INDIA – SRI LANKA

INDIA – SRI LANKA

Current Relations

1. Economic
   • Bilateral Trade: 2020 – USD $3.6 billion.
   • Trade Relations:
     • Sri Lanka is India’s second-largest trading partner in SAARC.
     • India is Sri Lanka’s largest trade partner.
     • Indian Investments: Petroleum retail, tourism & hotel, manufacturing, banking, and financial services.
     • India-Sri Lanka Free Trade Agreement (ISFTA) signed in 2000.
   • Joint Marine Resources Management Authority: Established between the two countries to address Palk Bay fisheries conflict.
   • Infrastructure Development:
     • Indian housing project in war-affected areas.
     • Assistance for Deep Sea Fishing techniques.
     • Development of Trincomalee port and oil tank farms.
     • Joint India-Japan agreement for Mattala Airport & East Container Terminal (ECT).
     • Jaffna-Colombo rail track and other railway lines.
   • Eastern Container Terminal: Sri Lanka scrapped its $500 million agreement with India and Japan.
   • Financial Aid: India confirmed a $400 million currency swap with Sri Lanka, deferring another $500 million due for settlement to the Asian Clearing Union (ACU) to aid the nation amidst an economic crisis.
2. Political
   • Tamil Diaspora: Strong cultural and family linkages between Tamil Nadu and Sri Lanka.
   • 13th Amendment: India has urged Sri Lanka to pass the 13th amendment to establish Tamil Provincial Councils.
   • UNHRC Resolution: India abstained from voting on a UNHRC resolution concerning human rights in Sri Lanka.

1. Strategic
   • Chinese Projects: Colombo awarded a $12 million energy project to a Chinese firm for developing three renewable power plants.
   • Trust Issues: Sri Lanka harbors mistrust for India due to the previous LTTE civil war.
   • Sea Routes: Sri Lankan waters are crucial and busy routes for India.
   • Strategic Location: Influential tactics by countries like China and the USA at India’s “backyard,” with China’s success in gaining influence.
   • Debunk China’s String of Pearls and countering debt-trap diplomacy.

1. Multilateral Interaction
   • SAARC, BIMSTEC, IORA, South Asia Co-operative Environment Programme (SACEP), South Asia Regional Initiative for Energy Integration (SARI/EI), Asian Disaster Preparedness Centre (ADPC).
2. Cultural/People-to-People
   • Indian-Origin Tamil Community: Predominantly in Central, Uva, and Sabaragamuwa provinces.
   • Indian Cultural Centre in Sri Lanka: Indian music, dance, Hindi, and yoga are gaining significance.
   • Sri Lankan Students: India offers 195 scholarship schemes for Sri Lankan students.
   • e-Tourist Visa (eTV): Sri Lankan tourists can now easily obtain a visa, enhancing people-to-people interactions.
   • Antiquity: Historical ties through Buddhist interactions.
   • Bilateral Cooperation: Under the Indian Technical and Economic Cooperation Scheme and the Colombo Plan for human resource development.
3. Security

• Bilateral Exercises: Mitra Shakti (Army) and SLINEX (Navy).
• Counter Drug & Human Trafficking Agreement: Signed in 2019.
• Trilateral Maritime Security Cooperation: Involving India, Sri Lanka, and the Maldives.
• Cooperation Fields:
  • Counter-Terrorism Agencies: Indian intelligence support, especially before the Easter bombing.
  • Disaster Management Cooperation: For cyclone and tsunami-prone areas.
  • Environmental Protection.

