India's southern neighbour, Sri Lanka, is struggling to stay afloat amid the deepening economic crisis with the island nation on the brink of bankruptcy, with nearly USD 7 billion of its total USD 25 billion in foreign debt due for repayment this year.
A severe shortage of foreign exchange means the country lacks the money to buy imported goods. People have endured months of shortages of essentials like food, cooking gas, fuel, and medicine, and lining up for hours to buy the very limited stocks available.
With the prevalent situation, India’s exporters are rethinking plans to send shipments to Sri Lanka as state-run companies have run out of money and private buyers have cancelled orders. Without assurances from the government, exports to the island nation are set to shrink from April, analysts say.
During such situations, shipments with high freight-on-board value are the first to be hit. These are mostly products that get imported into the country.
As of now, import of vehicles, engineering goods such as iron and steel, heavy machinery, and electronics have begun to reduce as exporters are looking to renegotiate contracts or hold off on shipments coming to Sri Lanka.
Recently, the Export Credit Guarantee Corporation, which provides credit risk insurance and related services for exports, put Sri Lanka in the Restricted Cover Category-I. This has further complicated and made exporters wary of shipping goods into Sri Lanka.
India is one of the biggest business partners for Sri Lanka, and it also carries out some very significant pieces of business with the island nation. The bilateral trade between India with Sri Lanka stood at $5.9 billion during 2021-22, rising from $4.1 billion in 2020-21.
Sri Lanka was slowly moving closer to India both diplomatically and with respect to trade in recent years even before the Covid-19 pandemic with the year 2018-19 seeing the bilateral trade reaching $6.1 billion.
India is the major partner in the bilateral trade with most trade happening from India to Sri Lanka. Indian exports amount to almost 87 per cent of the overall trade between the nations. Petrol and diesel, along with processed petroleum make up the majority chunk of exports aside from iron, steel, apparel, rice, wheat, cotton, pharmaceuticals, and boats.
Recently, India’s line of credit amounted to $1 billion mainly for the import of food, medicine, and essential items and $500 million specifically for petrol and gas. It is not sure how long India can continue to support Sri Lanka in a similar manner.
Indian companies have also made strong investments in Sri Lanka in the areas of petrol, retail, IT, banking and financial services, real estate, telecom, metal, tyre manufacturing, cement etc. Tata, Bharti Airtel, Indian Oil, Mahindra & Mahindra, and banks like SBI are some of those who directly operate in Sri Lanka.
One of the key shortages in Sri Lanka was the unavailability of essential medicines and critical pharmaceutical products that stopped surgeries from taking place across hospitals. Now, Indian pharma majors are concerned about payments for their exports into Sri Lanka, which is pending an IMF (International Monetary Fund) bailout.
Sri Lanka is India’s 18th largest partner in terms of pharma and medicine exports. But India is a very key partner for Sri Lanka for pharmaceutical goods with imports worth more than $274.40 million to Sri Lanka in 2021, marking a 25 per cent growth over the previous year. The exports, however, have declined this year owing to attached uncertainty.
Another heavily hit sector is the automotive sector with vehicle and kit exports from India as well as local production taking a massive hit owing to shortages. Vehicle kit shipments for LCV (light commercial vehicles), trucks and buses, have declined sharply, owing to a lack of forex reserves and fuel shortages.
Tata Motors exports vehicle kits to local distributors in Sri Lanka, while other companies like Mahindra & Mahindra, Ashok Leyland and TVS Motors have local assembly operations in the country.
Owing to a lack of incoming vehicle kits, local assembly units are unable to complete vehicle production. Sri Lanka also imports a lot of tractors from India which are mainly from Mahindra & Mahindra.
In recent times, Sri Lanka has seen a lot of interest and sales when it comes to small commercial vehicles from India, owing to their low cost and sturdiness.
Owing to the transition of Sri Lanka from a market economy to a product-based economy, the exports of CBUs (completely built units) stopped owing to forex shortages, and the imports of auto products including 2 and 3-wheelers were stopped by the Sri Lankan government as a result.
Sri Lankan exports hit, providing an opportunity to other countries:
Sri Lanka is one of the most sought-after exporters of tea and tea-related products and now their internal issues have heavily affected their tea exports resulting in countries like India looking to fill in the gaps in the global market. The island nation has been left grappling with a sharp decline in tea production amid severe power cuts that span as long as 14 hours a day.
Sri Lanka produces around 300 million kg of tea annually with almost 98 per cent of those being exported. Most of the tea products are orthodox in nature. ‘Orthodox tea’ refers to loose-leaf tea produced using traditional methods plucking, withering, rolling, oxidation/fermentation and drying.
