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Sri Lanka crisis: Lessons we Indians can learn from it

Ranil Wickremesinghe was Sworn In As The Eighth President Of Sri Lanka before the former Sri Lankan President fled after months of criticism of his administration over the greatest economic crisis in the nation’s history.

But what really happened in our neighboring country? What mistakes were made and what solutions could have been taken?

And the most important Question will India face an economical breakdown next? If so what are the lessons we can learn from the Sri Lankan government? Prior to the government’s economic mismanagement, Sri Lanka’s economy was middle-income, steadily advancing on social indexes.

Everything began with the tourist sector, which was badly damaged both by the coronavirus epidemic the next year and the attacks carried out by Islamic extremists in 2019 that targeted hotels and churches. In 2018, tourism receipts made up 5.6% of Sri Lanka’s GDP, but by 2020, they had decreased to barely 0.8%. India as a nation is also reliant on tourism, with this industry contributing 9.3% of India’s GDP in 2019. The coronavirus epidemic has caused problems for the Indian tourism sector as well, which must be managed to avoid losing the source of income.

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Rajapaksa’s administration in Sri Lanka decreased the VAT to 8%, the corporate tax rate from 28% to 24%, and both the Pay As You Earn (PAYE) tax and the 2% “nation-building tax,” which were used to fund infrastructure improvements. All of these contributed to a decrease in registered taxpayers of 33.5%. With the implementation of the Goods and Services Tax (GST), a lower corporate tax rate, and the exemption of individual taxpayers with taxable income up to Rs 500,000 by offering a 100% tax rebate, India is also in the process of revamping its tax system. It is important to proceed cautiously with these improvements.

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The Institute of Policy Studies of Sri Lanka highlighted capital inflows, uncomfortable borrowing patterns, flimsy and superficial fast solutions, and a monopoly of foreign direct investment flow into the hotel industry in its 2014 State of the Economy Report. Sri Lanka’s foreign debt more than quadrupled from 2005 to 2020, reaching $56.3 billion. From over 42% of GDP in 2019 to 119% of GDP in 2021, the nation’s foreign debt soared. By the end of 2022, the country’s debt amounted to $4 billion, while as of April 2022, the government’s foreign currency reserves were just $2.3 billion.

India’s external debt was valued at $ 620.7 billion at the end of March 2022, up $ 47.1 billion from the end of March 2021, according to figures from the Reserve Bank of India. Five Indian states have been labeled as being heavily indebted, according to a recent RBI assessment. India has to control its debt-to-GDP ratio to prevent default.

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In order to deal with its debt obligations, the Sri Lankan government issued an increasing amount of currency, but this caused the rupee to weaken and cut into its foreign exchange reserves. India should restructure its debt while simultaneously increasing exports to offset any negative effects on its foreign exchange reserves.

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