The Pulse

India and China’s Tug of War Over Sri Lanka

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The Pulse

India and China’s Tug of War Over Sri Lanka

India sets out to check China’s efforts to turn the island into a maritime hub on its “Belt and Road.”

India and China’s Tug of War Over Sri Lanka
Credit: Flickr/ Narendra Modi

Unnerved by growing Chinese influence in Sri Lanka, India is seeking to strengthen ties with the Colombo government through economic cooperation as the Indian Ocean island nation assumes increasing importance as a regional trading hub in one of the world’s busiest sea lanes.

In the past few weeks, India’s Prime Minister Narendra Modi has met his Sri Lankan counterpart Ranil Wickremesinghe in New Delhi and, more recently, in Colombo. In India’s capital, they sought to consolidate a growing economic partnership, signing a memorandum of understanding on future cooperation, which provides a framework for Indian investment in infrastructure projects on the island. Modi’s subsequent visit to Colombo, the second since he became premier in 2014, reflected what New Delhi officials have described as “qualitative transformation” in bilateral ties. They hope the upturn in relations will help to loosen Beijing’s hold on their southern neighbor.

In recent years, Beijing has invested heavily in Sri Lanka’s infrastructure as part of its “string of pearls” policy aimed at establishing a naval presence across South Asia by building ports and other facilities in friendly countries – including Pakistan, Bangladesh, and Myanmar. The expansion is part of its “One Belt, One Road” (OBOR) project, a new trade route linking China with the West, underpinned by billions of dollars of infrastructure investment.

India has been looking on nervously, concerned that China is encroaching on its sphere of influence and eroding its commercial and cultural links with the island, some of whose Tamil minority are descendants of colonial-era indentured workers from the southern Indian state of Tamil Nadu. Sri Lanka’s current President Maithripala Sirisena has sought to rebalance relations with the competing regional powers, reaching out to New Delhi with Modi keen to reciprocate.

Under Sirisena’s predecessor, Mahinda Rajapaksa, Sri Lanka looked to China for economic and diplomatic backing at a time when the West was threatening to sanction Colombo for crimes committed in its conflict with Tamil separatists. China is the largest investor in Sri Lanka, having spent hundreds of millions of dollars repairing war-damaged infrastructure and developing new projects following the end of the civil war in 2009. With Western investors keeping their distance because of the country’s poor human rights record, Beijing was only too willing to further its own economic interests on the island, which has dovetailed with Colombo’s ambition to become an important regional hub.

Chinese funds have been channeled into roads, airports, and sea ports, the two highest profile initiatives being the Hambantota Port Development and the Colombo Port Project. Yet the influx of capital has not been without controversy. The commercial value of some of the infrastructure projects has been questioned, while Chinese loans – with which much of the investment has been financed – have contributed to the country’s huge national debt of $64 billion, or 76 percent of GDP. After coming to power, Sirisena suspended projects that he said were badly priced and financed on onerous terms. But eventually, with the country’s economic crisis worsening, he allowed them to go ahead.

Sirisena asked China to resume work at the $1.4 billion Colombo Port Project in October, although a deal to increase the commercial viability of the loss-making Hambantota facility and also help Sri Lanka generate much needed funds has been held up. Colombo is offering China an 80 percent stake in the port on a 99-year lease for $1.12 billion.

Negotiations have reportedly been stalled due to a dispute about plans for an adjoining 15,000-acre Chinese industrial zone, which has been opposed by locals who fear they will be evicted from their land. In January protesters clashed with the police at the proposed site in the country’s first violent display of opposition to Chinese investment. Trade unions, meanwhile, are unhappy with the size of the Chinese stake in the port and the length of the lease period. The government is under pressure to resolve these issues as China, which has so far spent $1.7 billion on the port and a nearby airport, has said it will invest $5 billion to develop the area over next few years and create 100,000 jobs if “everything goes well.”

Notwithstanding Sri Lankan reservations over Chinese investment, Colombo is keen to keep China on board. Wickremesinghe attended a major OBOR summit in Beijing this month and aims to finalize a free trade agreement (FTA) with China this year. But, as the recent talks with Modi highlight, Sirisena also wants to bolster relations with India, which came under significant strain in the Rajapaksa era. This month, Sri Lanka turned down a request by China to allow one of its submarines to dock in Colombo, concerned that this might alarm its neighbor.

India’s importance to Sri Lanka is beyond question: it is the island’s largest trading partner and has provided over $2.5 billion worth of development assistance. Over 70 percent of the cargo handled in Colombo port is transhipment cargo to and from India. The two countries are keen to upgrade their existing FTA by signing a new trade pact called the Economic and Technology Cooperation Agreement (ETCA), which would enhance commercial ties between Sri Lanka and India’s fast-growing southern states.

As with certain Chinese investments, some Sri Lankans are nervous about India’s economic overtures. There have been protests against the ETCA over fears that the country would lose out to Indian businesses. Criticism has also been leveled at India’s flagship planned investment in the region, the joint development of colonial-era oil storage tanks in the northern port of Trincomalee. Opponents argue that the government is selling off state assets to India.

For India, Trincomalee and other planned investments – which include power plants, railway line upgrades, and the creation of special economic zones – have a strong strategic value. New Delhi appears to be determined to check China’s geopolitical ambitions in South Asia. Developing a bigger economic footprint in Sri Lanka is central to this aim. Colombo clearly sees benefit from cultivating ties with both countries as a means of transforming the island into a regional commercial hub. But the government may find it hard to strike a balance between the competing interests of China and India, while fending off domestic concerns over economic colonization.

Yigal Chazan is an Associate at Alaco, a London-based business intelligence consultancy.