Sri Lankan lessons for India

Sri Lanka has been in the news so much of late that its current woes are the stuff of popular knowledge. Everyone can see the extreme deprivation caused to its people due to the absence of their staple food at an affordable price in the market and the shortage of petrol at the pump. Those with even a modicum of economics can trace it back to the dwindling foreign exchange reserves, which are needed not only to import food but also to service external debt. They would even comprehend the default on this debt that has now taken place. But Sri Lanka’s foreign exchange crisis is only the symptom of a larger malaise which needs to be understood. How is it that a country fails to produce sufficiently even the most basic of foodstuff, such as rice and milk? This is less easy to comprehend.

Since the end of the colonial rule, Sri Lanka’s political arrangements have been an amalgam of nationalism in politics and welfarism in economics. Ethno-nationalism was stoked to forge a nation state in terms of a Sinhala identity, the beginnings of which had emerged in the fifties. It is recognisable in the official “Sinhala Only” language policy introduced at the time. Though this may have been diluted subsequently, it empowered ethnic chauvinism and left the sizable Tamil-speaking population insecure.

Linguistic disenfranchisement

The origins of the linguistic disenfranchisement of the Tamils owed partly to the appeasement of the Buddhist clergy, which is almost exclusively Sinhala. It not only caused the alienation of the Tamil-speaking population but led to the formation of the Tamil Tigers, a terrorist organisation, and a civil war. The Tamil Tigers were finally vanquished, but it took over two-and-a-half decades for the Sri Lankan state to achieve this. In the meanwhile, there was an exodus of Tamils, the better-off leaving for the West and, those who could escape, heading for Tamil Nadu.

With the Tamils having had a significant presence in the professions, the country experienced a loss of expertise in almost all spheres. The impact of a loss of technical expertise for an economy is slow and often indiscernible but sure to affect it adversely, which we see happening in India. The civil war is also likely to have held back investment. While all uncertainty stalls investment, private investors would be particularly reluctant to commit their money in a time of near anarchy. A State pursuing a civil war can hardly make up for this through public investment, as it is bound to be severely fund-constrained due to its military operations. Nor would it have had much time to address stress points that arise from time to time in any market economy, let alone plan for economic development. In diverse ways, then, social strife can hamper the development of the productive forces of a country, and its economic growth gets affected.

So here we have the first cautionary tale from Sri Lanka for India. Sri Lanka’s woes are economic on the surface but stem from social strife that have been exacerbated by majoritarian identity politics fanned by the State. Identity politics between social groups is a recipe for economic disaster. It would not be off the mark to suggest that the Modi government’s inability to even restore, let alone raise, the investment rate in India is partly related to the socio-political gtension that has come in its wake. The strife between the Centre and the States and antagonism between religious communities are sure ways to deter investment even if there is some improvement in the ease of doing business. The exit of some high-net-worth Indians from the country and the outflow of foreign direct investment are examples of this. Inflow of foreign direct investment to India has been high since 2014 but has been unable to make up for the depressed domestic private investment.

Political, economic lessons

If the first lesson from Lanka is about how politics can affect the economy, the second is about how flawed economic policy can affect an economy’s prospects. The country first came into the world’s reckoning in the 1950s when its economic policy was lauded for welfare programmes that included subsidised rice. But not everyone was impressed at the time. In his autobiography ‘Home and the World’, Amartya Sen narrates how the Cambridge economist Joan Robinson had described this as a case of “wanting to taste the fruit before growing it”. Mr. Sen implies that he was not convinced by this view but his supervisor appears to have been endowed with some remarkable foresight. Now, the grande dame of economics in her time, could hardly have been against the idea of welfare per se living as she was in the U.K., the world’s pre-eminent welfare state. She was very likely decrying welfarism, which makes the distribution of consumer goods the centrepiece of economic policy. In any case, she has been proved right.

In Sri Lanka, distributism seems to have run ahead of what could be guaranteed from domestic sources. This newspaper’s correspondent in Sri Lanka, Meera Srinivasan, has unearthed the  slogan “Produce or perish” from the country’s past political hustings. It would serve as smart advice not only for the three Sri Lankan economists now tasked to take their country out of the crisis but also to the political class of India. As India’s economy has grown many of the States have stepped up their welfare spending. Some have distributed bicycles for girls and others television sets to families. While no form of welfare need be precluded in principle, the public finances are subject to an accounting constraint. When revenues are limited, free bicycles and televisions sets crowd out spending on measures that increase an economy’s productive capacity, which includes its endowment of schools, hospitals and the infrastructure needed for production. There is also an ethical issue to be faced. When welfarism is financed by borrowing rather than taxes, future generations pay for our consumption.

A third lesson from Sri Lanka is to not treat openness to the world economy as a panacea. In the 1970s, in a switch from avowedly socialist economic policies, Sri Lanka liberalised trade and capital flows. It is a moot question how this policy re-orientation may have worked had a civil war lasting decades not intervened but the reliance on world markets that it led to has not helped the country. A celebrated theorem in economics, the theory of comparative advantage, encourages a country to specialise in its production and to rely on foreign trade for goods that it does not produce. This assumes that there will be a continuing demand for the country’s product. Sri Lanka’s case shows us why it can be damaging for a country to rely on trade for its essential consumption goods. By comparison, the States of India that face a deficit of food are saved by being part of the Indian Union. Unlike Sri Lanka, they need not earn foreign exchange to receive food from the national granary, Kerala being the prime example of this arrangement. Sri Lanka’s first task would be to urgently revive its food producing sector. As for India, it must learn from her neighbour’s misfortune and step up domestic production from oilseeds to renewable energy and defence equipment.