Competing with China’s growing influence in South Asia is not only a strategic objective of the US but also the major power in the region, notably, India. Big-ticket investments are important to further the process of regional integration and ensure neighbours like Sri Lanka have a greater stake in the India growth story. Given the island-nation’s strategic location on major shipping routes in the Indian Ocean, the financing of $553 million by the US International Development Finance Corporation to develop the Colombo West International Terminal (CWIT) is a game-changer in this regard. This project pertains to a $700-million deal signed in 2021 between Adani Ports and SEZ and Sri Lanka Ports Authority and Sri Lankan conglomerate John Keells Holdings to jointly develop the shipping container terminal. This is the largest foreign direct investment into Sri Lanka through a single project. Since this funding is for a project consortium led by an Indian entity, the big-ticket investment considerably enhances the country’s role in developing the island nation as it will have huge multiplier effects in generating thousands of jobs. The Adani Group has also indicated its intent to invest $750 million to set up a 500-MW wind farm.
India’s FDI is a serious effort to rebalance its relationship with the island-nation away from the dragon’s embrace although it cannot compete with the latter’s cheque book diplomacy. India’s outbound investments to Sri Lanka amounted to $5.9 billion or 2% of its total from April 2000 to March 2023, while the latter’s FDI into India was only a paltry $96 million over this period. If investing in each other’s economies grows, this is bound to result in greater two-way trade flows and will further closer integration, which Sri Lanka also desires. When president Ranil Wickremesinghe visited India in July, both nations adopted a vision document for promoting greater connectivity. India’s involvement in CWIT exemplifies closer cooperation in ports and logistics infrastructure. India’s investments in wind energy help in developing Sri Lanka’s significant renewable energy potential. Direct flights between Chennai and Jaffna have improved air connectivity options for the Tamil population in the island nation’s northern region. A ferry service between Nagapattinam in India and Kankesanthurai in Sri Lanka has also been launched. As the Sri Lankan government seeks to divest its stake in state-owned enterprises, several Indian corporates have expressed interest in taking over SriLankan Airlines, for instance.
The upshot is that a process has been set in motion to catalyse FDI from India which is bound to lead to greater bilateral trade flows. Greater mutual investments can of course be strengthened by policy consistency, greater ease of doing business and fair treatment of each other’s investors. Talks have also been revived over a more ambitious Economic and Technical Cooperation Agreement which include trade in services, including movement of professionals. No doubt, this can be fostered through unilateral trade concessions by India so that Sri Lanka’s significant bilateral imbalance in goods trade—which amounted to $4 billion in FY23—is reduced. Settlement of trade in rupees helps, but the perception that investment-driven freer trade with the dominant partner is not necessarily inimical to Sri Lanka’s interests must get created. At a time it has expressed interest in joining the Regional Comprehensive Economic Partnership, closer integration is bound to raise Sri Lanka’s stakes in India’s rapid growth.