Sri Lanka’s department of commerce and the directorate general of foreign trade are exploring ways to address the bottlenecks faced by its tea exporters. This may give a window for Indian tea exporters to focus on venturing into new markets like Turkey, Iraq, the US, China, and Canada.
But the same may not be so straightforward, as Turkey imposes a very high import duty which acts as a deterrent in expanding India’s footprint, Turkey’s import tariff of 145 per cent. Sri Lanka was able to evade this by building a packaging plant in Turkey itself.
India does not have a similar unit. Also, international tea packers who use Sri Lanka tea in their blend are not going to replace the variety with those from India in a hurry. It will majorly change the quality and taste of the tea.
Data show that in 2019, Sri Lanka exported $533 million worth of tea to Turkey, Russia, Iran, Iraq, and China. That is a large market and even a 10 per cent shift to Indian exporters will result in a huge chunk of revenue.
The opportunity itself resulted in Listed Indian tea companies trading higher in recent days. Stocks like McLeod Russel India, CCL, Tata Tea and Neelamalai Agro had significant gains in the past months.
Tea processing units too like other industries are heavily affected by long power cuts and do not have enough fuel to run their generators. This also leads to a decline in quality. Add this to a below-normal monsoon and the production could fall by 20-25 per cent.
Apart from India, China, Vietnam and Indonesia also produce a lot of tea-related products. But China consumes a lot of tea within and does not export a lot. Already existing orders for other nations may give India the opportunity to expand its foot base, but the quality may still be inferior to the high grown (high altitude) variety that contributes to around 35 per cent of production. The tea varieties of Assam and Bengal do not fit into this demand needs to fill the vacuum of Sri Lankan varieties.
Sri Lanka’s apparel exporters have urged their government to seek International Monetary Fund assistance to get the economy back on its feet and ease forex shortages. Many trade associations have joined the protests by the public calling on President Gotabaya Rajapaksa to go home, leading to the resignations of ministers, and officials.
Power and fuel outages have led to the shut-down of many small establishments and increased the cost of production of apparel and clothes. Apparel production accounts for six per cent of Sri Lanka’s GDP and employs 3,50,000 people directly and another 7,00,000 indirectly.
The economic crisis has hurt Sri Lanka’s image as a reliable apparel industry partner and exporter. Once again, India is being seen as a viable alternative here for countries concerned with importing from Sri Lanka.
Unlike tea products, India produces high-quality apparels that any of the Sri Lankan exporters can offer and hence this could be a lot easier to expand.
Speaking to ANI, UP Singh, Union textile secretary, said, "Some countries, which were earlier importing from Sri Lanka, have started contacting India, as Sri Lanka is under its worst economic crises. Some orders have already been given to companies in the Tirupur district of Tamil Nadu. Tirupur is the hub of the textile industry in Tamil Nadu."
India currently produces more than 340 lakh bells of cotton, but consumption is going to be more than production due to the order diversion from Sri Lanka due to the crisis.
Countries like the United Kingdom and those from the EU (European Union) have started making enquiries for woven items, shirts, t-shirts, and some baby garments. Indian exporters are hoping they will receive bonus orders from these countries and from brands like Zara, Mango and H&M which regularly source from Sri Lankan apparel exporters.
Aside from India, Bangladesh, Cambodia and Vietnam are also large exporters of apparel to these countries. But huge existing orders may tip the scale in favour of the large-scale capacities of Indian manufacturers.
One of the exporters from Tirupur was however concerned about the high cotton and yarn prices being a spoiler in terms of the incoming profits from these new orders. This is significant as Sri Lanka uses high-end yarn for inner garments and India does not use them.
Sri Lanka exports $5.42 billion worth of garments to the global markets annually. Even a five to 10 per cent of it coming India’s way can mean a lot of additional revenue.
With respect to fishing, the economics do not seem to be working any better for the Sri Lankan fishermen.
Fishing only contributes 1.3 per cent to Sri Lanka’s GDP, but it employs close to one-tenth of its population. The island nation is famous for its tuna, swordfish, crabs, lobsters, and prawn exports to countries including the United States, Britain, China, and Japan, amounting to eight per cent of its agricultural exports.
Like other businesses, the fishermen have also stopped repaying loans owing to the economic crisis. Searching for fuel to run their boats has become a huge challenge.
An average fishing expedition will require close to 1,000 liters of diesel and several hundred kilograms of ice which are hard to procure given the emergency in Sri Lanka. The price rise with respect to fishing nets, boat spare parts and others has also been a major impediment.
Petrol stations have also stopped large scale filling of petrol cans and containers and hence those few who continue to fish take multiple trips on bikes to source fuel in small bottles and cans to accumulate and use for their boats.
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