By Focus | 2025-08-07

Indian Prime Minister Narendra Modi's recent visit to the Maldives marked a diplomatic reset after months of strained relations between the neighboring nations.

Modi attended the 60th Independence Day celebrations in Malé as guest of honor, becoming the first foreign leader hosted by President Mohamed Muizzu since Muizzu's election in November 2023.

The two-day visit concluding July 26 coincided with the anniversary of Indo-Maldivian diplomatic ties and signaled the easing of tensions that had followed Muizzu's "India Out" campaign and tilt toward China.

India and China, the Maldives' two largest lenders, continue to compete for influence in the strategically located archipelago.

Since Muizzu took office, the Maldives has deepened engagement with China, including a free trade agreement and participation in the Belt and Road Initiative (BRI).

The BRI is a Chinese-funded infrastructure construction drive to facilitate the export of poor countries' raw materials to China.

In January 2024, Muizzu visited China before India, a move perceived in New Delhi as a diplomatic slight.

However, at an Indo-Maldivian banquet on July 25, Muizzu sought to present a tone of cooperation with India.

"India has long stood as the Maldives' closest and most trusted partner," he said.

"We deeply value the friendship of India and are grateful for the timely assistance your country has extended to us in moments of need," he added.

'A clear path'

Observers saw Modi's visit as crucial to India's ambition to control the seas and shipping routes of the Indian Ocean in a race with its regional rival China.

Modi during his visit unveiled a $565 million line of credit for the Maldives, along with reduced repayment terms on earlier loans -- from $51 million to $29 million annually.

He inaugurated several India-funded infrastructure projects, including a 4,000-unit housing complex and the new Defense Ministry headquarters.

"India remains committed to supporting the aspirations of the Maldivian people," Modi tweeted.

"Mutual cooperation in the field of defense and security is a symbol of mutual trust. The building of the defense ministry ... is a concrete building of trust. It is a symbol of our strong partnership," Modi said at a news conference in Malé.

Talks began on a potential free trade agreement, and the two sides signed cooperation agreements in areas such as fisheries, tourism, digital development and health care.

The visit set "a clear path for the future of [Maldives-India] relations," Muizzu posted on X after Modi's departure.

Economic vulnerability

The Maldives' economic vulnerability has played a critical role in the realignment.

Despite its luxury tourism sector, the nation is facing an acute debt crisis, with total debt rising from $3 billion in 2018 to $8.2 billion in early 2024. It is projected to exceed $11 billion by 2029.

It largely owes its external debt, now totaling $3.4 billion, to China and India, the Economic Times reported in March.

The financial pressure is severe. The Maldives must service external debt worth $600 million in 2025 and $1 billion in 2026. As of last December, foreign exchange reserves stood below $65 million, after briefly turning negative in August.

The China-Maldives Free Trade Agreement, implemented in January, has deepened the country’s trade deficit, with China accounting for 97% of Sino-Maldivian trade and Maldives contributing less than 3%.

"The scale of the debt problem is staggering," human rights advocate Dimitra Staikou wrote on Medium in March.

"Without significant international intervention or debt restructuring, the Maldives risks following neighboring Sri Lanka into sovereign default," she added.

The removal of tariffs on 91% of Chinese goods has offered "a concession [to China] that has yielded little reciprocal benefit given the country's narrow export base," Staikou noted.

Strategic balancing

China has expanded its footprint in the Maldives through large infrastructure projects like the China-Maldives Friendship Bridge and the expansion of Hulhulé airport, deepening its influence in India's traditional sphere.

The upgraded ties benefit Beijing strategically, as the Maldives sits along key Indian Ocean trade routes that carry the bulk of Chinese oil imports.

China seeks to ensure Malé remains a friendly maritime presence so that Beijing can safeguard its access to the Persian Gulf, according to a brief published by the Council on Foreign Relations in May 2024.

In contrast, India has pursued a development-focused approach under its "Neighborhood First" policy, offering financial aid and backing major initiatives such as the Greater Malé Connectivity Project, the country's largest infrastructure scheme, according to the report.

Though Muizzu initially sought to reduce reliance on India for critical supplies and services, his government has intensified engagement with New Delhi in recent months.

Tourism, too, has become a point of tension. After Muizzu's early trip to Beijing, Modi publicly promoted India's Lakshadweep Islands as a tourist destination.

The result was a sharp drop in Indian tourist bookings to the Maldives, down 33%, which hit an economy that depends on tourism for almost 30% of GDP.