On July 21, Sri Lanka’s President Ranil Wickremesinghe will arrive in India for a two-day bilateral visit – the first since he was appointed President a year ago. He will meet Prime Minister Narendra Modi and finalise several investments supported by India, especially in energy, infrastructure, and tourism. Wickremesinghe was elected by a majority of MPs to tackle Sri Lanka’s economic crisis when the country defaulted on its sovereign debt in April 2022, and the measures implemented since are starting to stabilize the economy.
It is perfect timing for both countries. India is emerging as a serious alternative to China for global investments, its manufacturing sector is being noticed, and it has embarked on ambitious trade agreements. It is expending energy for a conducive neighbourhood too. India provided $5 billion in economic aid to Sri Lanka during its crisis in 2022, paving the way for the IMF’s $3 billion Programme in March 2023[1]. Sri Lanka is now seeing interest from Indian private investment. Keeping Sri Lanka close helps India keep China at the periphery. A determined Neighbourhood First policy from India will uplift South Asia’s regional attractiveness. Strategically, the bilateral engagement could naturally extend to the Indian Ocean, and beyond it, to the Indo-Pacific.
Now there is hard work that needs to be done. India and Sri Lanka currently have a giver-taker relationship, where India provides aid. Ideally, it should be reciprocal, where gradually aid should turn into trade. The India-Japan bilateral relationship is a model. India is still the largest recipient of Japan’s overseas aid[2], but the assistance has changed from basic needs and health to infrastructure-building, like Metro rails. Japan is now also India’s 5th largest investor, with a cumulative investment of $38.7 billion.[3]
For India-Sri Lanka to follow a similar track, five dimensions need attention.
First, India can consolidate its fragmented aid programme. Currently, Indian aid is routed via multiple ministries and agencies. A single development bank will work better. Good models exist, like the Japan Bank for International Cooperation and China’s Development Bank, neither of which are Multilateral Development Banks (MDBs), but which finance large scale development projects internationally. The Asian Development Bank, which is closely managed by Japan can be a model of an MDB for South Asia.
Second, as India becomes a destination for manufacturing and services, it can foster supply chains in South Asia. Significant private Indian companies are investing in Sri Lanka. The Adani Group invested $1.14 billion renewable energy in the Mannar Basin and the West Container Terminal at Colombo port. The Tata Group already has investments in Sri Lanka’s tourism, agri-business, telecom and automobiles. On 17th July, chairman N. Chandrasekharan was in Sri Lanka intent to make more investments – including perhaps a stake in Sri Lankan Airlines. This is in addition to the total $1.95 billion Indian investment already in Sri Lanka.[4] All of them are allied to the Indian government’s agenda for investing in renewable energy, infrastructure and tourism for Sri Lanka.
Thus aligned, Sri Lanka will gradually integrate into India’s emerging supply chain paradigm. It is attractive too: South Asian countries have lower hourly wages than China; like China, its businesses are flexible, willing to work with small orders or even custom orders. To compete, they now need logistics services, trade and transport-related infrastructure, and border controls. Once implemented, South Asia will develop export processing zones and industrial clusters along a well-oiled supply chain. India is embarking on trade agreements that are precursors to this, and talks should be accelerated for a comprehensive and high-quality India-Sri Lanka free trade deal with a focus on supply-chains and foreign investment.
Third is digitalisation. The special focus of India’s G20 presidency is digital public infrastructure. India’s open source fintech is among the best in the world and is being adopted to achieve the UN’s SDGs; in particular, the combination of the foundational ID, linked to individual bank accounts to be operated via the mobile phone, and the easy availability of cheap data. India’s United Payment Interface is being rapidly adopted worldwide – most recently in France, where Indian tourists can now make payments directly in rupees. And India’s digital package has been adopted by Morocco and Rwanda. But it has not been exposed to its own South Asian neighbourhood. Most urgent on the Wickremesinghe agenda should be the adaptation of India’s digital public infrastructure for Sri Lanka. Its success will enable its virtuous spread in the neighbourhood.
Fourth, a deeper engagement with the central bank governors of India and Sri Lanka is needed. Frequent meetings and an early warnings system for economic crises are necessary. The Asian Financial Crisis of 1997 ensured that ASEAN adopted a mutual monitoring mechanism for early warnings and methods to assist each other during a crisis.[5] India and Sri Lanka can work on a similar system, which template can then be extended to other South Asian countries. Another model can be the IMF Capacity Building programme. The IMF Training and Technical Assistance Center for Economic Capacity Building in South Asia is already located in Delhi and should be expanded with Indian aid to provide increased capacity building on macroeconomic management and financial stability.
Such institutional mechanisms are key to regional stability
Finally, there is security. It is no secret that India’s most significant concern with Sri Lanka is the deep presence of China. Cumulative Chinese investments accounted for 18% of Sri Lanka’s GDP in 2021, and 10.8% [6] of the country’s foreign debt. It allows China special access to Sri Lanka and its waters. The docking of a Chinese ‘research’ vessel in Hambantota Port in August 2022 caused consternation with India. The Indian Ocean is still India’s – and Sri Lanka’s – strategic backyard. India, Sri Lanka, and the Maldives conduct a trilateral naval exercise already, but it has not deterred China, whose entrenched economic muscle and might in both island countries is forbidding.
Sri Lanka must understand India’s security concerns. India has stepped up to help its neighbour in difficult economic straits. A credit line is showing the path to private and public investment. This can lead to increased trade and the building of a robust South Asian supply chain. It is a winning proposition for the region and offers potential security through trade across to the Indo-Pacific too.
Ganeshan Wignaraja is the Professorial Fellow in Economics and Trade, Gateway House.
Manjeet Kripalani is the Executive Director, Gateway House.
This article was first published in The Indian Express.
References
[1] “IMF Executive Board Approves US$3 Billion under the New Extended Fund Facility (EFF) Arrangement for Sri Lanka.” IMF, March 20, 2023. https://www.imf.org/en/News/Articles/2023/03/20/pr2379-imf-executive-board-approves-under-the-new-eff-arrangement-for-sri-lanka.
[2] Dayal, Isha. “A Comparative Analysis of China and India ICRIER.” Indian Council for Research on International Economic Relations (ICRIER). Accessed July 19, 2023. https://icrier.org/pdf/isha_japanese.pdf.
[3] 2023. “Japan-India Relations (Basic Data).” Ministry of Foreign Affairs of Japan. Accessed July 19, 2023. https://www.mofa.go.jp/region/asia-paci/india/data.html.
[4] “External Sector: Central Bank of Sri Lanka.” External Sector | Central Bank of Sri Lanka, 2023. https://www.cbsl.gov.lk/en/statistics/statistical-tables/external-sector.
[5] ASEAN. “ASEAN Economic Co-Operation Adjusting to the Crisis by Suthad Setboonsarng.” 1998. https://asean.org/asean-economic-co-operation-adjusting-to-the-crisis-by-suthad-setboonsarng/.
[6] “International Monetary Fund – IMF.” International Monetary Fund, 2023. https://www.imf.org/-/media/Files/Publications/CR/2023/English/1LKAEA2023001.ashx.