-
CENTRES
Progammes & Centres
Location
What began as emergency financial assistance during the economic crisis has evolved into a more dynamic partnership encompassing digital payments, banking linkages, and digital infrastructure
In 2022, when Sri Lanka descended into its worst economic crisis since independence, India’s response marked not just an emergency intervention but the beginning of a new phase in bilateral economic relations. What began with unprecedented flows of financial assistance has since evolved into digital and financial collaborations that are shaping a new phase of partnership.
The magnitude of Sri Lanka’s 2022 economic collapse was unprecedented. Foreign exchange reserves plummeted to just US$2.36 billion by the end of January 2022, barely enough to cover a month of imports. Inflation spiralled to over 50 percent, and in April 2022, Sri Lanka defaulted on its US$51 billion external debt for the first time in its history. As fuel shortages and electricity cuts paralysed the nation and food prices skyrocketed, India emerged as a vital source of financing support.
India’s support package was extraordinary in both scale and speed, totalling approximately US$4 billion in emergency assistance during 2022. This included a US$400 million currency swap through the Reserve Bank of India’s SAARC swap facility (extended in April 2022), a deferral of around US$510 million of accumulated trade liabilities in the Asian Clearing Union (ACU) a US$500 million credit line for petroleum products, a further US$1 billion credit line for essential commodities including food and medicines (via the State Bank of India), and a US$55 million credit line for fertilizer imports (via India’s Exim Bank).
As fuel shortages and electricity cuts paralysed the nation and food prices skyrocketed, India emerged as a vital source of financing support.
This financial support served immediate socio-economic needs and positioned India as a vital player in Sri Lanka’s economic stabilisation and debt restructuring pathway. Indian External Affairs Minister S. Jaishankar went to the extent of remarking in January 2023 that what India did for Sri Lanka was “bigger than what the IMF has done”, and “India did not wait for other bilateral partners”. In fact, India was the first country to extend bilateral financing assurances aligned with IMF programme requirements in January 2023, cementing its role as co-chair of the Official Creditors’ Committee overseeing Sri Lanka’s debt restructuring (along with Japan and France).
India also showed flexibility in its funding relationship with Sri Lanka, converting US$100 million of debt into grants, bringing total grant assistance to US$780 million. During Jaishankar’s October 2024 visit, India announced the conversion of US$20 million in completed Line of Credit projects into grants.
Notably, however, India-Sri Lanka relations have swiftly evolved beyond this phase, and into a new phase characterised by a focus on digital and financial integration.
Perhaps the most visible symbol of this new phase came in February 2024, when Prime Minister Narendra Modi and Sri Lankan President Ranil Wickremesinghe launched India’s Unified Payments Interface (UPI) services in Sri Lanka. This landmark initiative represented more than just a technical integration—it signalled a wider commitment toward smoother digital financial connectivity between the two countries, and strengthening people-to-people connectivity as well.
India-Sri Lanka relations have swiftly evolved beyond this phase, and into a new phase characterised by a focus on digital and financial integration.
By October 2023, successful integration tests were conducted, with demonstrations of scanning LANKAQR codes using Indian payment apps like PhonePe.
For the over 400,000 Indian tourists who visit Sri Lanka annually, UPI-based payment provides a familiar and convenient payment method that eliminates currency exchange hassles and transaction fees. This convenience helps boost tourism spending and provides an added incentive for Indian visitors to choose to visit Sri Lanka. At a recent India-Sri Lanka tourism partnership event in Colombo, the Chief Operating Officer of Paytm remarked that fintech connectivity (coupled with the high frequency of flight connectivity and availability of visa-on-arrival) can make Sri Lanka “the most frictionless destination for Indian tourists”, and called on the two countries to “build the most seamless travel corridor in the region”.
The UPI-LankaPay integration has also exemplified India’s growing role in promoting its digital public infrastructure expertise in South Asia.
Building on the success of UPI integration, India and Sri Lanka agreed to a comprehensive Digital Public Infrastructure (DPI) partnership during President Anura Kumara Dissanayake’s December 2024 visit to India - his first foreign trip after assuming office. Mentions of bilateral collaboration on unique digital identity, digital payments, and broader digital economy projects featured prominently in the joint statement issued at the end of the visit. In New Delhi, President Dissanayake also addressed business leaders in the IT sector and the startup ecosystem at the India-Sri Lanka Business Forum.
