China’s significant investments in South Asia have often come with a heavy price tag, as countries like Sri Lanka, the Maldives, and Bangladesh grapple with the consequences of Chinese debt. This has led to a complex dynamic where initial economic benefits are overshadowed by financial instability.
This also comes as a challenge for India as it tries to keep its unrivalled position intact in South Asia. The success of India’s approach will depend a lot on how it leverages economic ties, provides timely support, and adapts to shifting political dynamics.
It unravelled with Sri Lanka
In 2022, Sri Lanka was engulfed in a severe economic crisis that led to widespread protests and the ousting of President Gotabaya Rajapaksa. The crisis was exacerbated by substantial Chinese debt, which had become unsustainable for the country. The economic downturn was marked by soaring inflation and a significant drop in foreign reserves.
India stepped in as the first responder, providing crucial financial aid and securing an IMF package for Sri Lanka. This assistance was pivotal in stabilising the Sri Lankan economy, with inflation dramatically decreasing from 67.4 per cent in September 2022 to below 3 per cent today. India has a decades-long experience of managing inflation through fiscal policy interventions — something that Sri Lanka benefitted from since it sought New Delhi’s help in the face of stringent requirements set by agencies such as the International Monetary Fund (IMF) for a bailout deal.
India’s timely intervention not only helped stabilise Sri Lanka but also positioned it as a more favourable partner compared to China, which had failed to provide similar support.
The current situation of Sri Lanka shows that the country has begun to recalibrate its relations with China, evidenced by its decision to ban foreign research vessels in Lankan waters, which was seen as a move to counter Chinese aggression. Although the ban is expected to be lifted next year, the shift seems categorical and reflects a broader realignment away from excessive reliance on China.
A hint from the Maldives: Rethinking Chinese debt
The Maldives, under President Mohamed Muizzu, initially pursued an anti-India stance, reflecting a growing influence of Chinese debt on the country’s policies. Muizzu had built his political capital on an anti-India campaign, playing to the gallery at home. His “India Out” slogan was his war cry during the 2023 election and he hoped that he could continue stretching that line indefinitely — until, of course, came a warning.
In May 2023, the IMF warned of the Maldives’ ballooning Chinese debt, which exceeds $4 billion. This led Fitch Ratings to downgrade the Maldives’ credit rating due to increased risks from worsening external financing and liquidity issues.
The development came too close to Sri Lanka’s economic crisis to ignore. The two countries are neighbours in the Indian Ocean and had long been trusted friends of India before their respective leadership fell for the Chinese lure of infrastructure investments on borrowed money.
The Maldives seems to be taking course correction seriously. The economic strains from Chinese debt became apparent as Muizzu’s government faced rising prices and debt servicing challenges. The Maldives’ attempt to reduce dependency on India by sourcing essentials from West Asia proved costly.
The reality of high prices and the need for affordable supplies led Muizzu to seek India’s assistance. India responded by easing debt repayment schedules and providing currency swap arrangements. This pragmatic shift underscores the Maldives’ reevaluation of its approach to foreign debt.
And Bangladesh: As tensions cool, it’s reassessing relations
Bangladesh has been another focal point of concern as it navigates its relationship with China.
Firstpost earlier reported how jobs and economic distress under the weight of Chinese loans dragged Bangladeshi youths to a revolt against the country’s longest-serving prime minister, Sheikh Hasina, who was forced out of power and also the country her father fought to carve out from East Pakistan in the 1970s.
The country has been cooling down from these tensions and has begun to reassess its diplomatic strategies. Recent statements suggest that maintaining a relationship with India, including the continued stay of Sheikh Hasina in India where she fled to save her life, will not necessarily harm ties with New Delhi.
India has maintained a strategic presence in Bangladesh, leveraging its deep economic ties and investments. The current political climate in Bangladesh shows signs of stabilising, with growing recognition of the benefits of India’s economic support. The somewhat anti-India sentiments seen during the mass agitation are giving way to a more balanced approach, reflecting an understanding of the high costs associated with excessive reliance on Chinese debt.
What Bangladesh has experienced was already faced by Sri Lanka and the Maldives. Pakistan has perennially been in a debt trap. The addition of another layer of Chinese trap has, however, begun to show its impact, with locals along the China Pakistan Economic Corridor (CPEC) staging protests against Chinese companies and personnel.
Nepal has also started to feel the impact. That is why its newly reinstated prime minister, KP Sharma Oli, known for his long-held anti-India stance, has reached out to India with an invitation to Prime Minister Narendra Modi to visit Nepal. India’s foreign secretary Vikram Misri has just visited the country holding talks with Nepal’s top leadership.
Chinese debt trap versus Indian help in South Asia
The experiences of Sri Lanka, the Maldives, and Bangladesh illustrate a recurring pattern where initial economic assistance from China leads to substantial debt, which eventually becomes a trap. The inability to service these debts often results in political and economic instability, prompting countries to seek support from alternative partners like India.
India has effectively turned these crises into opportunities to strengthen its influence in the region. By providing timely financial support and leveraging its economic ties, India has managed to position itself as a reliable partner compared to China, which often fails to offer the same level of support during crises.
India’s investments in infrastructure, energy, and finance across South Asia have created a network of economic dependencies. This interconnectedness makes it challenging for neighbouring countries to disengage from India, even amidst political shifts. This gives India economic leverage for encouraging long-term fiscal discipline, the only viable way forward for developing countries.
In terms of broader geopolitical balance, the strategic partnership between India and the US also influences the regional dynamics. As countries in South Asia reassess their foreign policies, the India-US alliance plays a crucial role in counterbalancing Chinese influence and shaping regional stability. In Bangladesh, it appears to have taken the two countries apparently in opposite directions, with reports quoting Hasina as saying that the US played a role in her ouster while India preferred the toppled leader to stay in power and manage the economic and strategic issues of the country.
As South Asian countries from Sri Lanka and the Maldives to Bangladesh and Nepal navigate the complexities of foreign debt and geopolitical alliances, the impact of Chinese investments becomes increasingly evident. India’s strategic response and economic support have positioned it as a key player as a stabilising force in the region. This points to an intricate balance between economic assistance and geopolitical strategy. The evolving dynamics in these countries indicate broader patterns of debt diplomacy and regional influence.
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Sri Lanka, Maldives … Bangladesh? Why India beats China’s game in its neighbourhood
