New Delhi: Several weeks after the Maldives began to implement free trade agreements with China and Türkiye, India on Friday (January 31) publicly expressed concern, warning that the deals could undermine the island nation’s fiscal stability and would have implications for Indian policies.
The statement was an unusual rebuke, coming after Maldives-India ties appeared to be back on track following a rocky phase, in the wake of President Mohamed Muizzu’s visit to India in October 2024.
At the weekly media briefing on Friday, Ministry of External Affairs (MEA) spokesperson Randhir Jaiswal, responding to a question on the Maldivian economy, said New Delhi was in “close touch” with Maldivian authorities.
He then added a pointed remark criticising the Maldives over “recent agreements” and warned that they would have implications for Indian policies.
“Recent agreements that are likely to result in revenue loss for the Maldives government are, obviously, a matter of concern and do not bode well for the long-term fiscal stability of the country. We would, obviously, need to take that into account while framing our own policies,” said Jaiswal.
While he did not name specific agreements, the Maldives’ free trade agreement with China came into force on January 1 this year. In November, the Maldives also signed a preferential trade agreement with Türkiye – Muizzu’s first foreign destination as president – set to be implemented in the first quarter.
The agreement with China was activated more than seven years after it was signed. The Maldives had concluded the free trade agreement with China in 2017 under the Abdulla Yameen government, but it was shelved after the Maldivian Democratic Party (MDP) came to power under President Ibrahim Solih following the 2018 elections, as his administration sought amendments to the deal.
Muizzu’s sweeping victory in the 2023 presidential election initially strained bilateral ties, given the baggage of his ‘India Out’ electoral campaign. He also chose to visit China before traveling to the neighbourhood.
India’s decision to withdraw its uniformed personnel operating a Dornier aircraft and two helicopters – donated for search and rescue missions – helped pave the way for reconciliation, fulfilling a key election promise of Muizzu.
Muizzu was invited to Prime Minister Narendra Modi’s third-term inauguration in June 2024 and returned to Delhi in October for a state visit. During the visit, India offered two currency swap deals – one in US dollars and another in Indian rupees – worth $760 million to help the Maldives manage its external debt crisis.
China agreement; India-Maldives talks
However, in his Independence Day speech in July, Muizzu announced that the China-Maldives free trade agreement was being revived and implemented, making it the first free trade deal for the archipelago.
The Maldivian opposition party, the MDP, had criticised the deal, arguing it would lead to a loss of import duty revenue and thereby severely impact the economy, as the Maldives imports 95% of its essential commodities.
The MDP also warned that rather than diversify the economy, the agreement would increase dependence on duty-free Chinese imports.
Responding to these concerns, Maldivian economic minister Mohamed Saeed claimed last month that the revenue shortfall would be offset through other state earnings.
Citing an example, he said that while the state would lose significant revenue from import duties on materials used to build a guesthouse, it would recover the money through GST and other taxes once the guesthouse became operational.
While the MEA spokesperson’s remarks on Friday did not indicate whether current policies were under review, it is worth noting that during Muizzu’s state visit, the Maldives had sought additional aid beyond India’s two currency swap deals.
Indian foreign secretary Vikram Misri had told reporters that India was examining several proposals discussed during the visit and would remain in contact with Maldivian officials in the coming weeks and months to determine their next steps.
India and the Maldives had also announced that they would begin talks for a free trade agreement.
In its October 2024 economic update on the Maldives, the World Bank warned that the country faced “heightened external and fiscal vulnerabilities”, noting that “increasing public debt and high fiscal spending, particularly for public sector investments and subsidies, remain worrying”.
