Changes in strategic backdrop

There is a seamless link between trade and war. In the words of American scholar of international economy Robert Gilpin, “trade is the oldest and most important economic nexus among nations. Indeed, trade along with war has been central to the evolution of international relations.”

Peninsular India is separated from Sri Lanka by 40 km of Palk Strait. Sri Lanka’s location astride the international sea lanes of the Indian Ocean gives it a pivotal role of strategic importance not only for India, but for global security and trade as well.

Prime Minister Narendra Modi’s efforts to build a win-win relationship with China during his first term was unsuccessful mainly due to China’s persistent intrusions across the Line of Actual Control (LAC) in Eastern Ladakh as well as McMahon Line in the Northeast. The relations between the two countries suffered a huge setback after twenty unarmed Indian soldiers were killed in a clash with Chinese intruders across the LAC in Galwan valley on June 14-15, 2020.

Since then little progress has been made even after 21 rounds of talks between the two countries. Both China and India have undertaken massive infrastructure improvement projects along the border. India has also embarked on a policy of Atmanirbharata (self-sufficiency) in the manufacture of arms and military armaments. As a result, India has emerged as one the largest exporters of arms and equipment in the world.

During the last decade, China’s President Xi Jinping’s strategic infrastructural project the Belt and Road Initiative (BRI) and its IOR counterpart Maritime Silk Road (MSR) has made huge inroads in India’s neighbouring states. As a result, China has emerged as a challenger to India’s political, commercial and strategic influence in these countries. The China-Pakistan Economic Corridor (CPEC), a multimodal infrastructure initiative through the Pakistan Occupied Kashmir has emerged as BRI’s crown jewel. China-Pakistan strategic relations has increased India’s threat potential to a two-front war.

Indian Navy’s domination of the IOR is being challenged by the increasing presence of PLA Navy’s warships. China has also increased its strategic reach in IOR by creating maritime assets and facilities in Indian Ocean rim countries. In the East, Kyakpyu port in Myanmar and Chittagong port developed by China in Bangladesh provide direct access from the mainland to the Bay of Bengal. China has a 99-year lease on Sri Lanka’s Hambantota port that dominates the sea lanes of the Indian Ocean.

A Chinese company controls two carrier terminals in Colombo port. China also exercises control over the reclaimed land in Colombo port economic zone. In the West, China has shown interest in developing infrastructure in Ilhavanddhippolhu atoll in Maldives, strategically located on the sea lanes of the Indian Ocean. China has gained a foothold near the Strait of Hormuz after developing a deep sea port in Gwadar in Pakistan as a part of the CPEC. Since 2017, China has established its first overseas military base in Djibouti in the Horn of Africa. 

Alarmed at the increasing threat posed by China to international maritime traffic in the Indo-Pacific, four nations – India, the US, Japan and Australia - have formed the ‘Quad’, a quadrilateral non-military framework. It is ushering in close cooperation between the members in manufacturing, logistics and political issues. The AUKUS – Australia-US – military alliance is poised to introduce the nuclear triad in the Indo-Pacific theatre. A trilateral alliance of the US-Japan-South Korea has been formed to tackle any threat from China and its protégé North Korea, flaunting their military strength in their vicinity.

China’s visible presence has made India’s ‘Neighbourhood First’ policy more relevant not only to India’s national security, but also its trade and commerce. Conscious of this, PM Modi revamped maritime cooperation doctrine with the launch of the SAGAR (Security and Growth for All in the Region) initiative March 12, 2015, to build better relations with island nations of IOR - Sri Lanka, Maldives, Mauritius, and Seychelles. 

Impact of Covid 19 pandemic

The Covid-19 pandemic between 2020 to 2022 caused a huge set back to the economies of South Asian countries. Sri Lanka was one of the most affected by the Covid pandemic. The economy, largely dependent upon remittances from the Diaspora and tourism industry, suffered heavily.

The Ukraine war and the slapping of stringent sanctions against Russia affected it further as tourists from the two countries formed around 15 percent of international tourist travellers. By March 2022, the country saw 10-hour power shutdowns almost every day, endless queues waited for hours for petrol at pumps. Surgical operations were halted due to lack of medical supplies. Newsprint shortage forced daily newspapers to go online mode; public exams in schools were cancelled for want of paper. Adding to the woes, hydropower generation dipped as water sources dried up and annual agriculture production fell by 40 percent due to President Gotabaya Rajapaksa’s ill-timed ban on import of chemical fertilizers and pesticides.

The country went bankrupt in April 2022. Sri Lankan rupee was devalued by 36 percent, pushing up the prices of daily necessities. In a bid to save foreign exchange, authorities banned imports including fruits, vegetables and milk powder.  The essential items ran out of stock in stores adding to the agony of the public.  The public suffering from prolonged shortages and high prices gathered in mass protests demanding the resignation of Rajapaksas in power as president and prime minister.

By July 9, 2022 it snowballed into Aragalaya, a national movement spearheaded by university students. When ruling party goons and troops tried to suppress the protests, irate mobs ransacked the houses of President Gotabaya and Prime Minister Ranil Wickremesinghe. The Aragalaya protests forced President Gotabaya to flee the country. Some semblance of order was restored when the parliament installed Ranil Wickremesinghe as interim president.

India-Sri Lanka vision document

India played a crucial role in supporting Sri Lanka during the economic crisis and recovery thereafter. India provided over $4 billion in financial aid during its financial crisis. The aid included credit lines for essential imports of food, medicines and fuel. India was the first bilateral creditor to offer financing assurances to the International Monetary Fund (IMF), which paved the way for other creditors to follow suit. This enabled Sri Lanka to meet the conditions for formalising the IMF programme for financial assistance. India also participated in debt restructuring agreements along with other countries i.e., China, France and Japan. These agreements allowed Sri Lanka to restructure its debt on more favourable terms.

