Sri Lanka crisis an opportunity for India to wean it away from Beijing's close embrace

Ironies abound as India hastens to come to the aid of Sri Lanka, a close neighbour, ravaged by economic mismanagement and food and fuel shortages.

A burgeoning crisis there has provided an opportunity to regain the goodwill India had almost lost in the region at the end of a bleak 2021, which came close to an annus horribilis for India’s foreign policy.

Sri Lanka, in recent months, has been struggling with an escalating economic downturn, comprising currency, food, energy and power shortages, leading to the army being called in to quell near food and fuel riots across the island nation normally famed for its superb cuisine and idyllic beaches.

The situation was so dire in January that Sri Lanka had to sell its gold reserves and use currency-swap agreements to repay a $500 million international sovereign bond (ISB) due for settlement.

The dire state of the Sri Lankan economy, probably its worst ever, has provided India with its best chance to regain primacy in the region after the Covid pandemic and some unfortunate domestic decisions saw its vaunted ‘neighbourhood first’ policy in deep distress.

While considerable blame for an awful 2021 would surely accrue to the global Covid-19 pandemic, India’s mis-steps with managing the pandemic and reneging on vaccine commitments did not go down well in the neighbourhood.

Relations between India and Sri Lanka, particularly, were further strained after the Gotabaya Rajapaksa government, in February 2021, reneged and decided to cancel an MoU with India and Japan for Colombo Port’s East Coast Terminal project, clearing it instead for a Chinese company. Several other projects involving India were also delayed for unexplained logistical and bureaucratic reasons.

However, Sri Lanka’s subsequent decision to award a 51% stake to develop and run the strategic Colombo Port’s Western Container Terminal to the Adani Group, considered close to the Indian government, did smoothen ruffled feathers, while a decision to finalise the arrangement to share ‘oil tank farms’ in Trincomalee, between Ceylon Petroleum Corporation and Indian Oil Corporation, further helped to ease bilateral tensions.

So, when Colombo faced an imminent debt default, New Delhi stepped in to ensure that Sri Lanka was not humiliated. India has, so far in 2022, extended $1.4 billion support to Sri Lanka, through a $400 million RBI currency swap arrangement, deferral of a $ 0.5 billion loan and another half a billion dollars as a line of credit for the island nation to sustain essential fuel and food imports.

The latter was signed during the visit earlier this month of Sri Lanka’s Finance Minister Basil Rajapaksa to New Delhi, when India announced a US$ 1 billion line of credit to Sri Lanka as part of its financial assistance.

This time, Delhi has assumed the role of a good neighbour and is making all the right gestures, suiting its offers to Colombo’s requirements, from helping out with money, to ensure Sri Lanka doesn’t default on commitments, to trying to get a hospital functional after it stopped working when supplies ran out.

India has adopted its earlier Afghanistan model, of letting the concerned state guide the terms and nature of assistance it provides, in contrast to the Chinese model, of providing huge funds on terms which enable it to take over the project land.

India’s role “as a good neighbour” has led to a fresh impetus in bilateral ties, with New Delhi and not Beijing suddenly appearing to be the preferred destination. A flurry of visits, from Lankan Foreign Minister G L Peiris and Finance Minister Rajapaksa to Delhi and Indian External Affairs Minister S Jaishankar visiting Colombo, has revived some of the warmth from the Sri Lankan strongmen, albeit reluctantly. Jaishankar’s visit, days after India extended a $1-billion credit facility to Sri Lanka, aims to ensure that the rising trajectory in ties retains momentum.

In a widely appreciated gesture in Sri Lanka, Jaishankar ended his visit to Colombo by asking Indian High Commissioner Gopal Baglay to help a Sri Lankan hospital that was forced to suspend surgeries due to lack of medical facilities in the unprecedented economic crisis. The Peradeniya Hospital in Kandy district had announced the temporary suspension of all routine surgeries due to shortage of medicines.

India plans to cash in on this opportunity and actively raise its investments in Sri Lanka, in renewable energy, ports, logistics, infrastructure and connectivity, to help it build capacity “holistically,” unlike Chinese investments, and thereby help to repair the ailing Sri Lankan economy.

A high-level group of 14 Indian investors, representing sectors from apparel to hospitality to food processing, cement, pharmaceutical production to robotics, drone technology and home security equipment manufacture, travelled to Sri Lanka recently to explore investment opportunities.

Reports suggest that a slew of projects could be finalised soon. In a just-signed agreement, India will set up hybrid power projects in three islands off Jaffna, replacing the Chinese venture cleared by Colombo last year.

India has enormous security and strategic interests in Sri Lanka and, while reinforcing its economic engagement in its southern neighbour, hopes to wean Colombo away from Beijing’s close embrace. It aims to bolster its strategic economic assistance by emphasising its close cultural and civilizational ties with the Buddhist-majority country, something Beijing cannot claim. However, Sri Lanka remains a critical part of China’s maritime Belt and Road Initiative, despite the situation at Hambantota port.

As India and Sri Lanka prepare to celebrate 75 years of their independence and the establishment of diplomatic relations between them, plans are being made to suitably mark the occasion.

Particularly important for the Buddhist-majority Sri Lanka is India’s assistance to revive the Buddhist tourist circuit. The Covid pandemic ravaged the Sri Lankan tourism sector and is among the major causes for its current economic nightmare.

Jaishankar in Colombo reiterated that India seeks expeditious implementation of mutually beneficial projects, including enhanced bilateral air and maritime connectivity, to reinforce people to people linkages and economic and investment initiatives, to enhance Sri Lanka’s energy security and ensure shared maritime security.

For India, however, there is a cautionary note. Its aid to a neighbour to ensure steady fuel supplies will increasingly face critical scrutiny domestically, as fuel prices skyrocket in India.

Additionally, the mismanagement of Sri Lanka’s economy by the Colombo strongmen should serve as a warning to New Delhi, about the dangers of a very high debt to GDP ratio and force it to maintain fiscal prudence.

It has got an opportunity, but the maturity of Indian neighbourhood policy will be reflected in the way it tackles the unfolding Sri Lankan crisis.

(This was first published in National Herald on Sunday)