The centrepiece of the DPI collaboration is the Sri Lanka Unique Digital Identity (SLUDI) project, for which India has provided grant assistance of INR 450 crore (approximately US$50 million). It aims to create a foundational digital identity system similar to India’s Aadhaar program, which has enrolled over a billion Indians and transformed service delivery and financial inclusion. The SLUDI system is expected to enable Sri Lankans to access government services, but has raised privacy concerns both among the public as well as among some government bodies. Notably, the Department of Registration of Persons of Sri Lanka has submitted a dossier of twenty-two concerns to the Digital Ministry, primarily regarding the role of a foreign entity in the development, implementation and maintenance of the SLUDI system (the so-called ‘Master Systems Integrator’ role).
The SLUDI system is expected to enable Sri Lankans to access government services, but has raised privacy concerns both among the public as well as among some government bodies.
Related concerns have arisen as India is exporting its tech stack, especially its Aadhaar-based model, as a development accelerator across Asia, Africa and Latin America. These systems carry with them unresolved tensions from India’s own experience, including continuing debates on privacy, data security, function creep and the voluntary nature of digital identity. When such systems are introduced in countries with weak legal and institutional safeguards, these vulnerabilities can become more pronounced. The imbalance in digital capacity and governance readiness between India and its partners may also risk amplifying the very governance challenges that DPI aims to solve.
The DPI collaboration seems to extend beyond the digital identity project. India has committed to training 1,500 Sri Lankan civil servants in e-governance and digital transformation, sharing expertise in systems, including the Government e-Marketplace and the ‘PM Gati Shakti’ platform. A Joint Working Group has been established to explore the implementation of India’s complete DPI stack in Sri Lanka, including the potential adoption of the DigiLocker document management system in the Government.
The growing bilateral collaboration on the digital transformation agenda represents a distinct evolution in the two countries’ G2G relationship, from the usual development grants-based partnership.
India is also pursuing its INR internationalisation agenda with Sri Lanka. Earlier this year, Sri Lankan and Indian authorities held discussions on increasing trade settlement in the respective local currencies - INR and LKR. At a stakeholder roundtable at that time, senior RBI officials presented to a Sri Lankan banking and corporate sector audience what the overall RBI reforms around this were, and the ‘INR internationalisation’ efforts underway. Already, by late 2022, the Central Bank of Sri Lanka designated the INR as a ‘designated foreign currency’ (with the concurrence of the RBI), facilitating easier banking transactions and reducing costs for small-scale traders. At least six Sri Lankan banks have established Nostro accounts in INR, facilitating easier trade finance transactions with their Indian counterparties. During 2024 and 2025, Sri Lankan banks started lending their excess foreign currency liquidity to Indian banks (like SBI) and companies. Some banks are also looking at raising capital from India by issuing INR-denominated debt instruments and listing these bonds on international exchanges with the support of GIFT City (Gujarat International Finance Tec-City).
Sri Lankan and Indian authorities held discussions on increasing trade settlement in the respective local currencies - INR and LKR.
This growing trade finance integration can support greater bilateral trade. Despite the crisis and the economic slowdown, bilateral trade between India and Sri Lanka has been resilient. India maintained its position as Sri Lanka’s largest trading partner, with bilateral merchandise trade surpassing US$5.5 billion in 2023-24, with India exporting US$ 4.1 billion worth of goods and Sri Lanka exporting US$ 1.42 billion.
Even as the India-Sri Lanka Free Trade Agreement (ISFTA) on trade in goods has been in force for a quarter of a century, efforts to deepen the agreement to cover services and investment have faltered. It has been 22 years since the launch of the Joint Study on an India-Sri Lanka Comprehensive Economic Partnership Agreement (CEPA) in October 2003, where an eminent group of experts from both sides charted a path towards a deeper and more comprehensive partnership. Although negotiations on a CEPA commenced, they collapsed under the weight of narrow-interest lobbying by parts of the Sri Lankan private sector, and a lack of political conviction by successive Sri Lankan administrations. The Sirisena-Wickremasinghe administration revived these efforts in 2015-16 and launched talks on an Economic and Technology Cooperation Agreement (ETCA)—the CEPA’s re-branded avatar, but similarly going beyond trade in goods, to cover services, investment, and economic cooperation.