Importance / Benefits of India-Sri Lanka Relations

1. Economic
   • Trade Surplus: India maintains a trade surplus with Sri Lanka, indicating a strong demand for Indian products.
   • Tourism Sector: Sri Lankan tourists rank among the top sources for the Indian tourism market.
     • Example: India and Sri Lanka signed an Open Sky Agreement to boost tourism.
   • Economic Development: Economic projects in Sri Lanka strengthen India’s relations with them.
2. Strategic
   • Location: Sri Lanka’s geographic location makes it central to India’s SAGAR vision.
   • Piracy: Both nations collaborate on anti-piracy activities in the Palk Bay and Gulf of Mannar.
   • Information Fusion Centre: Sri Lanka is vital for India’s data gathering and enhances the center’s capabilities.
   • Indosphere: Good relations with Sri Lanka support India’s influence in the region, benefiting India geopolitically.
3. Security
   • Disaster Management: Proximity to India allows effective management of disasters with Indian Navy support.
     • Example: The Indian Navy’s response during the MT Diamond crisis.
   • Counter-Terrorism: Both nations face radical terrorism, fostering intelligence sharing.
   • Environmental Cooperation: Addresses environmental issues, including hazardous waste transfer from developed to developing countries.

Concerns/Issues

1. Strategic
   • Chinese Influence: China’s FDI in Sri Lanka is significant, with involvement in ports and infrastructure.
     • Example: Hambantota Port leased to China for 99 years.
   • Historical Mistrust: Sri Lanka harbors mistrust toward India due to India’s regional support for LTTE during the civil war.
   • Chinese Political Meddling: Reports suggest Chinese funding for former President Mahinda Rajapaksa’s 2015 election campaign.
   • Eastern Port Terminal Issue: Sri Lanka awarded the Eastern Port Terminal contract to China, canceling a previous tripartite deal with India and Japan for a deep-sea container port.
   • 13th Amendment Issue in SL: An outcome of the Indo-Lanka Accord, with the new government planning to abolish the amendment.
2. Security

• Fishermen Issue: The Sri Lankan navy frequently shoots and kills Indian fishermen for allegedly crossing into their territorial waters.
• Tamil Issues: Tamil Sri Lankans still do not have the same rights enjoyed by the Sinhalese.
• Katchatheevu Island: It is an uninhabited island that India ceded to Sri Lanka in 1974 based on an accord called the “Katchatheevu island pact.” The central government recognizes Sri Lanka’s sovereignty over the island per the 1974 accord. However, Tamil Nadu claims that Katchatheevu falls under Indian territory.

SRI LANKA ECONOMIC CRISIS

The Sri Lankan economy is facing a crisis due to a severe Balance of Payments (BoP) problem. Foreign exchange reserves are depleting rapidly, making it increasingly difficult for the country to import essential goods.

Reasons for the Crisis

1. Dip in Foreign Exchange Reserves: In July 2021, forex reserves dropped from over $7.5 billion in 2019 to around $2.8 billion, partly due to a struggling tourism sector.
   • Example: Tourism, Sri Lanka’s third-largest forex earner, suffered after the 2019 Easter Sunday bombings, which killed over 250 people. Tourist arrivals fell by up to 70%.
2. COVID Impact: The pandemic severely affected tourism and remittances from foreign workers, which dropped 22.7% to $5.5 billion in 2021.
3. Hasty Switch to Organic Farming: The government’s ban on chemical fertilizers reduced agricultural production, driving up prices of essential goods.
   • Example: A survey indicated that 90% of Sri Lanka’s farmers previously used chemical fertilizers.
4. Dependence on Imports: Sri Lanka’s heavy reliance on imports for items like sugar, pulses, and cereals worsened the economic meltdown due to a lack of foreign reserves to cover import bills.
5. Low Industrial Production: Garment factories and tea estates were disrupted by COVID-19, leaving thousands of Sri Lankan laborers in West Asia unemployed.
6. Hambantota Port Case: The Hambantota port project, aimed at economic relief, instead increased debt, as Sri Lanka borrowed $1 billion from China.
7. Russia-Ukraine War-Induced Inflation: The ongoing war has driven up prices of crude oil, sunflower oil, and wheat.
   • Example: Crude oil prices hit a 14-year high, exceeding $125 per barrel.
8. Policy Failures of Government:
   • No Strategy: The government lacked a comprehensive crisis-response strategy, leading to inadequate policy decisions.
   • Populist Policy: The Rajapaksa-led government promised lower taxes and extensive support for farmers, which, when implemented rapidly, exacerbated the crisis.
   • Economic Mismanagement by Successive Governments: Created a sustained twin deficit, including a budget shortfall and a current account deficit.
   • Food hoarding: The government declared emergency regulations for distributing essential food items. Wide import restrictions were imposed to save dollars, leading to market irregularities and reported hoarding.
   • Continuous borrowing: Fears of a sovereign default rose by the end of 2021, with foreign reserves dropping to $1.6 billion and looming repayment deadlines.
   • Debt distress: Sri Lanka’s liquidity issues have heightened debt distress risks. The public debt-to-GDP ratio was 109.7% in 2020, with gross financing needs remaining high at 18% of GDP.

