Sansad TV Perspective: China Debt Trap

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: China Debt Trap

Anchor: Teena Jha

Participants: 

1. Ashok Kumar Jha, Former Secretary, Ministry of Finance, GoI
2. A K Bhattacharya, Editorial Director, Business Standard
3. Dr. S.P. Sharma, Chief Economist, PHD Chamber of Commerce and Industry
4. Lt. Gen. (Retd.) Dr. Rakesh Sharma, Distinguished Fellow, Vivekananda International Foundation

Context: We step into a period when the world is confronting significant geopolitical tensions as an aftermath of the Russia-Ukraine conflict. The massive economic crisis in Sri Lanka has also ignited several discussions and conveyed the signals of an alarming situation in India’s neighbourhood. Apart from the failure of Sri Lanka’s domestic policies and credible leadership, the collapse of Lankan economy can be attrbuted to China’s debt trap policy. 

What is China’s debt trap? 

• It is alleged that China, in order to expand its global influence along with its political, economic and military strategies, has been extending loans to financially vulnerable states, thereby paving a way to intrude into the sovereignty of such states. 
• This practice, over the gradual progress of time, has taken the shape of a debt trap. 
• Many experts define it as China’s Debt Trap Diplomacy. 
• China has emerged as the biggest official creditor with its international loans reported to surpass more than 5% of the global GDP. 
• Under this, China lends money to the borrowing country without gauging the country’s creditworthiness. This leads to a huge burden on the borrowing country leveraging China’s vested interests. 
• The debt trap can be prominently identified in Pakistan which is China’s sole strategic ally. Under extensive loans borrowed from China, Pakistan has given it exclusive rights coupled with a tax holiday, to run Gwadar Port for the next four decades. About 91% of the port revenues would be offered by China.
• In this way China has successfully converted big loans given to small island countries into acquisition of entire islets through exclusive development rights. It has enhanced its influence over a couple of islands in the Indian Ocean archipelago of the Maldives and one island in the South Pacific nation of the Soloman islands. 
• The Belt and Road Initiative (BRI) is central to the debt trap diplomacy of China. 

The China Factor of Sri Lankan Crisis:

• Sri Lanka has transferred the Hambantota Port, along with more than 6000 hectares of land around it, to Bejing on a 99 year lease. This has been an outcome of Sri Lanka’s  failure to repay the infrastructure loans borrowed from China. 
• The 99 year lease is a concept that derives its roots from the European colonial expansionism that has taken the form of China’s aggressive expansionist policies in the 19th century. 
• China is involved in more than 50 projects in Sri Lanka which are much beyond trade and economic considerations. 
• Gaining political and security leverage against India in the Indian Ocean Rim is the real intention of China which can be well realised through its strategic String of Pearls. 

Possible avenues for India:

• There is a need for proactive diplomacy that India must employ in Sri Lanka in the midst of the economic crisis. 
• Experts envisage a major reform in India’s narrative and plan of action which is provided with a more people-centred approach to resolution. 
• The Indian government needs to enhance its strategic investments in the island country. Indian Oil is the only strategic venture that controls approximately 35% of oil shipping to Sri Lanka along with some other investments which are not enough to prevent China’s influence in the country and expanding its interference in the Indian Ocean region. 
• The Free Trade Agreement (FTA) that was signed in1988 between SriLanka and India, must be revived with new impetus. 
• The BIMSTEC meeting signalled positive developments for India-Sri Lanka relations as India’s assistance was appreciated. India has not only extended liberal financial support to Sri Lanka but also got projects on the islets in the northern part of the country. 
• The people of Sri Lanka can be more closely involved to synergise mutual interests in multiple fields, creating a dedicated team for Sri Lanka affairs as necessary for India’s foreign policy to transform the hour of crisis into an ocean of opportunities. 

Tackling China’s Debt Trap: Ways suggested for global bodies

• Considering the challenges imposed by the execution of China’s financial tool in the form of debt trap, it suggested that the countries (prominent borrowers) must restructure their domestic policies and social set up with a thorough assessment on their overall creditworthyness before entering into hasty financial transactions. 
• A sustainable model of borrowing must be developed to prevent expansionist ideologies like those that accompany China to interefere with a country’s territorial sovereignty. 
• In an integrated world that we witness at present, a calibrated framework must be formulated to prevent such debt traps that turn disastrous for a country’s economy, thereby disrupting the global supply chain and international free and fair trade. 
• However, it was highlighted by an expert that the international community/groupings like that of the G 20 have a very narrow scope to prevent practices of debt traps as most of the transactions are through the public sector entities in China. 
• Therefore, the responsibility and solution lie within the policies of countries that intend to indulge in loan borrowing activities with countries like China. It’s time that such countries realise the implications of debt trap and execute restraints on taking loans in an unsustainable manner.

Read more summaries of Perspective in the link.

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