Implications of India – Sri Lanka connectivity

By Neville Ladduwahetty

During President Ranil Wickremesinghe’s India visit in July 2023, five Memorandums of Understanding (MOU) were signed by India and Sri Lanka to establish physical connections between the two countries. This was followed more recently by the launch of the Unified Payments Interface (UPI) – a mechanism that claims to reduce the cost of financial transactions between the two countries. It is now reported that India is exploring the possibility of Indian Rupee investments in Sri Lanka (Ceylon Today, February 28, 2024).

IMPACT of UNIFIED PAYMENT INITIATIVE (UPI)

It is reported that during the course of an interview with WION’s diplomatic correspondent, a State Minister is reported to have stated: “The UPI is beneficial to both countries. If you look at the events in Sri Lanka and what took place one and a half years ago, it mainly started out as a foreign exchange crisis, mainly a lack of dollars. So, we have to ensure that our dollar dependency is reduced. Now for example, our biggest tourist market is India and if we can collect the tourist remittances from India and we import about $ 5.5 billion worth of goods from India and we use those … pay in Indian rupees for the Indian imports, then we will reduce our dollar dependence. And it also becomes very flexible and very easy for the Indians to travel to Sri Lanka and then they pay in Indian rupees”. (Sunday Island, February 25, 2024).

COMMENT

Out of a total of 1.48 million tourists who arrived in 2023, the number from Indian tourists amounted to only 302844. This represents 20 % of the total. The revenue from tourism for the year 2023 was USD 2.1 billion. Therefore, on an average, earnings from Indian tourists would be 20% of USD 2.1 billion. This amounts to USD 420000. This represents only 7.6 % of the USD 5.5 billion needed for imports from India, meaning that Sri Lanka would need to acquire an additional Indian rupee equivalent of USD 5.08 billion to meet the cost of imports (ECONOMYNEXT, January 1, 2024 & January 5, 2024).

The net effect of this is that Indian rupees earned from Indian tourists would not be able to even make a dent to pay for imports even though tourist arrivals in 2023 were double the number in 2022. Under the circumstances, even if the number of Indian tourists were to significantly increase further, the benefits to India under UPI would far outweigh benefits to Sri Lanka because Sri Lanka would still have to find nearly 92% of the USD 5.5 billion needed for imports from India.

IMPACT of INDIAN RUPEE INVESTMENTS

It is reported that the Indian government is actively exploring the possibility of facilitating Indian Rupee investments for Indian Companies in Sri Lanka. The report states:

“In the fiscal year 2023, the Reserve Bank of India (RBI)granted permission for international trade for invoicing and payments to be conducted in Indian Rupees. This move allowed for exports and imports to be denominated and invoiced in Rupees, with trade transactions settled in the currency. The RBI’s decision aims to stimulate global trade growth, particularly Indian exports, while also working towards the internationalization of the Indian Rupee” (Ceylon Today, February 28, 2024).

“Last year, Sri Lanka officially recognized the Indian Rupee as a designated currency, ending trade settlements between the two countries to be conducted in Rupees” (Ibid).

“Currently, Indian Investors typically engage in investments in Sri Lanka using international currencies like the US Dollar, which involves additional complexities and conversion costs. The transition to Rupee investments is expected to streamline market entry for Indian companies, with the Ministry of External Affairs reportedly advocating for this transition” (Ibid).

The report finally states: “The push for Rupee investments aligns with India’s broader vision to elevate its currency to the status of hard currency in the future, potentially leading to inclusion in the IMF’s SDR basket and bolstering its foreign exchange reserves. This move is anticipated to benefit Indian firms with significant investments in Sri Lanka, such as the Adani Group’s development projects in the country’s port and power sector” (Ibid).

COMMENT

When Sri Lanka calls for competitive bids for Projects it is understood that bids would be based on international currencies so that all bids are evaluated on a level playing field. If Indian investors such as Adani or any other, are given a special privilege and permitted to submit proposals based on Indian Rupees which is still not recognised as an internationally recognised currency, it would amount to an act of discrimination. Furthermore, it would amount to an unsolicited offer that puts other bidders at a disadvantage.

In addition, any Dollar inflows into Sri Lanka would add to the reserves of Sri Lanka and could be used for debt payments. On the other hand, any Indian Rupee inflows, even if considered to be part of Sri Lanka’s reserves, would serve little or no purpose for international transactions.

Therefore, if Sri Lanka fails to recognize these implications and caves under Indian pressure to recognise Indian Rupees for investments in Sri Lanka for the sake of connectivity, it would be a grave injustice to the sovereign rights and independence of the People of Sri Lanka with consequences not only to Sri Lanka’s relations with other countries, but also the start of an ever widening process for India to financially colonise Sri Lanka.

PHYSICAL CONNECTIVITY

Of the five MOUs signed in July 2023 between the President of Sri Lanka and Prime Minister of India, those relating to establishing physical connectivity are:

(1) Establishing a multi-product pipeline; (2) Establishing a high capacity power grid (3); Establishing a road connection between the two countries to develop access to ports of Trincomalee and Colombo. While connectivity in respect of energy has benefits during times of relative peace, there is no denying that it exposes Sri Lanka and its People to vulnerabilities at times of geopolitical tensions.

