India - Sri Lanka Relations
In a pathbreaking development, India and Sri Lanka on Thursday signed a Line of Credit worth $1 billion that would enable Colombo in procuring food, medicines, and other essential items to overcome its acute economic crisis. Colombo is left with just $2.31 billion of reserves and is struggling to pay for critical imports including fuel, food, and medicines. Earlier, India's financial package to Sri Lanka, as announced in January, included a currency swap of $400 million and deferral of an Asian Clearing Union settlement of $515.2 million by two months besides $500 million for procurement of fuel. All this is done by India under the plan to revive Lanka’s Covid-hit economy using the 4 pillars strategy - urgent food and health security, energy security, currency swap, and Indian investments.
A brief history of India-Sri Lanka 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. In the 1970s-1980s, Sri Lanka was plunged into a civil war with Tigers of Tamil Eelam, a separatist insurgent force, on one side and the Sri-Lankan Government on the other. It was also believed that certain elements in the Research and Analysis Wing (R&AW), one of India’s many Central and Investigative Agencies were funding these insurgents. India faced growing resentment against its own Tamil populations in 1987. An influx of refugees from Sri Lanka further made matters worse. Hence, India took the decision to intervene directly in the Sri Lankan Civil War. The Tamils in the Jaffna region were supplied by economic blockades and military assaults, despite military assaults and economic blockades by the Sri Lankan government. After several rounds of negotiation, India and Sri Lanka entered into an agreement that would grant a degree of regional autonomy in the Tamil areas and called for Tamil militants in laying down their arms. Further India was to send a peacekeeping force, named the IPKF to oversee the disarmament and ensure stability in the region. Indian intervention in Sri Lankan civil war was inevitable as that civil war threatened India’s “unity, national interest, and territorial integrity”. The result was that the LTTE now found itself engaged in military conflict with the Indian Army. The conflict between the LTTE and the Indian Army left over 1,000 Indian soldiers dead. The Indo-Sri Lankan Accord, which had been unpopular amongst Sri Lankans for giving India a major influence, now became a source of nationalist anger and resentment as the IPKF was drawn fully into the conflict. Sri Lankans protested the presence of the IPKF, and the newly elected Sri Lankan president Ranasinghe Premadasa demanded its withdrawal, which was completed by March 1990. On May 21, 1991, Rajiv Gandhi was assassinated and the LTTE was alleged to be the perpetrator. As a result, India declared the LTTE to be a terrorist outfit in 1992. Bilateral relations improved in the 1990s and India supported the peace process but has resisted calls to get involved again. The conflict officially ended on 19th May 2009, with the President Mahinda Rajapaksa delivering a victory address to the Sri Lankan Parliament stating that “Sri Lanka is liberated from terrorism”. The leader of LTTE, Velupillai Prabhakaran, was eliminated a day before on 18th May 2009. The conflict had left 80,000-100,000 dead on both sides with about 800,000 being internally displaced.
India- Srilanka commercial relations:
India and Sri Lanka enjoy a vibrant and growing economic and commercial partnership, which has witnessed considerable expansion over the years. In this year itself, Beginning January 2022, India has been providing crucial economic support to the island nation in the grip of a severe dollar crisis that, many fear, might lead to a sovereign default, and a severe shortage of essentials in the import-reliant country. The relief extended by India from the beginning of this year totals over USD 1.4 billion —a USD 400 currency swap, a USD 500 loan deferment, and a USD 500 Line of Credit for fuel imports. Recently, in a bilateral meeting, India agreed to provide a grant to Sri Lanka to implement a ‘Unitary Digital Identity framework’, apparently modeled on the Aadhaar card. India’s development partnership with Colombo has always been demand-driven, with projects covering social infrastructures 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, etc. Foreign direct investment (FDI) from India amounted to around $ 1.7 billion over the years from 2005 to 2019. Projects for providing fishing equipment to the fishermen in the East of Sri Lanka and solar energy-aided computer education in 25 rural schools in Eastern Sri Lanka are under consideration. India has supplied medical equipment to hospitals at Hambantota and Point Pedro, supplied 4 state-of-the-art ambulances to the Central Province, etc. Indian governments have also shown interest in collaborating with their Sri Lankan counterparts on building tourism between the two countries based on shared religious heritage.
Why is India giving loans to Sri - Lanka? What are the Factors Responsible for Sri - Lankan Economic Crisis?
Sri Lanka is running out of foreign exchange reserves for essential imports like food. It has recently declared a state of economic emergency. Reasons being:
Covid Impact: Sri Lanka increased policy rates after the covid pandemic in response to rising inflation in August 2021 caused by currency depreciation.
Tourism: The 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.
Depreciating Currency: With the supply of foreign exchange drying up, the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods has risen. Due to this, the value of the Sri Lankan rupee has depreciated by around 8% so far this year.
Food Shortage: Sri Lankan Government’s recent decision to ban the import of chemical fertilizers and adopt an “organic only” approach. This overnight shift to organic fertilizers has impacted food production severely.
