hasina’s Awami League government. A big one was the reliance on a single industry, that is, ready-made garments. It became a huge revenue earner for the economy, and it still accounts for 85 per cent of the country’s exports. The other critical lifeline for the economy was the inflow of remittances from the overseas diaspora.

The situation began to deteriorate with the onset of the Covid-19 pandemic in 2020 as garment factories shut down for months, creating widespread unemployment. The scenario worsened with the outbreak of the Ukraine war in 2022, making imports, especially fuel, more expensive. Remittances dropped while global recessionary trends led to a dip in the demand for garment exports. The current account deficit widened, and foreign exchange reserves suddenly contracted. Ultimately, Bangladesh sought a loan of $4.7 billion, which was granted by the International Monetary Fund (IMF) in early 2023.

The economic woes of the past few years have been the backdrop for the unrest that ultimately led to the downfall of the Hasina-led government. But the political upheavals could have long-term ramifications unless bilateral relations are brought back on an even keel. Apart from the $12-billion annual trade, Indian companies have made sizable investments in Bangladesh.

Amid uncertainty, there is already talk of shifting the units back to India. Such an attitude would ultimately have a negative outcome. Firstly, the withdrawal of investments or cutting trade ties would deprive India of an easily accessible market. Secondly, creating a vacuum in the supply of basic goods could lead to a flood of cheap Chinese imports into Bangladesh. And since the long land border is relatively porous, these could find their way into India.

Besides, there has been increased cooperation in infrastructure. Several credit lines had been provided to Bangladesh for the development of road, rail and port projects. In addition, India has been exporting electricity to Dhaka. It would be in the interest of both countries to ensure that such developmental projects are not disrupted in any way.

There is as much concern about Sri Lanka. President Ranil Wickremesinghe had negotiated a $2.9-billion IMF loan to bring the economy back on track. India, too, provided a $3.5-billion loan to the cash-strapped country.

The downturn in that country’s fortunes was caused by a series of unusual economic policies by the previous government. This included deep tax cuts that created severe revenue shortfalls. The situation was worsened by a decision to suddenly shift to organic fertilisers. The move led to shortages of the staple foodgrain, rice, and the main cash crop, tea. One of the key conditionalities laid down by the IMF was a rollback of the tax cuts.

As for Pakistan, it has taken recourse yet again to an IMF loan. But last year’s crisis, when inflation shot up to nearly 40 per cent, has been overcome; it has now moderated to 11.8 per cent. Besides, foreign exchange reserves are no longer at dangerously low levels.

One of the reasons for the hardships there was a decision taken by the Imran Khan government to cut retail petroleum rates at a time when world prices had risen sharply. Debt incurred as a result of the involvement in China’s Belt and Road Initiative also reportedly played a role in the economic distress.

Therefore, India remains an outlier in South Asia with a sustained growth rate and steady post-Covid recovery. Yet, there is potential for disruption to the domestic economy with a contagion effect from the surrounding countries facing economic emergencies. Assistance to neighbours like Sri Lanka is very much in India’s interest. The impact of a failing economy on India will be even greater in the case of Bangladesh, in view of the extremely long land border. Apart from issues related to trade and investment, an immediate concern would be an influx of refugees. It can only be hoped that the new interim government moves swiftly to restore order and ensure that the economy is back on track. This will be in the best interest of the entire region in the long run.