In September 2024, when Anura Kumara Dissanayake (AKD) was elected as the 9th Executive President of Sri Lanka, the populace was expecting broad political reforms and a swift road to economic recovery. Given the economic and political setting, the new Government had no option but to be pragmatic and balance its relations with India and China. Both countries are crucial for its IMF debt restructuring and enable speedy economic recovery. Five months into power, AKD’s Sri Lanka is witnessing a new phase of competition between both countries in the form of grants and investments, and balancing is becoming difficult. The recent visit to China has offered some clarity to his foreign policy, but is raising some concerns in India.
A new phase unfolds: Investments and Grants
The new regime’s relations with India have come a long way from the historical and ideological animosity. Indian External Affairs Minister (EAM) – S. Jaishankar was the first high-level foreign dignitary to visit Sri Lanka after the elections. The visit was reciprocated by President AKD visiting India for his first State visit. Similarly, China was one of the first countries to congratulate the new regime and the second destination of State visit for AKD. These engagements and interactions have often revolved around offering more investments and grants – underscoring a common tactic that India and China have embraced with Sri Lanka following the economic crisis.
China was one of the first countries to congratulate the new regime and the second destination of State visit for AKD.
With AKD, India has continued to build upon its US Dollar ($) 4 billion assistance. While the former assistance was in the form of grants, reliefs, loans, and credit lines, it has now begun to focus on investment-led growth, connectivity, and grant assistance. For instance, India will be implementing 33 development projects focussing on education, health, agriculture, fisheries, in Trincomalee, worth around $ 27 million. In recent years, India has offered grant assistance worth $ 391 million to Sri Lanka, of which nearly $ 211 million is allocated for ongoing projects, and the rest $ 180 million is in the pipeline. India has also converted over $ 100 million of its loans/ credit lines to grants. Since September 2024, India has committed or re-committed grants of over $ 2 million to modernise education infrastructure, $ 62 million for the Jaffna port, $ 14.9 million to undertake a signaling system for Sri Lankan railways, $ 1 million each for vehicle requirements of Sri Lanka Police and to rehabilitate a boatyard in Northern Province. India is also handing over 20 used locomotive engines.
China has focussed on debt restructuring, grants, and investments rather than offering new loans. China continued with its previous negotiations and reached a final agreement with the new Government, agreeing to restructure commercial loans worth $ 2.5 billion. Besides, China offered emergency and humanitarian assistance worth $ 1 million during the recent floods. It is also keen on developing the Hambantota region, investing $ 25 million in Comfort Mattress Lanka and over $ 41 million in crane technology. It has also offered grants in the form of school uniform materials. China has also closely cooperated with Sri Lanka in investigating and cracking down on Chinese cybercriminals in the country.
Visits to India and China
Given the benefits, AKD has continued to balance both the major powers. Sri Lanka’s joint statements with Delhi and Beijing reflect similar wide-ranging and holistic themes. He promised both countries to bolster bilateral relations and intensify political, Parliamentary, and leadership exchanges. He is also keen on increasing trade, domestic production of agriculture and dairy, air connectivity, tourism, training programmes, digital public infrastructure and digitalisation and capacity-building programmes with both countries.
On energy connectivity, the new Government has agreed to cooperate with India on power grid interconnection, LNG supply, multi-product pipeline, wind power projects, Sampur solar project, and the Trincomalee oil tank farm.
AKD’s visit to India seems to have offered more assurances and direction for bilateral relations. On energy connectivity, the new Government has agreed to cooperate with India on power grid interconnection, LNG supply, multi-product pipeline, wind power projects, Sampur solar project, and the Trincomalee oil tank farm. These projects are likely to take place in the form of investments, joint ventures (JV), or grants, and are expected to increase energy security and generate foreign reserves. On economic connectivity, both countries agreed to take forward the Economic and Technological Cooperation Agreement (ETCA) and explore the possibilities of trading in local currencies.
