Context

The present economic crisis in Sri Lanka has pushed it closer to India for immediate relief.

Reasons for the Crisis

The first wave of the pandemic in 2020 offered early and sure signs of distress.

• In-migration: Thousands of Sri Lankan laborers in West Asian countries were left stranded and returned jobless.
• Shut-down: Garment factories and tea estates could not function, as infections raged in clusters. Tourism sector to saw a big dip.
• Domestic job losses: Thousands of youth lost their jobs in cities as establishments abruptly sacked them or shut down.
• Forex decline: It meant that all key foreign exchange earning sectors, such as exports and remittances, along with tourism, were brutally hit.

Reasons behind crisis

• The Easter bomb blasts of April 2019 in churches in Colombo resulting in 253 casualties,consequently, dropped the number of tourists sharply leading to a decline in foreign exchange reserves.
• The newly led government by Gotabaya Rajapaksa in 2019 promised lower tax rates and wide-ranging SoPs for farmers during their campaign.
• No strategy: The lack of a comprehensive strategy to respond to the crisis then was coupled with certain policy decisions last year.
• Ill-advised policies: It included the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem.
• Food hoarding: The government declared emergency regulations for the distribution of essential food items. It put wide import restrictions to save dollars which in turn led to consequent market irregularities and reported hoarding.
• Continuous borrowing: Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves plummeting to $1.6 billion, and deadlines for repaying external loans looming.

Brief background of India-SL relations

• India is the only neighbor of Sri Lanka, separated by the Palk Strait; both nations occupy a strategic position in South Asia and have sought to build a common security umbrella in the Indian Ocean.
• There are deep racial and cultural links between the two countries. Both share a maritime border.
• The India- SL relations have been however tested by the Sri Lankan Civil War and by the controversy of Indian intervention during the war.
• In recent years Sri Lanka has moved closer to China, especially in terms of naval agreements.
• India has signed a nuclear energy deal to improve relations and made a nuclear energy pact with Sri Lanka in 2015.

India’s role in the Lankan Civil War

• In the 1970s–1980s, the RAW and the state government of Tamil Nadu were believed to be encouraging the funding and training for the Liberation Tigers of Tamil Eelam (LTTE), a separatist insurgent force.
• In 1987, faced with growing anger amongst its own Tamils, and a flood of refugees India intervened directly in the conflict for the first time.
• This was after the Sri Lankan government attempted to regain control of the northern Jaffna region by means of an economic blockade and military assaults; India supplied food and medicine by air and sea.

Why did India intervene?

• Indian intervention in Sri Lankan civil war became inevitable as that civil war threatened India’s unity, national interest and territorial integrity.

Outcomes

• The peace accord assigned a certain degree of regional autonomy in the Tamil areas with a body controlling the regional council and called for the Tamil militant groups to lay down their arms.
• Further India was to send a peacekeeping force, named the IPKF to Sri Lanka to enforce the disarmament and to watch over the regional council.
• The accord failed over the issue of representations. The result was that the LTTE now found itself engaged in military conflict with the Indian Army.

Areas of cooperation

(1) Political Relations

• Regular Exchange: Political relations between the two countries have been marked by high-level exchanges of visits at regular intervals.
• Bilateral Cooperation: A joint statement covering all areas of bilateral cooperation, titled ‘MitratvaMaga’ was issued following the Virtual Summit of 2020.

(2) Commercial Relations

• ISFTA: The India-Sri Lanka Free Trade Agreement (ISFTA) in 2000 contributed significantly towards the expansion of trade in areas such as infrastructure, connectivity, transportation, housing, health, livelihood and rehabilitation, education, and industrial development.
• Trading Partner: India has traditionally been among Sri Lanka’s largest trade partners and Sri Lanka remains among the largest trade partners of India in the SAARC.
  • In 2020, India was Sri Lanka’s 2nd largest trading partner with the bilateral merchandise trade amounting to about USD $ 3.6 billion.
• India and Sri Lanka are member nations of several regional and multilateral organizations such as the South Asian Association for Regional Cooperation (SAARC), South Asia Co-operative Environment Programme, South Asian Economic Unionand BIMSTEC.
• India is Sri Lanka’s third-largest export destination, after the US and UK.
• Exports: Sri Lankan exports to India have increased substantially since 2000 when ISLFTA came into force.

• FDI: India is also one of the largest contributors to Foreign Direct Investment in Sri Lanka. According to BoI, FDI from India amounted to about US$ 1.7 billion during the period 2005 to 2019.