Impact of the Sri Lankan Crisis

1. Transhipment Nature of Sri Lankan Ports: Thousands of containers sent from India to Sri Lanka remain uncleared at Colombo Port, as authorities cannot afford to transfer them.
   • Example: India heavily relies on Colombo Port for global trade, with 60% of India’s transshipment cargo handled here, making up 70% of the port’s total transshipment volume.
2. Deterioration of Relations with Sri Lanka Impacting India’s Investments:
   • Impact on Tourism: India was traditionally the largest tourism source for Sri Lanka pre-pandemic.
   • Import Dependency: Over one-fifth of Sri Lanka’s imports are from India.
   • FDI: India is a significant FDI contributor to Sri Lanka, with around $1.7 billion invested from 2005 to 2019.
3. Geopolitical Concerns in the Indian Ocean:
   • Sri Lanka-China Axis: A strong Sri Lanka-China relationship could threaten India’s interests in the region.
   • Refugee Crisis: Economic woes in Sri Lanka could escalate into a refugee crisis, affecting regional stability.
   • Extremism: Food scarcity, unemployment, and communal politics create breeding grounds for extremism.
4. Skepticism Toward Indian Assistance in Sri Lanka:
   • Growing Skepticism: While Sri Lankan leadership thanked India for assistance, some media and opposition figures viewed it suspiciously, especially over infrastructure projects.
     • Example: This includes the Triomalee Oil Tank Farm and a solar power plant project involving Adani Group, which some claim bypassed competitive bidding.
   • Media Accusations: Some Lankan media accused India of “diplomatic blackmail” and criticized Adani Group’s entry into Sri Lanka.

Steps Taken by India to Assist Sri Lanka

• Financial Assistance: Since January 2022, India has provided $2.4 billion in aid, including a $400 million RBI currency swap and a $500 million loan deferment.
• Fuel Shipments: India supplied diesel under a $500 million credit line in February 2022.
• Food and Medicine Assistance: India and Sri Lanka signed a $1 billion credit line for essential imports, including food and medicine.

Way forward

• Wipe out China from Sri-Lankan politics: Crucially, any disillusionment in Sri Lanka with China eases India’s effort to keep the Lankan archipelago out of China’s “string of pearls” game in the Indo-Pacific.
• Help India’s effort to contain China: It is in India’s interest to contain Chinese presence and influence in this region.
• Trans-shipment hub: Any disruption in Colombo port operations makes India vulnerable to an increase in costs and congestion issues. While work on a trans-shipment hub in Kerala has begun, it is in India’s interest to help Sri Lanka come out of the economic crisis in the short term.
• Due care is needed: While India can extend low-cost help to alleviate the hardships of Sri Lankans, it should be done with due care to maintain positive optics.

Quotes/statements by Analysts (For use in Introductions and Conclusions):

• “Under neighbourhood first policy and SAGAR Doctrine, India will give priority to Sri Lanka.” – PM Modi
• There is a need to “delink” the political and cultural aspects from the economic aspects of relations with Sri Lanka. India must leverage its economic and cultural strength in engaging with Sri Lanka and subsequently resolve political issues.

