By Rumeth Jayasinghe
“Blood is thicker than water. It was natural for India to see what it could do to stand by Sri Lanka at this very difficult time”
S. Jaishankar
Sri Lanka’s relations with India go back a long way. The first inklings of trade consolidated economic, cultural, and religious ties in both countries. In other words, then as now, it is trade that became a bedrock for relations on other fronts.
Geographical proximity has since enabled these countries to enhance connectivity, as captured in the recent India-Sri Lanka Vision Document, which delves into areas like maritime cooperation, renewable energy, and people-to-people ties.
In the 1990s, a series of discussions between the two countries paved the way for a formal trade agreement, the SLFTA or Sri Lanka – India Free Trade Agreement. It was signed in 1998 and came into effect two years later.
The agreement went a long way in strengthening economic ties between Colombo and New Delhi. In 2021, overall bilateral trade stood at USD 5.45 billion.
More recently, and more crucially, India granted financial assistance of over USD 4 billion and advocated Sri Lanka’s debt restructuring programme by being the first creditor to give financial assurance to the IMF. It was also the first and largest contributor of food, fuel, gas, and medicine, among other necessities, to the beleaguered nation.
These have all led to a turnaround in economic ties between the two countries, bolstering prospects for more agreements. Four of these, in particular, stand out.
ETCA (Economic and Technological Cooperation Agreement)
The Economic and Technological Cooperation Agreement or ETCA serves as an addition, one could say sequel, to the current free trade pact between India and Sri Lanka.
Introduced in 2015, it proved to be controversial, not just among nationalist parties and professional trade unions but also other groups. Many feared that it would lead to an influx of Indian workers in Sri Lanka, notably the IT industry, at the cost of local labour.
Regardless of this backlash, the proposal has gained a spotlight in recent months, with discussions resuming in November 2023 after a five-year hiatus.
The exact details of the agreement have yet to be disclosed. It is believed to include proposals for expanding trade in goods and trade in services.
Removing trade impediments and non-tariff barriers has also been recognised in the proposal. Though there is much ground to cover before reaching a final document, it is widely expected to be signed in and ratified within this year.
Land Connectivity
This is one of the more ambitious projects that the two nations have been vying for a long time, though its realisation has been delayed.
Earlier this year, Chief of Staff to the President Sagala Ratnayaka began negotiations to translate this into real action. Following a visit to India in March, a mutual agreement was reached on conducting a quarterly review process on connectivity projects.
Though security concerns have been raised, supporters of connectivity between India and Sri Lanka claim it will bring several benefits for Sri Lanka.
First, they argue it can reduce transportation costs by at least 40%, giving businesses the opportunity to transport goods to India conveniently. The time taken to exchange goods can thus reduce since customs clearance can be processed and finalised quickly.
They also argue that construction of a land corridor can benefit the port sector, since inbound containers coming to India can be redirected to Sri Lanka, and Indians will have the opportunity to transport them via roads or railway.
According to their reading, the tourism sector stands to gain enormously in terms of its catchment beyond Colombo to other parts of Sri Lanka, such as the North.
Given that India has become one of the biggest tourism markets in Sri Lanka, this can reap dividends in future, though security concerns have swamped optimism on these fronts, and they need to be assessed.
A land corridor can thus stimulate investments in Sri Lanka, especially the development of Trincomalee as a regional hub can be realised through this initiative.
Entrepreneurs in the Northern Province can get the opportunity to expand markets beyond Sri Lanka, covering key Indian states such as Tamil Nadu and Karnataka. Again, this needs to be taken with a pinch of salt, given the asymmetry between the two countries.
Digital Infrastructure Programme
Digital Connectivity is another area gaining traction between the nations. The Unique Payment Interface (UPI), introduced earlier this year, allows Indians to make payments in Sri Lanka through their smartphones, via LankaQR.
Both countries have begun trade settlements using the Indian Rupee, and an effort to create the Sri Lanka – Unique Digital Identity Number is currently underway with an Indian grant of INR 300 crore.
Renewable Energy Projects
The Sri Lankan government’s approval of a deal with Adani Green to develop two wind power stations in Mannar and Pooneryn has been received positively and negatively, with critics pointing to the environmental impact and supporters emphasising the immense potential of the Sri Lankan renewable energy market.
But Adani isn’t the only Indian company the Sri Lankan government has set its sights on. It has also signed a deal with the Bengaluru-based U Solar Energy Solutions to construct three hybrid renewable energy systems in Nainativu, Analathivu, and Delft.
Impact on Domestic Policies
Whatever critics or supporters may say, the growing Indian presence in Sri Lanka indicates one thing: that it wants to deepen economic integration with Sri Lanka.
In a recent interview, Indian High Commissioner Santos Jha stated that cooperation will always be driven by India’s goal of uplifting neighbour countries.
That reinforces the view that India’s growth trajectory can and will benefit Sri Lanka in the long-term, a view echoed by sections of the Sri Lankan Opposition as well, particularly MPs like Harsha de Silva. Leftwing and nationalist parties have more or less opposed that line, claiming that deeper integration will destroy local industriest.
For Sri Lanka, economists argue, increased Indian presence in economic and commercial spheres will bring in prosperity and expanded economic activity in the island. Greater integration presents an opportunity to facilitate export diversification. This may or may not have positive spillover effects on employment, particularly in the north and east.
On the political front, of course, deepening ties with India will reinforce dependency on the country. That Sri Lanka needs to navigate itself carefully here is a no-brainer.
A Way Forward?
Regardless of rhetoric, the potential of Indo-Lanka economic ties has yet to be fully realised. Both countries are working together to create strong bonds and greater linkages.
For instance, President Wickremesinghe was one of the first leaders to congratulate Indian Prime Minister Narendra Modi on his victory to secure a third term in office.
Prime Minister Modi’s reply to Ranil Wickremesinghe underscored a clear message: Delhi’s desire to foster connectivity in all dimensions between the long-standing allies.
The Vision Document developed by Colombo and Delhi underscores the confidence both countries have in these areas. The Sri Lankan government has set a target – 2048 – to become a fully developed country. There is much scepticism about this, but it is one of the proposals that have redefined its ties with India over the last year or so.
To be sure, these countries have faced several downturns throughout the history of their partnership. But both need to realise their aspirations. Whether physical connectivity can achieve this is debatable, considering the political fallout it can result in, particularly in Sri Lanka and even more so considering upcoming elections. Yet economic cooperation remains a crucial lynchpin in the future trajectory of Indo-Sri Lanka ties.
Rumeth Jayasinghe is an undergraduate at the University of Peradeniya who is studying management and is interested in economics. He can be reached at rumethj17@gmail.com.
Factum is an Asia-Pacific focused think tank on International Relations, Tech Cooperation, Strategic Communications, and Climate Outreach accessible via www.factum.lk.
The views expressed here are the author’s own and do not necessarily reflect the organization’s.