(3) Development Cooperation

• Grants: The overall commitment by GOI is to the tune of more than USD 3.5 billion.
  • Demand-driven and people-centric nature of India’s development partnership with Sri Lanka have been the cornerstone of this relationship.
• The Indian Housing Project: India has so far committed to construct close to 62,500 houses in Sri Lanka, making it one of the largest projects undertaken by GoI abroad.
• Emergency Ambulance Service: The Service which was initially launched in July 2016 is now expanded to all the Provinces.
  • At a total cost of more than USD 22.5 million, close to 300 ambulances were provided by GOI under this project.
• Other Projects: India is also involved in projects for renovation of Palaly Airport, Kankesanthurai Harbor, construction of a Cultural Centre in Jaffna, interconnection of electricity grids between the two countries, construction of a 150-bed hospital in Dickoya and setting up a coal power plant in Sampur as a joint venture between National Thermal Power Corporation (NTPC) and Ceylon Electricity Board (CEB).
• Latest Development: India-SL agreed for joint development of Trincomalee Oil Tank farmed in 2022 after 35 years of wait.

(4) Projects under Lines of Credit

• Sectors: 11 Lines of credit (LOC) have been extended to Sri Lanka by the Export Import Bank of India in the last 15 years.
  • Important sectors under these LOCs include: Railway, transport, connectivity, defense, solar.
• Infrastructure: Some important Projects completed are- supply of defense equipments; up-gradation of the railway line from Colombo to Matara; track laying by IRCON on Omanthai-Pallai sector; reconstruction of the Railway line; signaling and telecommunication system; supply of engine kits for buses, diesel locomotives railways, DMUs, Carrier and fuel tank wagons etc.
• Rehabilitation: A project for the rehabilitation of the Kankesanthurai harbor is being executed under a LOC of USD 45.27 million, bringing immense economic benefits to the Northern region of Sri Lanka.
• Solar Energy: A US$ 100 million LoC for undertaking solar projects in Sri Lanka has been signed for rooftop solar units for Government buildings, rooftop solar units for low-income families and a floating solar power plant.
• Security: In 2019, a LOC of USD 400 million for development and infrastructure projects and USD 50 million for security and counter-terrorism were announced.
  • These LOC Agreements are currently under discussion.

(5) Cultural relations

• India and Sri Lanka have a shared legacy of historical, cultural, religious, spiritual and linguistic ties that is more than 2,500 years old.
• In contemporary times, the Cultural Cooperation Agreement signed by the Government of India and the Government forms the basis for periodic Cultural Exchange Programmes between the two countries.

(6) People-to-people ties: Buddhism

• Buddhism is one of the strongest pillars connecting the two nations and civilizations from the time when Emperor Ashoka sent his children Arhat Mahinda and Sangamitta to spread the teachings of Lord Buddha at the request of King Devanampiya Tissa of Sri Lanka.
• Underlining the deep people-to-people connect and shared Buddhist heritage, the venerated relics of Lord Buddha from Kapilawasthu discovered in 1970 in India have been exhibited two times in Sri Lanka.
• India in 2020, announced USD 15 million grant assistance for the protection and promotion of Buddhist ties between India and Sri Lanka.
  • It may be utilized for the construction/renovation of Buddhist monasteries, education of young monks, strengthening engagement of Buddhist scholars and clergy, development of Buddhist heritage museums, etc.
• Transport- In July 2020, the GoI declared the Kushinagar Airport in India, the place of Lord Buddha’s Mahaparinibbana, as an international airport, to allow Buddhist pilgrims from around the world to visit the revered site associated with Lord Buddha with ease.

• The Swami Vivekananda Cultural Centre (SVCC)– since its inception in 1998, is actively promoting awareness of Indian culture by offering classes in Bharatnatyam, Kathak, Hindustani and Carnatic vocal, Violin, Sitar, Tabla, Hindi and Yoga.

(7) Tourism

• e-Visa- Tourism also forms an important link between India and Sri Lanka. GoI formally launched the e-Tourist Visa (eTV) scheme for Sri Lankan tourists on 14 April 2015.
• Visa Fee- Subsequently, in a goodwill gesture, the visa fee for eTV was sharply reduced. In 2019, out of the total 1.91 million tourists, 355,000 tourists arrived from India.
• Sri Lankan tourists too are among the top ten sources for the Indian tourism market.
• Visa on arrival- On 24 July 2019 Sri Lanka included India in the free visa on arrival scheme and commenced the scheme on 1 August 2019.

