India and Srilanka Relations
Recently, Sri Lanka declared a state of economic emergency, as it is running out of foreign exchange reserves for essential imports like food.
Economic Fall Out of Srilanka
- Tourism, a big dollar earner for Sri Lanka, 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, higher than most of its emerging economy peers.
- Following an international sovereign bond settlement of $1 billion in July 2021, its gross official reserves slipped to $2.8 billion, which is equivalent to just 1.8 months of imports.
- The external debt-to-GDP ratio stood at 62% in 2020 and is predominantly owed by its public sector.
- More than $2.7 billion of foreign currency debt will be due in the next two years.
China’s Debt Trap
- 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.
- Unable to service its debt, in 2017, Sri Lanka lost the unviable Hambantota port to China for a 99-year lease.
- 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).
- Owing to Sri Lanka’s strategic location at the intersection of major shipping routes, China has heavily invested in its infrastructure (estimated at $12 billion between 2006 and 2019).
Why is Sri Lanka’s economy in trouble?
A number of factors have led to the current economic crisis in Sri Lanka.
- The value of the Sri Lankan rupee has depreciated by around 8% so far this year
- The country depends heavily on imports to meet even its basic food supplies. So the price of food items has risen in tandem with the depreciating rupee.
- The government’s ban on the use of chemical fertilisers in farming has further aggravated the crisis by dampening agricultural production.
- The Sri Lankan government has blamed speculators for causing the rise in food prices by hoarding essential supplies and has declared an economic emergency under the Public Security Ordinance.
- The government has refused to end its aggressive push for complete organic farming claiming that the short-term pain of going organic will be compensated by its long-term benefits.
- Further, Sri Lanka’s central bank earlier this year prohibited traders from exchanging more than 200 Sri Lankan rupees for an American dollar and stopped traders from entering into forward currency contracts.
Implications for India
- The Colombo port is crucial for India as it handles 60% of India’s trans-shipment cargo.
- Sri Lanka’s economic crisis may further push it to align its policies with Beijing’s interests. This comes at a time when India is already on a diplomatic tightrope with Afghanistan and Myanmar.
- Nurturing the Neighbourhood First policy with Sri Lanka will therefore be important for India, albeit with due caution, to preserve its strategic interests in the Indian Ocean region.
- Regional platforms like the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation and the Indian Ocean Rim Association could be leveraged to foster cooperation in common areas of interest like technology-driven agriculture and marine sector development, IT and communication infrastructure, renewable energy, and transport and connectivity.
- Both countries could also cooperate on enhancing private sector investments to create economic resilience.
Back to Basics
India and Srilanka Relations
- India and Sri Lanka have a legacy of intellectual, cultural, religious and linguistic interaction and the relationship between two countries is more than 2500 years old.
- Indian-Sri Lankan relations or Indo-Sri Lanka relations, are the bilateral relations between India and Sri Lanka.
- Only 4% of Sri Lankans have a negative view on India, the lowest of all the countries surveyed by the Ipsos GlobalScan.
- The two countries are also close on economic terms with India being the island’s largest trading partner
- India is the only neighbour 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
- Both India and Sri Lanka are republics within the Commonwealth of Nations.
- The two countries share near-identical racial and cultural ties. Sinhalese people who make up 75% of the total population descend in part from Northern Indian Indo Aryan settlers who migrated the Island from 543BCE to 243BCE.
- Tamil people (included Indian Tamils and Sri Lankan Moors) who make up 25% of the total population are belong to Dravidian group who migrate to the island from 300BC.
- 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 Union and BIMSTEC, working to enhance cultural and commercial ties. Since a bilateral free trade agreement was signed and came into effect in 2000.
- Indian exports account for 14% of Sri Lanka’s global imports. India is also the fifth largest export destination for Sri Lankan goods, accounting for 3.6% of its exports.
- Both nations are also signatories of the South Asia Free Trade Agreement (SAFTA).
- Negotiations are also underway to expand the free trade agreement to forge stronger commercial relations and increase corporate investment and ventures in various industries.
- The year 2010 is predicted to be the best year for bilateral trade on record, with Sri Lanka’s exports to India increasing by 45% over the first seven months of the year.