Signing a comprehensive bilateral agreement can anchor and accelerate the already steadily expanding bilateral ties in sectors like services, investment, finance, and technology.
The ETCA talks have spanned three administrations and 14 rounds of negotiations (with the last being in July 2024). During previous rounds, meaningful gains were made on reducing non-tariff barriers, for instance, mutual recognition of standards and accreditation of labs in 2018. Yet, a full and final agreement has been elusive.
Unlike in earlier periods, when there was considerable stakeholder opposition to the ETCA, arguably, the conditions are somewhat different now. Sri Lanka’s economic crisis and global trade tensions have softened the stance of the country’s private sector, and made more apparent the need for strengthening non-Western economic partnerships. Signing a comprehensive bilateral agreement can anchor and accelerate the already steadily expanding bilateral ties in sectors like services, investment, finance, and technology.
Despite the lack of a trade agreement, investment and commercial ties between the private sectors of the two countries have been growing. Some of India’s largest corporations have invested in the country in recent years, from port terminals and automobiles to leisure and IT services. Leading Indian conglomerate The Mahindra Group forged a partnership with local corporate Ideal Motors to establish a vehicle assembly plant (Mahindra Ideal Motors), and invested in a non-bank financial services firm (Mahindra Ideal Finance). Leading Indian corporate ITC ventured into their first overseas hotel investment in Colombo, at a prominent oceanfront location. Indian IT services giant HCL Technologies set up a delivery centre in Sri Lanka, and - controversially - even received ‘Strategic Development Project’ status. Venture capital funding has also seen linkages, with collaborations between the Lankan Angel Network and Indian Angel Network, and some Indian investors taking equity stakes in Sri Lankan tech startups.
Some of India’s largest corporations have invested in the country in recent years, from port terminals and automobiles to leisure and IT services.
Business-to-business connectivity has also remained consistent, with the two largest chambers in India (CII and FICCI) and the Ceylon Chamber of Commerce in Sri Lanka engaging regularly, in addition to platforms like the India-Sri Lanka Business Council and the Indian CEO Forum in Colombo. Recently, CII and CCC held a ‘CEO Roundtable’ in Colombo to strengthen business ties. A newly formed business grouping - Lanka India Business Association (LIBA) - is working to promote Lankan businesses in India through strategic advisory and practical guidance.
Some business associations that were hitherto notoriously hostile towards India have begun softening their tone and shown interest in engaging. Most notable has been the business grouping called the Chamber of Young Lankan Entrepreneurs (COYLE), whose leadership have previously vehemently opposed deeper economic integration with India, and strongly criticised the ETCA (and its predecessor, the CEPA), but now appears to recognise the need to forge bilateral economic ties, including with India. In 2024, the group had a closed-door meeting with the Indian High Commissioner.
The evolution of India-Sri Lanka bilateral economic relations from 2022 to 2025 is an interesting case in South Asian cooperation, under India’s ‘Neighbourhood First’ policy approach. What began as emergency financial assistance during the debilitating economic crisis has evolved into a more dynamic partnership encompassing digital payments, banking linkages, and digital infrastructure. Despite the delays in concluding a comprehensive trade and economic agreement, commercial ties appear to be growing. This evolution perhaps exemplifies that in the 21st century, digital connectivity and financial integration can be as important as traditional trade and investment flows in forging closer bilateral economic ties.
The evolution of India-Sri Lanka bilateral economic relations from 2022 to 2025 is an interesting case in South Asian cooperation, under India’s ‘Neighbourhood First’ policy approach.
Political dynamics also matter. Sri Lanka’s September 2024 presidential election brought Anura Kumara Dissanayake to power, leading a coalition with different ideological orientations from those of previous governments. However, the joint statements issued during his first visit to India (in December 2024) showed little departure from those of the statements of the administration he replaced, suggesting continuity in the partnership agenda and recognising India’s important role in Sri Lanka’s economic prospects. The digital and financial integration now underway creates institutional and commercial linkages and technical and economic interdependencies that are hard to pull away from and are likely to outlast political shifts.
Anushka Wijesinha is an Economist based in Colombo and is the Director of the public policy think tank Centre for a Smart Future (CSF).
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Anushka Wijesinha is an Economist based in Colombo and is Director of public policy think tank Centre for a Smart Future (CSF). He is also ...
Read More +
PREV
