Last year, Sri Lanka faced its worst economic crisis in over 70 years, leading to riots, shortages, and domestic strife.
The crisis was aggravated by significant foreign debt owed to Chinese creditors due to heavy borrowing during the civil war.
China had been increasing its influence on the island nation, challenging India’s traditional sphere of influence in the region.
Chinese loans and investments, such as the 99-year lease of the Hambantota Port, raised concerns about Colombo’s vulnerability to aggressive Chinese creditors.
Amidst the turmoil, India recognized an opportunity to strengthen its ties with Sri Lanka strategically.
Instead of focusing on issues beyond its control, India offered economic assistance to its neighbor, showcasing itself as a reliable and trustworthy development partner.
India’s timing proved crucial.
Just before Sri Lanka’s President, Gotabaya Rajapaksa, was forced to flee the country, India’s Foreign Secretary, Vinay Kwatra, visited Colombo, reaffirming India’s commitment to support its economy and people.
India provided significant aid and financial assistance, earning the trust of the Sri Lankan public.
This economic diplomacy transformed bilateral ties between India and Sri Lanka.
India disbursed US$4 billion in aid and extended a US$1 billion credit line, enabling Sri Lanka to pay for essential imports despite limited cash flow and reserves.
India also supported Sri Lanka’s application for debt restructuring at the IMF.
Furthermore, both countries laid the groundwork for closer economic ties during President Wickremesinghe’s visit to India.
The focus was on logistics, energy, and tourism, encouraging investment from India’s private sector and joint ventures with Sri Lankan companies.
Proposals for an oil pipeline and power grid connection could provide Sri Lanka with cheaper fuel and reliable electricity.
To truly integrate bilateral trade, three other business-oriented alignments were proposed.
Integrating Sri Lanka into India’s supply chain framework, promoting bilateral foreign direct investment flows, and resuming talks on the Economic and Technology Co-operation Agreement were essential steps.
Improved central bank cooperation and enhanced IMF capacity building were also highlighted as critical to regional stability.
India’s economic diplomacy successfully outmaneuvered China’s influence in Sri Lanka.
By earning confidence and trust through economic support, India positioned itself for long-term strategic investments to further erode China’s influence in the region.
As both countries realize the benefits of trade facilitation, closer business-to-business ties may pave the way for prosperity and growth in the Indian Ocean region.