India and Sri Lanka formalised their economic partnership after detailed discussion during President Wickremesinghe’s visit to New Delhi on July 21, 2023. President Wickremesinghe specially appreciated India’s timely, unprecedented, and crucial support to Sri Lanka and its people. India and Sri Lanka agreed upon an economic partnership vision to speed up Sri Lanka’s economic recovery. The vision document’s title “Promoting Connectivity, Catalysing Prosperity: India-Sri Lanka Economic Partnership Vision” contains the key elements of the partnership. The plan is to strengthen the maritime, air, energy and people-to-people connectivity between the two countries. They have signed six energy agreements, including an oil pipeline from India to Sri Lanka, electricity grid connectivity and cooperation on renewable energy.

India’s decision to allow the use of Indian rupee for trade settlement between the two countries and allowing the use of UPI based digital payment system is likely to boost trade and tourism. Already there are signs of improvement in Indian tourist arrivals in Sri Lanka and we can expect it to grow exponentially when ferry services and air connectivity are beefed up.

With South India becoming an industrial and IT hub, a multipurpose infrastructure link with Sri Lanka would bring a sea change in economic growth of the island nation. With Tamil Nadu becoming the heartland of automobile industry and IT manufacture, such a link would particularly benefit the Northern and Eastern provinces.

Contentious issues

A land bridge connecting India and Sri Lanka across the Palk Strait is one of the ideas mooted in the joint vision statement. It is not a new idea; the then PM Ranil Wickremesinghe had proposed it in 2004. The proposal for a 23 km long Palk Strait Bridge met with intense opposition in Sri Lanka. Tamil Nadu Chief Minister Ms Jayalalithaa was also opposed to the idea on security considerations.

In 2015, India’s transport minister Nitin Gadkari proposed to build the ‘Hanuman bridge’ with the aid of the Asian Development Bank as a part of the Trans Asian road network. However, it was shot down by Sri Lanka Minister for highways Lakshman Kiriella. He said “We are against it because people of Sri Lanka are opposed to it. We cannot let India build a bridge.” As Sri Lanka had joined the BRI just then; apparently Sri Lanka did not want to upset China. Moreover, India’s domination of Sri Lankan life is resented by sections of people in all political parties.

It will not be easy for President Wickremesinghe to politically sell the idea of a land bridge with India, particularly when he is contesting the presidential election in September 2024. The attitude of Sri Lanka Podujana Peramuna (SLPP) with its strong Sinhala nationalist moorings and the Janatha Vimukthi Peramuna (JVP) and its cohorts is no better. The land bridge proposal can be used by them to whip up anti-India rhetoric. Even a non-political personality like Colombo Archbishop Malcom Cardinal Ranjith had opposed the land bridge proposal from the pulpit.

The India-Sri Lanka vision document also speaks of two other issues that are contentious. The first is on encouraging Indian investments in the divestment of Sri Lankan State-owned Enterprises (SOE). This sale of SOE is already mired in political controversy. The Economic and Technology Cooperation Agreement (ETCA) proposal to comprehensively enhance bilateral trade and investments has already become a politically sensitive issue. Some stakeholders like domestic businesses in Sri Lanka fear increased competition from India can put them out of business.

There are differences in regulatory frameworks and standards between the two countries. Harmonizing them will require full cooperation and effort. There is public opposition from professional bodies and trade unions in Sri Lanka who worry about the influx of professionals from India reducing their opportunities for employment. Similarly, some fear the huge economic disparity between the “big brother” India and Sri Lanka could lead to Indian domination of certain sectors gaining unequal benefits.

Adequate infrastructure and connectivity are essential for smooth implementation of ETCA. Both countries need to invest to improve logistics, transportation, digital trade and services for people to see the advantages of economic technical connectivity. Similarly, the two countries should invest in building trust through people-to-people connectivity at various levels, particularly through increased links with academic institutions, professional bodies and civil society organisations in both countries.

Despite these challenges, both India and Sri Lanka seem to recognize the potential benefits of ETCA and continue to work towards it. After all, the India-Sri Lanka Free Trade Agreement (FTA) has been quite successful in enhancing economic ties between the two countries.

Bilateral trade has grown from $658 million in 2000, when the FTA was signed, to $5.45 billion in 2021 before Covid-19 pandemic queered the pitch of growth. Sri Lanka benefited considerably from the FTA with more than 60 percent of its exports to India utilizing the provisions of the agreement. This enabled Sri Lankan products to enter the Indian market with zero tariff.

As against this, only 5 percent of India’s exports to Sri Lanka used FTA provisions. India is one of the largest investors, exceeding $2.2 billion in 2021. India has been the largest source of tourists to Sri Lanka further strengthening the island nation’s economy. Overall, the ISFTA has played a crucial role in deepening the economic and commercial partnership between India and Sri Lanka, benefiting both nations in various sectors.

India-Sri Lanka partnership has also imparted a certain level of political stability in Sri Lanka in the last two years. One can only hope it will continue to grow under whoever is elected as President of Sri Lanka in September 2024, regardless of China’s machinations in the IOR.

Col R Hariharan VSM, a retired MI specialist on South Asia and terrorism, served as the head of intelligence of the Indian Peace Keeping Force in Sri Lanka 1987-90. He is associated with the Chennai Centre for China Studies.

Courtesy World Focus, September 2024 issue

https://www.worldfocus.in/current_issue?key=492&val=India-and-Neighbourhood