Contemporary Relation INDIA - SRI LANKA

Significance of Sri Lanka to India

Trade and Investment:
- Sri Lanka is one of India’s largest trading partners in South Asia. India in turn is Sri Lanka’s largest trade partner globally. Exports from India to Sri Lanka in 2016 were US$ 3.83 billion.Sri Lanka also provides investment opportunities for Indian Infrastructure companies. E.g., Colombo port west terminal project.
- India and Sri Lanka have entered into a Free trade agreement in 2000. The two countries are negotiating Economic and Technology Co-operation Agreement (ETCA).

Connectivity: Transshipment ports of Sri Lankan like Colombo and Hambantota handle huge cargo that comes to India, since India did not fully develop a transshipment port in the southern Coast.
Tourism: Huge scope for religious tourism (Buddhist tourism) and medical tourism (Sri Lankan patients frequently visit Chennai for medical treatment)
Strategic:
India and Sri Lanka share membership in SAARC, BIMSTEC and IORA
Sri Lanka is also important for India in its ambitions to become Net security provider in Indian ocean
Pursuing Strong ties with Sri Lanka is an integral part of India’s Neighbourhood first policy

Challenging issues in the relationship

Ethnic issues: The long drawn ethnic conflicts and human rights violation of Tamils, lack of proper rehabilitation and insufficient devolution of powers (Under 13^th Amendment act) to the northern Tamil provinces strained the relation between the two countries.
UNHRC resolution: India voted against Sri Lanka in UNHRC resolutions in the past (2012 & 2013).
Fishermen issues: Sri Lankan fishermen object to Indians using bottom trawlers and fishing illegally along their coast, which often leads to arrests of the Indians. The dispute status of Katchatheevu islands is still not resolved.
Growing trust deficit
- Scrapping of Indian infrastructure projects like Colombo east container terminal project at a time when China is increasing its investments in the same Colombo port city
- India’s passive response to Sri Lanka’s request for debt repayment waiver for 3 years and a separate currency swap for $1 billion to help with economic crisis
China factor
- Recently, Sri Lanka gave approval to Chinese funded ‘Colombo port city’ with some autonomy.Already, China developed the Hambantota port which was later leased to it for a period of 99 years.
- Sri Lanka endorsed Belt & Road Initiative of China.

Increased Chinese presence in Sri Lanka

Sri Lanka - Pakistan – China: Convergence of interests between Sri Lanka, China and Pakistan in the Indian

Ocean region in defence co-operation. Pakistani PM visited Sri Lanka recently. Both nations have had good defence ties.
In 2016, India put pressure on Sri Lanka to drop a plan to buy Chinese JF-17 Thunder aircraft made in Pakistan’s and co-produced by Chinese Chengdu Aircraft Corporation.

Container terminal issue

Sri Lanka will develop West Container Terminal at Colombo Port, along with India & Japan. The decision came a month after Rajapaksa government rejected the two partners from a 2019 tripartite agreement to jointly develop East Container Terminal (ECT), citing resistance to “foreign involvement”.
Signed a MoU with India and Japan to jointly develop and operate East Container Terminal wherein India and Japan together were to hold 49% stake in ECT. However, then opposition parties in Sri Lanka opposed Indian Involvement in construction of port.

Importance of having a terminal at Colombo port FOR INDIA

This port was strategic for India since it was adjacent to Chinese Colombo International Container Terminal.
More than two-thirds of trans-shipment here is tied to India, making it an important trade & connectivity link.
As a joint venture for India and Japan to invest in, ECT project was expected to showcase how the two Indo-Pacific partners, and Quad members, could provide South Asia with viable, transparent and sustainable alternatives for financing and development.

Reassignment of West CONTAINER Terminal

Commercially, the west terminal offer is better for India as it gives 85% stake for developers of the West Terminal against the 49% in ECT.
And geo-politically too, West Terminal is almost the same if we consider the security aspect and the necessity to have a port terminal in Sri Lanka.
West Terminal is no smaller in size or depth compared to the East Terminal.
There is no difference between East and West Terminals except for the fact that development of the ECT is partially completed while the development of the West Terminal must start from scratch.

Indian & Chinese ports in Indian Ocean region

Based on theory of string pearls in Indian Ocean, China is investing in strategically important foreign commercial ports.
Some of these ports include Chittagong in Bangladesh, Gwadar in Pakistan, Hambantota in Sri Lanka, Kyaupkyu in Myanmar, Malacca in Malaysia, Mombasa in Kenya
Chinese scholars recognize far-reaching strategic significance of these projects for success of maritime Silk Road.
India has also begun to invest heavily in expanding its naval and air power across the Indian Ocean.
The effort is driven by two factors: a desire to improve maritime domain awareness and maritime security throughout the vast region, and New Delhi’s growing anxieties about Chinese inroads in its strategic backyard
Piracy, illegal fishing, and other maritime crimes remain serious concerns and potential sources of instability around the entire Indian Ocean rim
As a response, India has presence in the ports shown in the picture above.

Sri Lankan Crisis

Sri Lanka is facing protests and political turmoil because of unprecedented economic crisis, a result of domestic as well as external factors. One of the factors for this economic crisis has been the Chinese debt obligation on Sri Lanka. With China reluctant to help Sri Lanka during this crisis, there is an opportunity for India to increase its humanitarian aid and leverage the trade and investment potential overall.

In this context, let us understand the reasons for economic crisis in Sri Lanka, role of China and opportunity for India

Chinese Aid and Challenges

In recent years, China has invested in infrastructure projects in Sri Lanka under BRI initiative. Ex. Hambantota & East container terminal at Colombo.
Commercial loans for Belt and Road Initiative (BRI) projects in Sri Lanka have led to a ‘debt trap’ crisis.
China is facing dilemma in bailing out Sri Lanka. As, unilaterally restructuring Sri Lanka’s debt would set a new precedent in its lending practices, leading to a queue of similarly distressed countries seeking debt relief from China.
China, which is a leading economy, wanting to challenge USA, does not want its reputation to be tarnished by bailing out a floundering economy.

Opportunity for India

India was the first responder to Sri Lanka’s desperate calls for foreign aid to help tackle its crippling debt and economic crisis.
In the first six months of 2022, Indian aid worth $3.8 billion has flowed to Sri Lanka through loans, swaps and grants. This is India’s largest bilateral aid program in recent times.
Stabilizing Sri Lanka’s economy can be a major boost to India’s neighborhood policy.
Boost India’s image as an important responder to any crisis in South Asia.
Humanitarian and bilateral aid would help India counter its Big Brother image by not interfering politically in Sri Lankan crisis and creating a positive image in minds of Sri Lankan people.
Once Sri Lankan economy stabilizes, India can deepen its trade and investment linkages and could spur regional integration and prosperity.

With Chinese projects under scrutiny in Sri Lanka, there is an opportunity for India to upscale its aid and cement its first mover advantage over China by leading an aid consortium for Sri Lanka, working closely with other friendly countries such as the United States, Japan and EU as well as International Monetary Fund (IMF).