Plummeting relations

• The ties began to worsen between the two since February, 2021 when Sri Lanka backed out from a tripartite partnership with India and Japan for its East Container Terminal Project at the Colombo Port, citing domestic issues.
  • However, later, the West Coast Terminal was offered under a public private partnership arrangement to Adani Ports and Special Economic Zones Ltd.
• Sri Lanka in a state of economic emergency: Sri Lanka is running out of foreign exchange reserves for essential imports like food. It has recently declared a state of economic emergency.
• Covid Impact:
  • Sri Lanka increased policy rates after the covid pandemic in response to rising inflation in August 2021 caused by currency depreciation.
  • Tourism sector has suffered since the Easter Sunday terror attacks of 2019, followed by the pandemic.
  • Earnings fell from $3.6 billion in 2019 to $0.7 billion in 2020, even as FDI inflows halved from $1.2 billion to $670 million over the same period.
  • Sri Lanka’s fragile liquidity situation has put it at high risk of debt distress. Its public debt-to-GDP ratio was at 109.7% in 2020, and its gross financing needs remain high at 18% of GDP.
  • Its gross official reserves slipped to $2.8 billion, which is equivalent to just 1.8 months of imports. More than $2.7 billion of foreign currency debt will be due in the next two years.

Major outstanding issues

1. Fishing disputes

• There have been several alleged incidents of Sri Lankan Navy personnel firing on Indian fishermen fishing in the Palk Strait, where India and Sri Lanka are only separated by 12 nautical miles.
• The issue started because of Indian fishermen having used mechanized trawlers, which deprived the Sri Lankan fishermen (including Tamils) of their catch and damaged their fishing boats.
• The Sri Lankan government wants India to ban use of mechanized trawlers in the Palk Strait region, and negotiations on this subject are undergoing.
• So far, no concrete agreement has been reached since India favors regulating these trawlers instead of banning them altogether.

2.Alleged political interference

• A media report from Colombo soon after Rajapaksa’s defeat in the January 8 elections of 2015 had said that an Indian Intelligence official was instrumental in uniting rival political parties — the Sri Lanka Freedom Party (SLFP) and the United National Party (UNP) — against him during the polls.
• In October 2018, President Sirisena alleged that Indian intelligence agencies were plotting his assassination.

3.Katchatheevu Island

• It is an uninhabited island that India ceded to Sri Lanka in 1974 based on a conditional agreement called “Kachchativu island pact”.
• Later on, Sri Lanka declared Katchatheevu, a sacred land given the presence of a Catholic shrine.
• But Tamil Nadu claimed that Katchatheevu falls under the Indian Territory and Tamil fishermen have traditionally believed that it belongs to them and therefore want to preserve the right to fish there.

4.China factor

• Sri Lanka has a history of taking independent decisions even if they cause misgivings in India.
• In the period of low profile relationship between the two nations, Sri Lanka apparently started favoring China over India.
• China is Sri Lanka’s largest bilateral creditor: China’s loans to the Sri Lankan public sector amounted to 15% of the central government’s external debt, making China the largest bilateral creditor to the country.
  • Sri Lanka has increasingly relied on Chinese credit to address its foreign debt burden.
• China’s Exports surpasses India: China’s exports to Sri Lanka surpassed those of India in 2020 and stood at $3.8 billion.
  • India’s exports were $3.2 billion.
• Infrastructural Investment by China: Owing to Sri Lanka’s strategic location at the intersection of major shipping routes, China’s investment stands at $12 billion between 2006 and 2019.
  • Unable to service its debt, in 2017, Sri Lanka lost the unviable Hambantota port to China for a 99-year lease.
  • Sri Lanka passed the Colombo Port City Economic Commission Act, which provides for establishing a special economic zone around the port and also a new economic commission, to be funded by China.
  • The Colombo port is crucial for India as it handles 60% of India’s trans-shipment cargo.

Why is Sri Lanka important to India?

• India is Sri Lanka’s closest neighbor. Both sides have built upon a legacy of intellectual, cultural, religious and linguistic interaction.
• Sri Lanka has always been politically and economically important to India given its strategic geographical position in the Indian Ocean. The relationship has been marked by close contacts at all levels.
• Sri Lanka sits at the epicenter of the arc connecting the Persian Gulf to the Strait of Malacca. An island nation with an economy that’s mainly reliant on tourism and tea exports, Sri Lanka’s blessed geography puts it at a crucial juncture of the busy shipping lanes of the Indian Ocean.
• India also has a vital strategic stake in Sri Lanka for its own security interests. An unfriendly Sri Lanka or a Sri Lanka under influence of a power unfriendly to India would strategically discomfit India.
• For the Indian Navy, Sri Lanka is important as the switching of naval fleets from the Bay of Bengal to the Arabian Sea and vice versa requires the fleets to go around the island nation.
• Both countries share a common broad understanding on major issues of international interest and experience common social-political problems relating to community divides.

