Sri Lanka’s new President Anura Kumara Dissanayake is on a state visit to India, his first foreign trip. He was given a high ceremonial welcome by his counterpart, President Droupadi Murmu, and received with warmth by Prime Minister Narendra Modi at Rashtraprati Bhavan. In the joint statement, India has pledged to supply LNG gas to Sri Lanka, enhance trade settlements between the two countries, boost education and technology exchanges and encourage Indian FDI in Sri Lanka.
It is clear that India recognises a new Sri Lanka – one that has moved on from just security concerns, to one that can be a premier partner in making South Asia a progressive economic region in an uncertain global economy. Dissanayake brings a different politics to Sri Lanka domestically and internationally. His National Peoples Power (NPP) won the Presidential elections on September 21, and the November 12 parliamentary election with a two-thirds majority – a first for Sri Lanka, indicating that all Sri Lankans, across ethnic and economic lines, voted for his “clean Sri Lanka” manifesto. Within two weeks of Dissanayake’s win, Foreign Minister S Jaishankar travelled to Colombo and invited the new President to make a state visit to India.
This visit’s success is imperative. Sri Lanka has been South Asia’s highest GDP per capita economy, reaching a peak of $4,388 in 2017, a productive, medium and small enterprises machine. Its fall, in five years, to $3,3431 per capita, was a blow to the country. Already, since he was elected President in September, Dissanayake has confirmed that Sri Lanka will continue with its 17th IMF programme but with increased social spending to reduce high poverty. He is improving governance by adopting anti-corruption measures, digitising government and modernising agriculture.
The bilateral agreements with India will help him continue these efforts and change the focus of the relationship from aid to trade. Dissanayake acknowledged India’s significant assistance through Sri Lanka’s economic crisis. India promised to continue that support. It has agreed to help Sri Lanka in the digitalisation of its public services, a model which India has pioneered and which will help achieve some of the promises NPP made for targeted social protection and anti-corruption. On his part, Dissanayake reiterated he would respect India’s security concerns and not allow Sri Lanka to be used against India. No specific mention was made of the $440 million Adani wind power project for Sri Lanka, signed in 2023, which Dissanayake had said he would reconsider or annul if elected.
It’s a promising start, and there’s much more that can elevate the bilateral to make it like the close cooperation between Thailand, Cambodia and Laos PDR, for instance, in the Greater Mekong sub-region.
First, Sri Lanka can broaden its engagement beyond Tamil Nadu to all four southern Indian states, through business-to-business (B2B) ties. Traditionally, Indian and Sri Lankan business collaborations have been led by the two apex chambers of commerce in India, the CII and FICCI in New Delhi, and the Ceylon Chamber of Commerce in Colombo, which are big business focussed.
As geography determines trade flows, these B2B ties can expand with the states and cities geographically closest to Sri Lanka and most importantly, between the smaller businesses chambers and firms. For both countries, MSMEs are the basis of their economies This needs sincere effort, and activation by more inbound business visits and participation in trade fairs, for instance, to build trust which translates into actual deals. Specific sectors of mutual business interest could include food processing, textiles and garments, auto parts and IT-related services.
Second, New Delhi and Colombo can consider piloting a regional Production-Linked Incentive (PLI) 2 scheme in Sri Lanka. The PLI scheme lies at the core of India’s efforts to build domestic capabilities in sophisticated manufacturing industries including solar panels, electric vehicles and electronics components. This has led to success and reduced India’s dependence on imports of items into which it seeks to make headway, such as green energy and energy security. A limited extension of the domestic PLI scheme to Indian businesses to make solar panels in Sri Lanka will limit the risks of overseas investment and build regional supply chains in the neighbourhood – a key goal for India’s China+1 strategy.
Third, it’s time to conclude an upgraded India-Sri Lanka Free Trade Agreement (FTA). India-Sri Lanka trade negotiations resumed under former President Ranil Wickremasinghe and there was expectation of an early harvest investment agreement in 2024. This was to be the agreement that sets the terms and conditions for Foreign Direct Investment, thereby promoting bilateral business and protection for investors. However, such talks paused as the new Sri Lankan government took stock of trade negotiations in order to develop its FTA stance.
India’s commerce ministry, which is negotiating FTAs with several countries, can restart bilateral FTA talks with a view to concluding an investment agreement in 2025 and a comprehensive trade deal in 2026, covering expanded goods coverage, services trade, investment and trade facilitation. There can also be a built-in agenda for including new trade issues such as intellectual property, competition policy and government procurement, when the conditions are right. To alleviate domestic Sri Lankan concerns about opening up, India can maintain asymmetrical treatment for Sri Lanka in the new deal – and consider providing some aid for trade. This will help to foster B2B ties, stimulate inward investment, and provide for market access, and regulatory cooperation.
Fourth, improving physical connectivity is vital for trade and tourism. Indigo and Air India have increased flights between Indian cities and Colombo airport. Palaly Airport in Jaffna has been modernised to enable flights to and from South India and the ferry service has been re-started to cover 60 nautical miles from Nagapattinam to Kangesanthurai. This is showing results particularly in northern Sri Lanka, where projects have been co-financed by Indian aid and Sri Lankan public expenditure. The Adani Group has co-invested with John Keels holding, Sri Lanka’s largest conglomerate, in developing the West Container terminal in Colombo port which largely tranships to India.
Indian finance for an undersea oil pipeline and an electricity transmission line, agreed to in 2023 but not yet started are important next projects for Sri Lanka’s energy security. So too is the upgrading of Sri Lanka’s digital connectivity by drawing on India’s successful national roll out of digital public infrastructure. However, the notion of a land bridge between the two countries such as motorway/railway bridge between Denmark and Sweden has evoked scepticism in Sri Lanka.
Sri Lanka’s economy is stabilising in 2024 from a crippling debt default and economic crisis in 2022. Indian aid and an IMF programme were instrumental in the economic turnaround. Tourism arrivals during the European winter season have increased, bringing in much need foreign exchange – tourism receipts were $2.5 billion in Jan-Oct. 2024, an increase of 59 per cent over January to October 2023. To its credit, Sri Lanka’s new government has reiterated support for the IMF programme and the new budget is eagerly awaited in early 2025. Apart from limited fiscal space for social spending, the island faces the serious risk of repayments (capital) on its external debt starting in 2028 if it is unable to generate sufficient foreign exchange though trade-led growth. Working in partnership with the IMF and World Bank, India should stand ready to help if Sri Lanka falters a second time.
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Such enhanced cooperation with Sri Lanka is almost a necessity. Ties with Bangladesh are strained and debt-distressed Maldives reluctantly accepted a short-term liquidity inflow of an RBI swap after China cooled about request for aid. Nepal’s PM K P Sharma Oli just signed a framework agreement with China to implement the Belt & Road Initiative’s infrastructure projects. Struggling economically under Taliban rule, Afghanistan risks becoming a regional centre for narcotics trade and illegal migration, as does Myanmar. Relations with Pakistan remain in cold storage.
These issues concern both India and Sri Lanka. An economic partnership in South Asia that works can become a model for others, enhance India’s Neighbourhood First Policy and India’s status as a regional power.
Ganeshan Wignaraja is the Professorial Fellow for Trade and Economics and Manjeet Kripalani is the Executive Director & co-founder at Gateway House: Indian Council on Global Relations
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