INDIA-SRI LANKA-CHINA TRIANGLE

Sri Lanka’s relationship with China has dominated both domestic and international political discussions over the last decade. This strengthening relationship is largely economic, but India and the United States are closely monitoring these developments.

India-Sri Lanka Relations

1. Political: The 2020 virtual summit issued a joint statement, “Mitratva Magga,” covering all areas of bilateral relations.
2. Economic: Sri Lanka remains among the largest trade partners of India in SAARC.
3. Cultural: Buddhism and shared history, including the Ashoka connection, play key roles in strengthening cultural ties between the nations.
4. Development Projects: India is one of the major development partners for Sri Lanka.
   • Example: India’s housing project in Sri Lanka.
5. Military Exercises: Includes MITRA SHAKTI and IN-SLN exercises.
6. Financial Support: India provided a $400 million currency swap to Sri Lanka and deferred a Clearing House settlement of $515.2 million. Credit lines for fuel and food were also extended.
7. Damage Control: Sri Lanka has prepared a roadmap to repair ties with India.
   • Example: Buddhist exchanges, promoting religious harmony, handling fishermen issues, and the proposed Ayodhya Ram Temple project.
8. Science and Technology Cooperation: India and Sri Lanka have extended existing cooperation for another three years, focusing on areas like biotechnology, sustainable agriculture, and big data.
9. Infrastructure Projects: India has signed deals with Sri Lanka to jointly develop the Trincomalee oil tank farm.

Rising Chinese influence in Sri Lanka

1. Chinese investment: China is the largest foreign investor and fourth-largest foreign lender in development projects in Sri Lanka.
   • Example: Hambantota port, Mattala Airport, Colombo Port City Project, etc.
2. Foreign trade: China is also the largest importer and exporter to Sri Lanka.
3. Arms trade: China sells a range of modern armaments to Sri Lanka.
4. Vessel deployment: Chinese deployment of research vessels (spy ships) in the Indian Ocean.
5. Lowering Indian influence: Proposal to establish a new forum for Indian Ocean island nations in spite of similar existing forums such as Indian Ocean Rim Association (IORA) and Indian Ocean Navies Symposium (IONS).
6. Technical assistance: China extended yuan 800 million for partnerships in the health and housing sector.
7. Debt trap diplomacy: Sri Lanka has been forced into a debt trap and has had to sell its strategic assets through debt-equity swaps, leading to the creation of zones where its sovereignty has been negated.
   • Example: It owes China more than $5 billion in debt and last year took an additional $1 billion loan from Beijing to address its financial crisis, which is being repaid in installments.

Reasons why Sri Lanka is moving away from India

1. Delay in finishing projects: Unlike China, India takes too much time with funding and completing promised projects, pushing Sri Lanka to prefer Chinese investments.
2. Big brotherly attitude: India’s tendency to dictate policy to neighboring countries has continued post-independence, which is looked down upon by its neighbors.
   • Example: Sending IPKF for peacekeeping in Sri Lanka.
3. Fishermen issue: There have been alleged incidents of the Sri Lankan Navy firing on Indian fishermen in the Palk Strait, which is only 12 nautical miles away.
4. Alleged political interference: A media report from Colombo after the 2015 election stated that an Indian Intelligence official allegedly united rival parties against Rajapaksa.
5. Katchatheevu Island issue: Tamil Nadu claims that Katchatheevu falls under Indian territory, with Tamil fishermen traditionally believing it belongs to them, preserving their right to fish there.
6. Unresolved Tamil issues: The rehabilitation of Tamils displaced by Sri Lanka’s civil war has not progressed at the desired pace.
7. Trade imbalance: Exports from India to Sri Lanka were high, while Sri Lankan exports to India were limited. Sri Lanka seeks to reduce this imbalance for better access to Indian markets.

