Developing Sri Lanka easier with enhanced ties with rapidly growing India

Unfortunately Increasing and strengthening relationships with India, Sri Lanka's closest neighbour and the main partner in helping deal with the economic crisis, which is rapidly growing at a rate of 7.2% would be beneficial to Sri Lanka on several levels especially in terms of developing the country faster.

India has stood by Sri Lanka throughout the history and played an active and a key role during the economic crisis it is going through by providing financial aid, credit facilities and taking lead in international fora on behalf of Sri Lanka to help secure financial assistance from the international organisations.

India has traditionally been among Sri Lanka’s largest trade partners and Sri Lanka remains among the largest trade partners of India.

In addition to being Sri Lanka’s largest trade partner, India is also one of the largest contributors to Foreign Direct Investment in Sri Lanka. According to the Central bank of Sri Lanka, the total FDI from India so far exceeds US$ 2.2 billion. In 2021, India was the largest source of FDI which amounted to US$ 142 million.

The main investments from India continued to be in the areas of petroleum retail, tourism and hotels, manufacturing, real estate, telecommunications, and banking and financial services.

Apart from helping its ailing neighbour on a large scale, India has simultaneously achieved an unprecedented economic growth. India remains one of the fastest growing emerging economies, especially with China's recovery stumbling.

The Indian economy, which is the third-largest economy in Asia, grew at a rate of 6.1 per cent in the final quarter of the previous fiscal year of 2022, likely pushing the overall growth rate to 7.2 per cent for 2023.

The Gross Value Added (GVA) growth in the manufacturing sector accelerated to 4.5 per cent in the March quarter as against 0.6 per cent a year ago.

GVA growth in the mining sector was 4.3 per cent in the fourth quarter compared to 2.3 per cent in the same quarter of the previous fiscal. The construction sector grew 10.4 per cent in the March quarter, up from 4.9 per cent in the corresponding period of 2021-22. The agriculture sector growth accelerated to 5.5 per cent from 4.1 per cent.

The Indian government expects growth could remain around 6.5% in the current fiscal year, despite risks emerging from a global slowdown.

“Despite the global slowdown, India’s economic growth rate is stronger than in many peer economies and reflects relatively robust domestic consumption and lesser dependence on global demand,” said ADB Country Director for India Takeo Konishi.

“The Government of India’s strong infrastructure push under the Prime Minister’s Gati Shakti (National Master Plan for Multimodal Connectivity) initiative, logistics development, and industrial corridor development will contribute significantly to raising industrial competitiveness and boosting future growth,” he said.

Sri Lankan exports to India have increased substantially since 2000 when Indo-Sri Lanka Free Trade Agreement (ISFTA) came into force and more than 60% of Sri Lanka’s total exports to India over the past few years have used the ISFTA benefits.

Apart from the growth in trade and investment, India has been the largest source market of tourists visiting Sri Lanka. Tourism related travel between the two countries has strengthened after the initial impact of the COVID-19 pandemic.

The conclusion of the Air bubble Agreement between India and Sri Lanka in April 2021 helped facilitate movement between two countries. Out of a total of 1,94,495 tourist arrivals to Sri Lanka in 2021, 56,268 were from India (about 29%). In 2022, a total of 719,978 international tourists visited Sri Lanka. Out of which, 123,004 tourists (17.1%) were from India making it the largest contributor of tourism to Sri Lanka.

Meanwhile, on May 30, India extended its USD 1 billion credit line to Sri Lanka by another year to help the country procure much-needed food, medicine and other essential items.

Altogether, India extended multi-pronged assistance of about USD 4 billion to Sri Lanka last year, through multiple credit lines and currency support, in line with India’s ‘Neighbourhood First’ policy.

Most recently, India and Sri Lanka stepped up their talks to proceed with trade in Indian Rupee as New Delhi and Colombo look set to expand their bilateral cooperation in "power and energy sector as well as aspects relating to Rupee trade".

Several banks in Sri Lanka have opened special rupee trading accounts, called Vostro accounts. This means that Sri Lankan citizens can now hold $10,000 (₹8,26,823) in physical form and for transactions with their Indian counterparts, they can use Indian rupees instead of US dollars.

Designating Indian Rupee as a legal currency in Sri Lanka has provided Sri Lanka the much-needed liquidity support to help tide over its economic crisis amid inadequate availability of the US dollar.

Meanwhile, India's finance ministry has asked the Indian Banks’ Association (IBA) and the Federation of Indian Export Organisations (FIEO) to proceed with an awareness campaign to sensitise stakeholders about the rupee trade.

Therefore, proactively interacting with India and finding innovative ways to integrate with India which has become the world’s fifth largest economy overtaking the UK, wouqld unarguably help develop Sri Lanka faster.