Context

India and Sri Lanka agreed to a four-pronged approach to discuss initiatives on food and energy security to help mitigate Sri Lanka’s economic crisis.

About

What is the Four-pillar initiative?

• The decisions included a four-pillar initiative, comprising
  • Line of credit: lines of credit forfood, medicines and fuel purchases granted by India
  • Currency swap agreement: a currency swap agreement to deal with Sri lanka’s balance of payment issues
  • Modernization of Trinco oil farms: an “early” modernisation project of the Trinco oil farms that India has been pursuing for several years
  • Facilitating Indian Investment: a Sri Lankan commitment to facilitate Indian investments in various sectors

Background

• In September 2021, Sri Lanka’s government declared an economic emergency  amid rising food prices, a depreciating currency, and rapidly depleting forex reserves.

What are the reasons behind Sri-Lanka’s troubled economy?

• Debt sustainability, or the lack thereof

Debt sustainability, according to the International Monetary Fund, refers to the government’s capacity to meet its current and future debt obligations without exceptional financial assistance or defaulting on its obligations.

• Affected tourism industry
• Dropped forex reserve
• Risen cost of imported goods
• Rise in food price
• Depreciation of currency
• Reduced agricultural production
• Food crisis
• Other factors
  • Corruption
  • Ad hoc-ism and overnight decisions
  • Miscommunication

Mapping India-Sri Lanka’s relations

• India and Sri Lanka have enjoyed a cordial and relatively stable relationship since their independence.
• In the post-Liberation Tigers of Tamil Eelam (LTTE) era, the neighbours align over key security and economic objectives, which includes
  • maintaining freedom of navigation in the Indian Ocean region
  • combating the threat of terrorism
  • working together towards a more prosperous South Asian neighbourhood
• Yet the relationship is in need of a fresh impetus.
• Over the years, Sri Lanka has drifted towards China for economic support and views her as a more reliable partner in enabling domestic economic development.
• This has generated concern in New Delhi over the state of the bilateral relationship between the two countries, which views Beijing’s proximity to its neighbours as undermining India’s influence in the island nation.

Recent developments between India and Sri Lanka Ties between New Delhi and Colombo were hit earlier this year when Sri Lanka scrapped a 2019 deal with India and Japan to operate the East Container Terminal at the Colombo port, angering both countries. In October, state-owned Sri Lanka Ports Authority (SLPA) inked a deal with India’s Adani Group to develop and run the Colombo port’s West Container Terminal. Adani Group and its local partner John Keells Holdings will jointly have an 85% stake in the West Container Terminal, giving India a much-needed strategic presence at the Colombo port, where almost 70% of operations involve shipments bound for India.