On July 21, Sri Lanka’s President Ranil Wickremesinghe will be in India for a visit. He will meet Prime Minister Narendra Modi, and finalise several investments supported by India, especially in energy, infrastructure and tourism. Wickremesinghe was elected by a majority of MPs to tackle Sri Lanka’s economic crisis when the country defaulted on its sovereign debt in April 2022, and the measures implemented since are starting to stabilise the economy.
It’s perfect timing for both countries. India is emerging as a serious alternative to China for global investments, its manufacturing sector is being noticed, and it has embarked on ambitious trade agreements. It is expending energy for a conducive neighbourhood too. India provided $5 billion in economic aid to Sri Lanka during its crisis in 2022, paving the way for the IMF’s $3 billion programme in March 2023. Sri Lanka is now seeing interest from Indian private investment. Keeping Sri Lanka close helps to keep China at its periphery. A determined Neighbourhood First policy from India will uplift South Asia’s regional attractiveness. Strategically, the bilateral engagement could naturally extend to the Indian Ocean, and beyond it, to the Indo-Pacific.
There’s hard work to be done. India and Sri Lanka currently have a give-take relationship, where India provides aid. Ideally, it should be reciprocal, where gradually aid should turn into trade. The India-Japan bilateral relationship is a model. India is still the largest recipient of Japan’s overseas aid, but the assistance has changed from basic needs and health to infrastructure-building, like metro rails. Japan is now also India’s fifth-largest investor, with a cumulative investment of $38.7 billion in India.
For India-Sri Lanka to follow a similar track, five dimensions need attention.
First, India can consolidate its fragmented aid programme. Currently, Indian aid is routed via multiple ministries and agencies. A single development bank will work better. Good models exist, like the Japan Bank for International Cooperation and China’s Development Bank, which finance large-scale development projects internationally. The Asian Development Bank, which is closely managed by Japan, can be a model of an MDB for South Asia.
Second, as India becomes a destination for manufacturing and services, it can foster supply chains in South Asia. Significant private Indian companies are investing in Sri Lanka. The Adani Group invested $1.14 billion in renewable energy in the Mannar Basin and the West Container Terminal at Colombo Port. The Tata Group already has investments in Sri Lanka’s tourism, agri-business, telecom and automobiles. On July 17, chairman N Chandrasekharan was in Sri Lanka intent to make more investments. This is in addition to the total $1.95 billion Indian investment already in Sri Lanka. All of them are allied with the Indian government’s agenda for investing in renewable energy, infrastructure and tourism in Sri Lanka.
Thus aligned, Sri Lanka will gradually integrate into India’s emerging supply chain paradigm. It’s attractive too: South Asian countries have lower hourly wages than China; like China, its businesses are flexible, willing to work with small orders or even custom orders. To compete, they now need logistics services, trade and transport-related infrastructure, and border controls. Once implemented, South Asia will develop export processing zones and industrial clusters along a well-oiled supply chain. India is embarking on trade agreements that are the precursor to this, and talks should be accelerated for a comprehensive and high-quality India-Sri Lanka free trade deal with a focus on supply chains and foreign investment.
Third is digitalisation. The special focus of India’s G20 presidency is digital public infrastructure. India’s open-source fintech is among the best in the world, and is being adopted to achieve the UN’s SDGs. India’s UPI is being rapidly adopted worldwide. But it has not been exposed to its own South Asian neighbourhood. Most urgent on Wickremesinghe’s agenda should be the adaptation of India’s digital public infrastructure for Sri Lanka.
Fourth, a deeper engagement between the central bank governors of India and Sri Lanka is needed. Frequent meetings and an early warning system for economic crises are necessary. The Asian Financial Crisis of 1997 ensured that ASEAN adopted a mutual monitoring mechanism for early warnings and methods to assist each other during a crisis. India and Sri Lanka can work on a similar system, which template can then be extended to other South Asian countries. Such institutional mechanisms are key to regional stability
Finally, there is security. It’s no secret that India’s most significant concern with Sri Lanka is the presence of China. Cumulative Chinese investments account for 18 per cent of Sri Lanka’s 2021 GDP and 10.8 per cent of the country’s foreign debt. This allows China special access to Sri Lanka — and its waters. The docking of a Chinese “research” vessel in Hambantota Port in August 2022 caused India much consternation. The Indian Ocean is still India’s — and Sri Lanka’s — strategic backyard. India, Sri Lanka and the Maldives conduct a trilateral naval exercise already and participate actively in the important National Security Advisor-led Colombo Security Conclave which includes Mauritius, Bangladesh and Seychelles. But it has not deterred China, whose entrenched economic muscle and might in both island countries is forbidding.
Sri Lanka must understand India’s security concerns. India has stepped up to help its neighbour in difficult economic straits. A credit line is showing the path to private and public investments. This can lead to increased trade and the building of a robust South Asian supply chain. It’s a winning proposition for the region, and offers potential security through trade across the Indo-Pacific.
Kripalani is the Executive Director, Gateway House and Wignaraja is Professorial Fellow in Economics and Trade, Gateway House
Sri Lanka must understand India’s security concerns. India has stepped up to help its neighbour in difficult economic straits. A credit line is showing the path to private and public investments. This can lead to increased trade and the building of a robust South Asian supply chain. 
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