Most importantly, India and Sri Lanka discussed defense and security cooperation on non-traditional issues, including trafficking, HADR, and terrorism. India also pledged to support Sri Lanka with capabilities to address maritime challenges, including hydrography. Both countries will also soon conclude a framework for defense cooperation. India sees defence and security cooperation as crucial to push back against increasing Chinese forays and spy vessels in the Indian Ocean Region.
On the other hand, AKD’s recent visit to China offered more investments and relief to Colombo. China agreed to renew the $ 1.5 billion currency swap agreement with Sri Lanka that was signed in 2021. While the visit could garner investments up to $ 10 billion, Sinopec finalised its investment in an oil refinery in Hambantota worth over $ 3.7 billion (previously estimated at $ 4.5 billion). The Chinese Government also offered a grant of $ 69 million for collaboration on media, tourism, and market access for agricultural products. China will also build an exhibition and convention center in Colombo Port City as a grant. Reflecting on China’s push for the ‘small is beautiful’ phase of BRI, where it has shied from investing in mega-infrastructure BRI projects or offering new loans, both countries signed over 15 MoUs related to economy, education, media, and culture.
During the visit, China and Sri Lanka have agreed to continue maritime cooperation, especially on conservation, maritime domain awareness, disaster relief, capacity building, and maritime personnel training, and consult each other regularly. They will also be signing a MoU to foster a blue partnership. Sri Lanka also reiterated its support to the Global Security Initiative, and both sides recognised the need to cooperate on security, law enforcement, and assistance of Police supplies.
Concerns for India
From Delhi’s point of view, AKD’s visit to Beijing indicates that Sri Lanka remains vulnerable to Chinese influence and pressure, which will only increase with its ‘burden-free’ investments and grants. The need for Sri Lanka’s cabinet to clarify its commitment to one-china policy and to reiterate the same during the President's visit underscores this persistent pressure. Colombo also had to pledge that it would not allow its territories for any anti-China activities, including in Tibet and Xinjiang. The assurances for the former seem to be timely as the issue of Dalai Lama's succession gains prominence. Delhi thus anticipates more pressure on Sri Lanka on certain issues like FTA, investments, and research vessels, as Beijing has expressed unhappiness over these issues in the past. Furthermore, concerns of Chinese pressure have only amplified in Delhi with the Maldives implementing the FTA with China earlier this year.
The need for Sri Lanka’s cabinet to clarify its commitment to one-china policy and to reiterate the same during the President's visit underscores this persistent pressure.
For India, a prime concern remains China’s maritime cooperation with Sri Lanka. While the AKD Government assured India that it will not harm Indian security interests, it has decided to amplify maritime partnership with China. Delhi continues to question the need for maritime cooperation with an extra-regional power like China, when it has already pledged to help Colombo with maritime security, including hydrography surveillance and capacity building. Furthermore, with China leveraging its assistance and investments, and the new Government having no policy in place for foreign research vessels, India continues to be concerned.
Finally, India continues to be worried about the politicisation of its projects. For years, India and China have competed to be Sri Lanka’s largest FDI and trade partners. This competition will only intensify with both countries trying to outdo each other in the future. However, considering that Indian projects and connectivity efforts have increased manifold since the economic crisis, they are prone to more politicisation when compared to China. For instance, the land bridge project seems to have taken a back seat under the new Government, and India’s JV to manage Hambantota airport is on the verge of cancellation.
The Government has also backtracked on the privatisation of SOEs where several Indian firms had expressed interest in. The Government is also negotiating tariffs with Sampur and Adani projects. In this case, AKD’s extensive catering to his domestic politics could be perceived as a policy that favours China or is directed against India. China’s grants and investments toeing its preference for the ‘small and beautiful’ phase of BRI projects and ability to make more inroads in Tamil provinces will only amplify Delhi’s concerns.
AKD’s recent visit offers some clarity and concerns for India. With the competition continuing in the form of grants and investments – India continues to be concerned of increasing Chinese inroads and pressures. Five months into power, balancing is becoming increasingly difficult for the AKD Government. The new dispensation will have to precariously walk the tightrope between its domestic politics, and India and China.
This commentary originally appeared in The Morning.
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