The newly elected Sri Lankan President, Anura Kumara Dissanayake (AKD), made his first official overseas visit to India. India emerged as an important partner for Sri Lanka during the Covid-19 and post-pandemic periods when the country faced an economic crisis leading to its bankruptcy. This ultimately ended Gotabaya Rajapaksa’s presidency through a Jana Aragalaya (people's struggle).

Dissanayake embodies the aspiration of the marginalised. His party, Janatha Vimukthi Peramuna (JVP), transformed its electoral base (which was 3 percent earlier) and secured massive votes with 160 seats—a two-thirds majority—in the 300-member Parliament. He visited India to discuss several Indian projects that are being implemented in Sri Lanka, the comprehensive economic partnership agreement that has been under discussion for several years, the Tamil issue and the larger security cooperation issue.

Emphasising the futuristic relationship, during Dissayanayake’s maiden visit to Delhi, Prime Minister Modi said, “Physical, digital and energy connectivity shall be the key pillars of our partnership.”

India-Sri Lanka relations

For the past two decades, India has emphasised connectivity as a precursor to economic integration with its neighbours, including Sri Lanka. However, China’s Belt and Road Initiative projects have helped construct ports and airports and emerged as a major competition to India’s infrastructure activities. China-funded infrastructure projects and India-funded ones have significant differences. First, the public sector companies from India enter into a joint venture with such companies in the host country. Second, India-funded projects are based on the host country’s needs. They play a leading role in identifying sectors that need investment.

Recently, Indian private sectors have begun investing in the neighbourhood, bringing private capital. Sri Lanka has become a destination for India’s public and private capitals. India’s line of credit is directed towards building rail networks and the energy sector, especially the Sampur solar power plant and the long-drawn project in Trincomalee, a port city on the northeast coast of Sri Lanka.

The Sri Lankan president’s visit should be seen in the context of the country’s larger foreign policy framework and India’s keenness to partner in developmental sectors. Sri Lanka is in the middle of a geopolitical fulcrum of the Indian Ocean and the Indo-Pacific. As a small state, it wants to stay away from the conflicting and competitive geopolitical interests of major powers. As a dominant player in the Indian Ocean, India, like Sri Lanka, is equally apprehensive of external power’s geopolitical interests toward seeking a firm foothold in the region. It is increasingly working with other economic players like Japan to collaborate on infrastructure projects, especially in developing ports. The Chinese have had a controlling stake in the Hambantota port for 99 years as the Sri Lankan government failed to repay debt to China.

Challenges of economic relations

Two important factors that could challenge the bilateral relations between India and Sri Lanka are an agreement on the Economic and Technology Cooperation Agreement (ETCA) and the Tamil issue. Both have domestic political implications for Sri Lanka. Moreover, the JVP was opposed to them in the past. India-Sri Lanka economic relations have a baggage of politicisation. The Free Trade Agreement (FTA) the two countries signed in 1998 and implemented in the year 2000 tripled the bilateral trade despite initial resistance from the business community to trade in certain commodities in which they had competitive advantages. Interestingly, 60 percent of Sri Lanka’s exports to India benefit from the FTA, while 5 percent of India’s exports to Sri Lanka use FTA’s provision to its advantage.

Despite FTA’s success, negotiations on the Comprehensive Economic Cooperation Agreement (CEPA) took eight years. They were finally abandoned due to excessive politics and the fear of the negative implication of Indian domination of Sri Lanka’s market on certain Sri Lankan industries. The Rajapakse regime politically manipulated this opposition in their strategy to oppose India while forging close economic cooperation with China. One also saw similar opposition from the Trade Union and the JVP to the trilateral Memorandum of Consent (MoC) between India, Sri Lanka and Japan in developing the Eastern Container Terminal, which cancelled the MoC. The Janatha Vimukthi Peramuna party and its new incarnation, the National People’s Power (NPP), continued opposing Indian projects in Sri Lanka. Sri Lanka also cancelled the wind power project on its northern island, which China was developing due to India’s security concerns.

From 2016-18, there have been 11 rounds of talks between India and Sri Lanka. These talks were revived in 2023 and included trade in goods and services. Trade in services is more politically complicated than goods.

Sri Lanka has welcomed India’s investment in renewable energy, especially in the solar and wind sectors, to reduce its dependency on electricity generated by fossil fuels. The country produces electricity using imported oil and coal, constituting 20 percent and 35 percent of energy production, respectively. This makes the unit cost of energy production expensive and impacts foreign exchange reserves. India’s solar and wind energy investment would be a game changer in Sri Lanka’s energy mix. During this visit by the Sri Lankan president, the two countries also agreed to connect their electricity grid and have a multi-product petroleum pipeline.

Tamil political question

Unresolved Tamil political issues have always shadowed India’s relations with Sri Lanka. The JVP, the main constituent unit of the National People’s Power party, has consistently opposed devolution. However, this time, the NPP has won 3 seats in Jaffna, the capital city of the northern province of Sri Lanka. At one point in time, Jaffna was a stronghold of the Tamil separatist group, the Liberation Tigers of Tamil Eelam. Voice in favour of Tamil political aspiration is often raised in Jaffna, which is also the provincial capital of the Northern province. The NPP has towed the Sinhala Buddhist majoritarian line that refused to recognise devolution as a means to the political solution of Tamil political aspiration.

Issues of militarisation of the North, including the occupation of Tamil lands, remain a potent point of dispute. After his victory, in the first rally addressing the Tamil, Dissanayake promised to gradually return their land grabbed by state agencies. With the closure of the Paruthithurai camp, some lands have already been handed back to the Tamil owners.

The important constitutional reform that will resolve ethnic conflict is yet to be implemented. With the NPP dominating the parliament and the complete erosion of the traditional political parties, Sri Lanka is expected to move to new politics that promises to be responsive to the marginal working class, who form the bulk of the voters for the NPP.

Given the challenges, India and Sri Lanka should be careful to advance their relations in a mutually beneficial way without giving in to nationalist fervour on both sides.