- India’s National Thermal Power Corp (NTPC) is also scheduled to build a 500 MW thermal power plant in Sampoor (Sampur).
- In 2020, India was Sri Lanka’s 2nd largest trading partner with the bilateral merchandise trade amounting to about USD $ 3.6 billion.
- India is also one of the largest contributors to Foreign Direct Investment in Sri Lanka.
- About one-sixth of the total development credit granted by India is made available to Sri Lanka.
- In the recent past, three lines of credit were extended to Sri Lanka: US$100 million for capital goods, consumer durables, consultancy services and food items, US$31 million for the supply of 300,000 MT of wheat and US$150 million for purchase of petroleum products.
- The Indian Housing Project, with an initial commitment to build 50,000 houses in war affected areas and estate workers in the plantation areas, is Government of India (GoI)’s flagship grant project in Sri Lanka.
- The country-wide 1990 Emergency Ambulance Service is another flagship project.
- Some of other notable grant projects which have been completed are the 150- bed Dickoya hospital, livelihood assistance to nearly 70,000 people from fishing and farming community in Hambantota etc.
- The India-Sri Lanka Foundation, set up in December 1998 as an intergovernmental initiative, also aims towards enhancement of scientific, technical, educational and cultural cooperation through civil society exchanges and enhancing contact between the younger generations of the two countries.
- India’s ‘Neighbourhood First’ policy towards Sri Lanka had resonated with Sri Lanka’s ‘India First’ foreign and security policy in 2020.
- India is Sri Lanka’s third largest export destination, after the US and UK.
- More than 60% of Sri Lanka’s exports enjoy the benefits of the India-Sri Lanka Free Trade Agreement, which came into effect in March 2000.
- India is also a major investor in Sri Lanka.
- India’s development partnership with Colombo has always been demand-driven, with projects covering social infrastructure like education, health, housing, access to clean water and sanitation, besides industrial development.
- Concessional financing of about $ 2 billion has been provided to Sri Lanka through various Indian government-supported Lines of Credit across sectors (for railway connectivity, infrastructure, supply of defence equipment, security, and counter-terrorism and solar projects, among others).
- Foreign direct investment (FDI) from India amounted to around $ 1.7 billion over the years from 2005 to 2019 and went into retail petroleum, hotels and tourism, real estate and manufacturing, apart from telecom, banking and financial services.
- In education, healthcare, and tourism, India is a far stronger partner than China.
- Under the Indian Technical and Economic Cooperation Scheme and the Colombo Plan, Sri Lankan nationals can benefit from 400 slots for short- and medium-term training courses in a variety of technical and professional disciplines.
- Since 2017, students from the island nation can also appear for the National Eligibility cum Entrance Test (NEET) and IIT JEE (Advanced) exams.
- In the technology sector, India could create job opportunities by expanding the presence of its information technology companies in Sri Lanka.
- 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.
- India and Sri Lanka must look for ways to boost people-to-people contacts. The island nation’s greatest number of tourists come from India, but the scope of religious tourism is yet to be explored.
- Through US $15 million grant for promotion of Buddhist ties with Sri Lanka announced last year, the two countries can look to create a Buddhism knowledge and tourism corridor.
- The ‘China factor,’ the ‘Sri Lankan ethnic issue,’ and the attendant ‘UNHRC resolution’ too have negatively impacted bilateral relations, but they have different connotations.
- 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.
- Later, the West Coast Terminal was offered under a public private partnership arrangement to Adani Ports and Special Economic Zones Ltd.
- Reserve Bank of India (RBI) had signed a currency-swap agreement with the Central Bank of Sri Lanka (CBSL) under the Saarc Currency Swap Framework 2019-22, for withdrawals of up to $400 million.
- India declined any further renewal of it in the absence of an International Monetary Fund programme to address Sri Lanka’s current macroeconomic imbalances.
- Lingering Issues
- growing proximity with China and leasing of the Hambantota Port
- history of ethnic contention between them and Sri Lanka-based Liberation Tigers of Tamil Eelam (LTTE)
- fishermen transgression in the Palk Strait and Bay of Bengal
- cancellation of the East Container Terminal port contract to India
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