Issues in India - Srilanka relations:
1. East Coast Terminal project: In the year 2021 Sri Lanka canceled an MoU signed with India and Japan for the East Coast Terminal project. India protested the cancellation though it later agreed to the West Coast Terminal being developed by the Adani group.
2. Influence of China: China’s rapidly growing economic footprint in Sri Lanka is straining India-Sri Lanka relations. China is already the largest investor in Sri Lanka, accounting for 23.6% of the total Foreign Direct Investment (FDI) during 2010-2019 as against 10.4% from India. China is also one of the largest export destinations for Sri Lankan goods and holds over 10% of its external debt.
3. The 13th amendment of the Sri Lankan constitution: It is an outcome of the Indo-Lanka Accord of 1987, which was signed by the then Indian Prime Minister Rajiv Gandhi and Sri Lankan President J.R. Jayawardene. The 13th amendment of the Sri Lankan constitution was part of an attempt to resolve Sri Lanka’s ethnic conflict between the majority Sinhalese and the minority Tamilians. It had resulted in a civil war between the armed forces and the Liberation Tigers of Tamil Eelam. The LTTE was seeking the right to self-determination and a separate state. The 13th Amendment mandates a measure of power devolution to the provincial councils established under the provincial council act No.42 of 1987 to govern the island’s nine provinces. This entailed providing a form of self-government. Subjects such as education, health, agriculture, housing, land, and police were to be devolved to the provincial administrations to provide them with more autonomy. Its significance: 1) Resolving the ethnic conflict 2) Development of the backward regions 3) Political decentralization. 13 plus & 13 minus amendment: 13plus establishes a senate to the parliament based on 4D-democracy, devolution, development, demilitarisation. 13minus- No devolution of land and police.
4. Indian fishermen from Tamil Nadu are often arrested by Sri Lanka for fishing:
Issues: It is a livelihood issue for fishermen on both sides. Also, there is an environmental concern as Tamil Nadu fishermen use bottom trawlers. Moreover, frequent loss of lives has made it a humanitarian issue. Even many rounds of discussions involving both countries have not made tangible improvements in the situation. The fishing issue has been an ever-present sore in India - Sri Lanka relations.
Solution: Need for improvement in the form of an Indian government scheme for replacing bottom trawlers with deep-sea fishing boats equipped with long lines and gill nets. The scheme has not taken off due to the limited planned unit cost and fishermen's share accounting for 30% of this cost which they are unable to afford. Government should push for the adoption of sea cage farming and sea/ocean ranching by Indian fishermen as there is limited marine wealth on the Indian side of Palk Bay.
5. Sri Lanka had handed over the strategic Hambantota Port to China on a 99-year lease: Although the Chinese took control of the port by projecting an image of commercial operations, the security establishment in India was worried about China using the Hambantota port for military operations. Moreover, Chinese Submarines have been spotted at Hambantota Port.
6. A joint venture for running the Mattala Rajapaksa International Airport with India has not moved forward in the desired direction: Mattala Airport is not far from Hambantota port, which is operated by China.
7. Indian Public Sector Undertaking National Thermal Power Corporation (NTPC) was supposed to undertake the Sampur Thermal Power Station Project located in the Eastern Province of Sri Lanka: Due to environmental issues, the project was canceled.
8. 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 i.e 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.
My opinion:
There is a trust deficit that exists between India and Sri Lanka yet neither Sri Lanka nor India can afford to have strained ties. However, as a much larger country, the onus is on India to carry Sri Lanka along. India needs to be extremely patient and avoid reacting to any pinpricks and engage Sri Lanka even more regularly and closely, especially at the highest levels. Nurturing the Neighbourhood First policy with Sri Lanka is important for India to preserve its strategic interests in the Indian Ocean region. We need to speed up the West Container Terminal project that Sri Lanka offered after canceling the ECT project, as well as the Trincomalee Oil Tank Farm and other pending projects. An inter-Agency Committee on Trade, Investment, and Tourism should be established to reach Foreign Direct Investment (FDI) goals of $256 million from India in 2022. Promote exchanges of Buddhist and Hindu scholars as well as Sri Lankan Catholic pilgrims to the “Velankanni trail” in Tamil Nadu. Top diplomats of Sri Lanka should engage directly with the government and fisheries associations in Tamil Nadu. Proposals to enhance connectivity have to include resuming passenger ferry services and more air connectivity and new destinations for Sri Lankan flights. As both countries have a democratic set up there is scope for broadening and deepening the ties. Both countries should try to work out a permanent solution to the issues highlighted above. As Sri-lanka has time and again iterated that "China is our friend but India is our relative", is an appealing perspective to take India-Sri Lanka relations to new heights.
Recent Updates:
In the first six months of 2022, Indian aid worth $3.8 billion has flowed to Sri Lanka through loans, swaps, and grants.
