Sri Lanka has largely restored macroeconomic stability, but sustaining the country’s recovery will depend on whether it can build domestic consensus for politically difficult structural reforms, attract stronger private investment, and maintain policy continuity beyond election cycles, according to former Planning Commission of India Deputy Chairman Montek Singh Ahluwalia.
Drawing repeatedly on India’s own reform experience rather than prescribing solutions for Sri Lanka, Ahluwalia said countries emerging from economic crises often mistook macroeconomic stabilisation for recovery, when it merely created the conditions for the harder task of lifting long-term growth.
Speaking at the ‘India Calling’ forum organised by the Lanka India Business Association yesterday, the architect of India’s 1990s economic reforms said structural reform inevitably became politically contentious because it redistributed costs and benefits across the economy, creating winners and losers even when it raised overall growth.
‘So we need the stability, but we also need to get much closer to what is our real growth potential. That’s where structural reform comes in,’ he said.
‘If you want a better growth rate than that, then you have to go down the structural reform route, which has to be slapped onto, in addition to macroeconomic stability,’ Ahluwalia added.
Using India’s experience as an illustration, Ahluwalia said reform programs were more likely to succeed when they were shaped through domestic debate rather than being perceived as externally imposed.
‘That’s why you need an internal debate so that people realise that these are issues that have been thoroughly discussed. There still are uncertainties. You won’t convince everybody. But at least they won’t say this has been imposed from outside,’ he said.
He recalled advising during Sri Lanka’s election period against abandoning the International Monetary Fund (IMF)-supported reform program, arguing that international institutions continued to influence investor confidence in smaller economies.
‘If you’re in a period of macroeconomic stability, you need world markets to think that Sri Lanka is on the right track. Whether we like it or not, if you’re a small economy, people will tend to look at ‘what does the World Bank say?’ ‘What does the IMF say?” I’m really glad that, in spite of that uncertainty, the Government decided not to cancel the program,’ he said.
Ahluwalia said Sri Lanka had now reached a different stage of recovery. ‘The return of macro stability in Sri Lanka is not in doubt. But you have a much bigger challenge now, which is, what about structural reforms for growth?’
He suggested the next measure of Sri Lanka’s progress would not be macroeconomic indicators alone but whether domestic businesses regained the confidence to invest, noting that foreign investors closely watched local investment behaviour before committing capital.
‘Most foreigners, when they’re looking at countries, are quite impressed with macro stability. I think you have that. Booming private investment. That you don’t have yet,’ Ahluwalia said.
‘Remember, foreign direct investment (FDI) is more likely to come in if domestic private investment goes up. Because the general assumption is that these private guys know more about the economy than we do. So if they’re not investing in their own country, there must be something wrong,’ he added.
Although stressing that he was not offering a blueprint for Sri Lanka, Ahluwalia encouraged policymakers to study reform debates taking place in neighbouring economies, particularly efforts to reduce unnecessary regulation, simplify compliance, and improve the ease of doing business.
He said regional comparisons could often be more persuasive than comparisons with advanced economies.
‘You have to ask yourself, do you want a more restrictive set of conditions for labour than, let’s say, Vietnam, Malaysia, Thailand? And if you do, then don’t be surprised that people would prefer to go there rather than come here. If you tell them that this is what Thailand is doing, this is what Malaysia is doing, this is what Indonesia is doing, then the argument becomes very powerful,’ he said.
Ahluwalia also argued that governments alone could not drive reform, urging businesses to participate openly in policy development while encouraging political leaders to preserve credible economic policies across administrations.
‘I don’t think business people can sit back and think that there is some wonderful process that will ensure that the right policy will come out. They have to be actively pushing for them. The worst thing they can do is to cancel all the projects that were done by the previous Government. That is a guarantee of not having private investors,’ he said.
Ahluwalia said Sri Lanka should avoid searching for a single reform to accelerate growth, arguing that the country’s next phase of development depended instead on identifying a handful of critical structural constraints and addressing them systematically over the next five to 10 years while preserving macroeconomic stability.
‘Let’s be clear, macroeconomic balance is a precondition. I don’t think you should come to the position that you become so strong now that you don’t have to care about macro,’ he said.
Drawing on India’s experience rather than prescribing a blueprint for Sri Lanka, he said policymakers should identify the reforms most critical to lifting medium-term growth, pointing to land, labour regulation, ease of doing business, liveable cities, and infrastructure financing as areas that deserved priority attention.
He also encouraged Sri Lanka to benchmark its reforms against Indian States such as Tamil Nadu, Karnataka, Telangana, and Kerala, arguing that regional comparisons could provide more practical lessons than looking only at advanced economies.
Ahluwalia said economies seeking higher growth also needed to examine whether they remained overly protected from competition, cautioning that excessive trade barriers could ultimately undermine export competitiveness.
He suggested land had become a significant constraint in both India and, from his discussions, potentially Sri Lanka, urging policymakers to make it easier for businesses to access land without abandoning appropriate safeguards.
‘You need to give very high-level attention to how can you sufficiently deregulate land, so that people five years from now say that land was a big problem and it’s now only a small problem. It’ll never go away,’ he said.
He also cautioned against designing investment policies that favoured foreign investors over domestic firms, arguing that removing structural bottlenecks would benefit both.
‘I don’t think you should make the mistake of thinking that all you need to do is target foreign investors and give them favourable terms vis-à-vis domestic investors. If you fix the land constraint, it’s the domestic investors who will benefit almost immediately. Foreign investors will benefit,’ Ahluwalia said.
Ahluwalia added that with limited fiscal space, Sri Lanka should also make greater use of public-private partnerships (PPPs) to finance commercially viable infrastructure projects, allowing scarce public resources to be directed towards areas where private capital was unlikely to invest, while maintaining the macroeconomic discipline needed to sustain investor confidence.