China Debt Trap | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Context

• As a result of the Russia-Ukraine conflict, the world is currently experiencing tremendous geopolitical tensions. The severe economic crisis in Sri Lanka has also sparked a number of conversations and signalled a dangerous situation in India's neighbourhood. 
• The economic downfall of Sri Lanka can be attributed to China's debt trap policy, in addition to the country's failed domestic policies and lack of convincing leadership.

What is China’s debt trap?

• It is said that China has been giving loans to financially weak states in order to undermine their sovereignty and increase its political, economic, and military initiatives in order to exert more influence globally.
• This behaviour has developed into a debt trap over the course of time.
• It is referred to as China's Debt Trap Diplomacy by many scholars.
• China has become the largest official creditor, accounting for more than 5% of world GDP in overseas loans, according to reports.
• As a result, China provides money to the borrower nation without evaluating its creditworthiness. As a result, the borrowing nation bears a heavy burden while China benefits.
• Pakistan, China's only strategic partner, is a prime example of the debt trap. For the next 40 years, Pakistan will grant China exclusive operating rights and a tax holiday for Gwadar Port in exchange for large loans that Pakistan has borrowed from China. China would propose to contribute almost 91% of the port income.
• China has been successful in using large loans it gave to small island nations to buy entire islets through exclusive development rights. It has expanded its control over a few islands in the Maldives archipelago in the Indian Ocean and one island in the Soloman Islands country in the South Pacific.
• China's debt trap diplomacy is centred on the Belt and Road Initiative (BRI).

The China Factor of Sri Lankan Crisis

• With a 99-year lease, Sri Lanka has given Beijing the Hambantota Port and more than 6000 hectares of surrounding territory. This resulted from Sri Lanka's inability to pay back the infrastructure loans it took out from China.
• The idea of a 99-year lease has its roots in the colonial expansionism of Europe, which in the 19th century manifested itself in China's aggressive expansionist practises.
• More than 50 projects that go well beyond trade and economic considerations are being carried out by China in Sri Lanka.
• The real goal of China is to obtain political and security leverage against India in the Indian Ocean region, which it can effectively accomplish 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.