PM Modi's engagement with the Maldives shows India is playing the long game
Prime Minister Narendra Modi was on a state visit to the Maldives from July 25 to 26. The visit comes against the backdrop of the President of the Maldives, Mohamed Muizzu, pushing for a recalibration with India. Driven by economic necessities, India's pragmatic outreach, and China's underwhelming support, he has moderated his 'India Out' policy and rhetoric and toned down his unconditional allegiance to China. Given the backdrop, the visit is a strong symbolic message of Delhi's persistent influence in the country. Besides, it has also laid the ground for New Delhi's long game in the Maldives. By pushing for economic and financial connectivity, especially with the Indian Rupee, and doubling down on political engagement, India is creating new leverage.
During PM Modi's visit, both leaders reviewed the entire gamut of relations and agreed to strengthen the multifaceted relationship by implementing the Joint Vision Document. They also inaugurated several India-funded projects, including roads and drainage in Addu city, the Ministry of Defence building, and six High Impact Community Development Projects. India also handed over 72 vehicles for the Maldives National Defence Force, 2 BHISHM Health Cube sets, and 3,300 housing flats. Additionally, they signed four MoUs to further cooperation in pharmacopoeia, meteorology, fisheries, and digitalisation.
Most importantly, both countries have signed four agreements on financial and economic connectivity, as the Maldives faces debt distress and declining foreign reserves. As of March 2025, the Maldives has a debt of $9.4 billion, of which nearly 60 per cent is in US Dollars. However, the government continues to struggle with low foreign reserves. Currently, it has a reserve of a mere $850 million, and this year alone, the government will have to service over $600 million, along with maintaining its imports. Next year, it will have to service over $1 billion.
Maturing debts, specifically bonds (domestic and external) and Chinese loans, have continued to deplete foreign reserves. China's loans have declined from $613 million in 2021 to $473 million in 2025, and its sovereign guarantees have reduced to $567 million. This has left India as the largest bilateral creditor to the country, especially with loans, currency swaps, and credit lines (LOC) taken under the previous government now maturing. Debts from EXIM India have increased from $15 million in 2021 to $572 million, and the sovereign guarantee is at $608 million. To complicate matters, more than $800 million of Indian loans committed are yet to be disbursed.
With a looming economic crisis and increasing Indian debts, India and the Maldives signed an amendatory agreement to close the previous LOC. This will be replaced by a Rupee-denominated LOC worth Rs 4,850 crore (equivalent to $565 million), reducing the Maldives' debt obligations by 40 per cent, from servicing $51 million to $29 million annually, and easing the pressure of depleting US Dollar reserves and overall debts.
Another major agreement was the implementation agreement on Unified Payment Interface (UPI). This, together with the RuPay card introduced in October 2024, will boost direct transactions between countries. These developments build on the finalisation of the local currency settlement system. Henceforth, India and the Maldives can now trade and allow tourists, diaspora, and businesses to make cross-border payments in local currencies (Rupees and Rufiyaa) rather than in US Dollars.
Both countries also finalised the terms of reference for the India-Maldives Free Trade Agreement (FTA) and formally commenced negotiations on the agreement. With the FTA reducing trade barriers and boosting trade, Indian commodities will become cheaper in the Maldives. India is one of the Maldives' largest trade partners. While their trade is worth $680 million, India exports goods worth $561 million. Earlier, the Maldives would have imported goods from India using US Dollars; they can now do the same with the Indian Rupee, which the Maldives can tap from the currency swap, credit line, and direct transactions. This will help ease pressure on the economy and reduce the outflow of the US Dollar. The FTA will also likely be complemented with a bilateral investment treaty, creating new economic leverage for India.
Learning lessons from the past, India also doubled down on its engagements across party lines. During his visit, PM Modi met prominent figures from the ruling party, including those who played a crucial role in the 'India Out' campaign and are close to China. These engagements also included bilateral meetings with the President, the Vice President, and the Speaker of the parliament. Modi also held a meeting with prominent figures from the Jumhooree Party, Maldives National Party, and Maldives Development Alliance. Separate meetings were held with the main Opposition, the Maldivian Democratic Party, and former President Mohamed Nasheed. These engagements underline India's attempts at making relations non-partisan and resilient to turbulent domestic politics.
PM Modi's latest visit to the Maldives shows that India is letting bygones be bygones, and is more optimistic about the future. There is confidence that the Maldives will understand that regional security is an issue of mutual interest. However, there are some problems. For India, the Maldives' economic stability remains a major challenge. On its part, Malé will continue to engage with Beijing to seek assistance and investments in order to diversify and not become over-reliant on India. Discussions of loan restructuring with China began in January 2024 and have shown little progress, further nudging Muizzu to engage with the country. India, therefore, should not let its guard down.
The writer is an associate fellow with the Strategic Studies Programme's Neighbourhood Studies Initiative
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