How India has helped to boost Sri Lanka’s economy

• Grants: The overall commitment by GOI is to the tune of more than USD 3.5 billion. Demand-driven and people-centric nature of India’s development partnership with Sri Lanka have been the cornerstone of this relationship.
• The Indian Housing Project: India has so far committed to construct close to 62,500 houses in Sri Lanka, making it one of the largest projects undertaken by GoI abroad.
• Other Projects: India is also involved in projects for renovation of Palaly Airport, Kankesanthurai Harbor, construction of a Cultural Centre in Jaffna, interconnection of electricity grids between the two countries, construction of a 150-bed hospital in Dickoya and setting up a coal power plant in Sampur as a joint venture between National Thermal Power Corporation (NTPC) and Ceylon Electricity Board (CEB).
• Latest Development: India-SL agreed for joint development of Trincomalee Oil Tank farmed in 2022 after 35 years of wait.

Impact of recent Economic crisis on India

• Export:
  • Sri Lanka’s share in India’s total exports has declined from 2.16 percent in FY15 to just 1.3 percent in the first 10 months of FY22.
• Shipping:
  • If the current situation in the island nation persists, it could cause a major disruption to the normal functioning of the Colombo Port.
  • This would be detrimental to India’s interest.
  • The port handles over 30 percent of India’s container traffic and 60 percent of its trans-shipment.
• Investments:
  • India has had a substantial investment in Sri Lanka in areas including real estate, manufacturing, and petroleum refining. They all might be adversely affected if the crisis continued.
• Migration:
  • Also, the continuing Sri Lankan crisis could compel many Sri Lankans to leave for India for their survival.
  • Already, scores of them have fled from the island nation to India.

Opportunities for India for deeper engagement

• Dairy sector: Sri Lanka imports a considerable quantity of milk powder. On average, Colombo annually imports dairy products worth $315 million. . India can help Sri Lanka develop its dairy sector.
• Poultry sector: In this area, through its host of agricultural universities, India can share its knowledge on ways to increase both production and productivity.
• Energy sector: Considering how the problem on the energy front exploded into a major political crisis in Sri Lanka, India’s participation in energy projects will be desirable.
• Education sector: School education is another area where India’s presence could be more felt. India can expand its scheme of establishing smart classrooms and modern computer labs to cover all those institutions teaching children of hill country Tamils, the most underprivileged section in society.

Challenges

• Possibility of greater economic collaboration: Whether this bonhomie can lead to greater economic collaboration between Sri Lanka and south India, not necessarily Tamil Nadu alone, given the historical baggage, is anybody’s guess.
• Baggage of history: Some sections of the Sinhalese still hold the view that India had been a threat to them and it can still be a threat to them.
• Modest investment in development: Despite India’s open willingness to take part in the development of Sri Lanka after the civil war, the scale of its involvement has been modest.
• Incomplete projects due to lack of political will: After the cancellation of the tripartite agreement, India was later provided with projects such as the West Container Terminal, the Trincomalee oil tank farm and a couple of renewable projects, there were several proposals that envisaged India’s participation but did not see the light of day.

Way forward

• Infrastructure development: Even now, there is enormous scope for collaboration between the two countries in the area of infrastructure development.
• Cross-border energy trade: The economic crisis has revived talk of linking Sri Lanka’s electricity grid with that of India.
• Facilitating people-to-people interaction: The apprehension in the minds of sections of the Sinhalese majority about India being a threat can be dispelled only by facilitating greater people-to-people interaction, including pilgrimages by monks and other sections of  society to places of Buddhist importance not only in north India but also in the south (Andhra Pradesh).
• No china factor indeed: Labeling governments in Sri Lanka as “pro-China” or “pro-India” is irrelevant. It is evident that China’s economic and strategic salience in the subcontinent is not tied to the regime leadership. Previous Lankan President Maithripala Sirisena who considered as pro-India came to power criticizing the Chinese projects in Sri Lanka, but within two years into power, it extended full backing to the Chinese projects.

Conclusion

• Given the history of bilateral ties, instances such as the Hambantota controversy are bound to arise. But what should not be glossed over is that a politically and economically stable Sri Lanka will be in India’s interest too.

Mains question 

Q. There is no such thing as charity in international politics. Critically analyse this statement showing how India can reap benefits of economic cooperation with Sri Lanka.