Challenge to India-Sri Lanka relationship due to China

1. Threat to maritime security: A permanent PLA presence in the eastern Indian Ocean may restrict Indian Navy deployment and negate geographical advantages.
   • Example: Sri Lanka approved a Chinese firm to install renewable energy systems in islands located in Palk Bay, 50 km from Tamil Nadu, which can interfere with Indian communications and track movements.
2. Favouring China over India: China is seen as a more reliable partner due to its timely project completion, cost-effectiveness, and infrastructure quality, leading to reduced Indian influence on the island.
   • Example: Last year, Indian government took five months to approve a loan mortorium sought by colombo while Beijing approved an additional US $500 million loan from its development bank in no time. 
3. Impact on trade: The recent import restrictions policy imposed by the Sri Lankan government to control foreign currency outflows reduced Chinese imports only by 8 % in 2020, while in contrast, it went down by 19 percent in India’s case.
   • Example: Availability of textile raw materials, such as yarn and fabric, at a low price from Chinese suppliers is the major reason for Sri Lanka to import these goods from China instead of from India.

1. Impact on trade: The recent imp 19 percent in India’s case.
2. Chinese opposition to SAGAR policy: The proposed Indian Ocean island countries forumsounded in opposition to Prime Minister of India’s SAGAR (Security and Growth for All in the Region) initiative.
3. Use of China card: Neighbours like Sri Lanka, Nepal, etc. demand more benefits from India saying that the Chinese are ready to offer better terms.
4. Debt trap diplomacy: Sri Lanka was forced to hand over control of the Hambantota port project to China for 99 years, as it owed massive debt to Beijing. This allowed China control over a key port positioned at the doorstep of its regional rival India.
5. Countering Chinese Malaccan dilemma: Apprehension that India will be able to block the western approaches to the Malacca Straits due to the close proximity to the Andaman and Nicobar Islands is countered by influencing Sri Lanka in the backyard of India.

Also add initiatives taken by India (Only those initiatives which counter China) like the India-Japan joint project etc.

Initiatives taken by India

1. Aid for the needy: India has so far committed $1.9 billion to Sri Lanka in the form of credits for essential commodities and fuel, and also in loans and currency swaps.
2. Role of Indian private sector: Sri Lanka Ports Authority (SLPA) said it signed an agreement with India’s Adani Group to build a brand-new terminal next to a $500-million Chinese-run jetty at the sprawling port in the capital Colombo.
3. Multilateral support: India, Japan, and Sri Lanka are weighing the development of a terminal at the bustling port of Colombo in a country that has seen ongoing political controversies related to investments from China’s Belt and Road initiative.
4. The Quad: Through the ‘Quad initiative’ India, Japan, and the US will cooperate economically, militarily, and strategically for a free, open, prosperous, and inclusive Indo-Pacific region that serves the long-term interests of all countries in the region.
5. Modernizing India’s Naval Power: India is modernizing its naval power; it has completed its Nuclear Triad by commissioning INS Arihant and has inducted INS Vikramaditya in the Navy in 2013. Further, it is indigenously building another aircraft carrier, INS Vikrant.

Way Forward/Suggestions

1. Exploring new domains: In education, healthcare, and tourism, India is a far stronger partner than China.
2. Sharing experience: As Sri Lanka embarks on the arduous project of drafting a constitution, India can lend its own experience in managing minority rights and diverse populations.
3. Strengthening cultural relations: The two countries can look to create a Buddhism knowledge and tourism corridor. India recently announced a US $15 million grant for the promotion of Buddhist ties with Sri Lanka.
4. Cooperation in maritime security: As maritime countries in the Indian Ocean, India and Sri Lanka have a shared interest in ensuring maritime security and safety.
5. Preserving Strategic Interests: Nurturing the Neighbourhood First policy with Sri Lanka is important for India to preserve its strategic interests in the Indian Ocean region.
6. Taking Advantage of Regional Platforms: Platforms like BIMSTEC, SAARC, SAGAR, and the IORA could be leveraged to foster cooperation in fields like technology-driven agriculture, marine sector development, IT & communication infrastructure, etc.