Sri Lanka’s economic crisis has led to the fall political and socio-economic consequences for the residents of the island nation. But beyond its effects on national stability, this crisis also has important implications for energy competition between India and China in South Asia.
The current situation could hamper China’s intention to increase its regional strategic influence and power projection. Alternatively, this situation may serve as an opportunity for India, which had cautiously observed China’s growing influence in the region in recent years. New Delhi now has a unique opportunity to strengthen its leadership role and showcase its positive contribution to the stability of South Asia by addressing and resolving the mess guaranteed by Beijing’s investments.
China’s rise over the past decade has been accompanied by a desire to project its power and maximize its influence beyond its immediate neighborhood. Since the mid-2000s, China has steadily expanded its deep-sea operations to the Indian Ocean to increase its strategic footprint. It has done so by participating in counter-piracy operations in the Horn of Africa, by deploying its nuclear submarines on a large scale in the Indian Ocean and by establishing its first overseas base in Djibouti in 2017. Despite its impressive military capability, China’s ability to maintain a robust military presence in the Indian Ocean region and South Asia in particular is still limited.
One of the most critical indicators of an extra-regional power’s strategic influence is its ability to support bilateral military exercises and operationalize defense cooperation with regional states.
As China has become a major arms exporter in the region (mainly Pakistan, Bangladesh and Myanmar), it has been unable to expand military exchanges and other facets of defense cooperation with South Asian states. Moreover, given India’s geographical proximity and growing material capabilities, South Asian states (with the sole exception of Pakistan) have also found it prudent not to overtly engage in actions with extra-regional states that could directly upset the regional balance of power. . Consequently, China’s attempts to convert its growing presence into strategic influence to offset India’s leadership role in the region have suffered a setback.
In trying to build its image as a major economic and development partner in the region, China has begun to engage with various South Asian countries through its Belt and Road Initiative (BRI ). In South Asia, Sri Lanka has received billions of dollars of Chinese investment. Beijing has provided large loans that have enabled Chinese companies to undertake several key infrastructure projects in Sri Lanka, from road and port development to the supply of railway equipment. These Chinese projects have been marred by controversial from the beginning given their lack of transparency, sustainability and accountability. Yet against the backdrop of its affinity with Beijing, the influential Rajapaksa family, which facilitated these investments, turned a blind eye.
However, as the economic crisis unfolded this year, Sri Lanka’s debt to China became evident. Some felt that China represented 10 percent of Sri Lanka’s total debt, while others argued that 10% was an understatement and could be as large as 20 percent. Despite this, China remained reluctant to restructure Sri Lanka’s loans in the face of repeated requests from Colombo.
This situation is a major challenge to China’s longstanding efforts to cultivate the image of a responsible power, given its desire to bring as many states into its BRI as possible. On the contrary, the crisis in Sri Lanka has shown that Beijing is not only an insufficient provider of economic growth and development but, with its hesitant response, also an unreliable comrade in times of economic distress.
This serves as a wake-up call for other countries, given that two other major recipients of Chinese loans in the region, Pakistan and Nepal, also appear to be heading down a similar path. Pakistan faces heavy debt, many of which are large Chinese loans and investments, and that debt is getting worse. It coincides with Pakistan decreases foreign exchange reserves when the cost of energy imports increases. Similarly, Nepal is going through a difficult period economically with its foreign exchange reserves. fall while the growing disequilibrium of its balance of payments aggravates the shortage of liquidity.
Conversely, the Sri Lankan crisis enabled India to intervene. New Delhi has emerged as a key player in pulling Colombo out of economic collapse. Since January 2022, it has offered unprecedented economic aid worth $3.8 billion (for comparison, India invested $3 billion in Afghanistan between 2001 and 2021) to Colombo and plans to offer more once the situation has stabilized. India’s proactive actions to come to the aid of its neighbor have established a more positive perception of India in the region and beyond.
With the consecutive economic crises induced by Chinese investments, questions now arise about the effectiveness of China’s role as a development partner in the region. Moreover, the growing global decline in Chinese investment and the continued skepticism of its economic growth are adding to this momentum, putting India in an advantageous position.
India, therefore, has the potential to offset China’s growing but still limited influence in the region (with the possible exception of Pakistan) by illustrating not only the shortcomings of the Chinese approach but, through the through economic assistance, also highlighting the Indian approach as a better, people-centered and viable alternative.