Establishing physical connections in respect of a pipeline for petroleum products and a power grid between India and Sri Lanka could be disrupted at any time as experienced by Europe. For instance, the pipelines that had delivered natural gas and petroleum products from Russia were sabotaged through a series of clandestine bombings that resulted in subsequent underwater gas leaks on the Nord Stream 1 and Nord Stream 2. Following the sabotage, “the European Commission has unveiled an ambitious and far-reaching plan, aptly coined “REPower EU”, to achieve full energy independence from Russia by 2027″ (euronews). Earlier, the pipeline had delivered 45% of natural gas from Russia to Europe; a dependence that the US had perceived as being hostage to Russia”.

Having learnt the cost of dependence for its energy needs, Europe is now scrambling to become independent. Sri Lanka on the other hand, is opting for the opposite for its energy needs because an underwater multi-product pipeline and a power grid connection from India to Sri Lanka would amount not only to dependence but also to vulnerabilities similar to what Europe experienced. Furthermore, it would give India opportunities to exercise control over Sri Lankan strategic interests and internal affairs in respect to India’s geostrategic interests.

Although access to ports of Trincomalee and Colombo through a land bridge connecting India and Sri Lanka is reported to have been initiated by Sri Lanka, it is pertinent to revisit its practicality in the light of India’s future development plans. Currently, the majority of exports from the West Coast of India are containerised and have ready access to Colombo by sea. In contrast, containerized exports from the East Coast are limited mainly to Chennai in the East Coast. The rest is mainly bulk cargo. Therefore, the need for access to Colombo and Trincomalee must be considered from the context presented in the ADB Report cited below.

According to an ADB South Asia Working Paper, India is seriously considering the “Development of its East Coast Economic Corridor (ECEC) and Vizag – Chennai Industrial Corridor (VCIC): Critical Issues of Connectivity and Logistics” (2017).

Its Introduction states: “ECEC is an example of an integrated economic development initiative. The key idea behind the corridor is port-based industrial development along the eastern coastal belt of India, in alignment with the goals of the Sagarmala initiative and integration of India’s industrial clusters with value chains extending to Southeast Asia and East Asia”

Paragraph 27 states: “While textiles and automobiles and automotive part require containerized solutions, these industries are clustered around Chennai, which is the only port in ECEC that handles a significant number of containers. The logical outcome of such an industrial orientation is that, with the exception of Chennai and Kattupali, the main focus of ECEC ports is break-bulk and raw materials such as petroleum, oil and lubricant, coal, iron ore, fertiliser and agricultural raw materials”.

Paragraph 29 states: “The VCIC final report predicts an expansion in industrial output of approximately 3.to 7.5times over the next 25 years under different scenarios. Such expansion will create significant additional demand for containerized cargo solutions in the corridor’s ports …” (ibid).

COMMENT

Even with projected expansion of containerised cargo from the VCIC in the East Coast of India, since sea transport by feeder ships is cheaper than road transport, the tendency would to be seek access to Hambantota as at present and to Trincomalee in the future, thus making a bridge across the Palk Strait a ridiculous symbol of connectivity other than for human traffic with all its attendant threats arising from drug trafficking and other hazards associated with human activity.

CONCLUSION

The President of Sri Lanka, political leaders and now the leaders of the JVP/NPP have, whenever the opportunity presented itself, consistently assured India that Sri Lanka would not undertake any measures that would threaten India’s security. On the other hand, the clear evidence is that Sri Lanka is prepared to go to any extent, even at the cost to its own interests, its independence and its universal right of self-determination, to fulfil this assurance. Furthermore, are the expressions of appreciation for the financial aid granted to Sri Lanka, not realising that at the end of the day, foreign relations are most often influenced by self-interest and not by sentiment.

For instance, starting with the 13th Amendment, that continues to be, a dead weight to Sri Lanka’s development and now to Financial and Physical Connectivity which are expressions of how far Sri Lanka is prepared to commit to becoming a part of India’s economically expanding bandwagon with no regard or concern for the dignity and independence of the People of Sri Lanka. The latest is the attempt by India’s Ministry of Mines to strengthen India’s critical minerals supply chain through the acquisition of mineral assets in Sri Lanka.

A report by The Indian Express cited by The Island states: “India’s interest in Sri Lanka’s graphite coincides with the Sri Lankan Government’s active pursuit of Indian companies for graphite mining in the country”. Quoting a Member of the Sri Lankan Government, the report states: “We have the best graphite in the world. Now Indian companies will be manufacturing electric vehicles. One of the large components for electric batteries is graphite. We used to have about 30,000 graphite mines. So, there are a lot of opportunities with the expertise and technology these Indian Companies have, I think they should seriously look at Sri Lanka” (March 5, 2024).

In view of the enthusiasm expressed by India to acquire mineral rights to mine graphite in Sri Lanka, it would be prudent for the Member of Parliament who is supportive of the prospect to be aware of the Supreme Court Judgment on the Eppawala Phosphate Extraction Case.

There is no denying that the warm cultural connectivity that Sri Lanka shares with India is buried in the mists of time. Although there have been threats to Sri Lanka’s interests, its independence and territorial integrity throughout its history, the cultural connectivity has persisted undisturbed. Despite this, the ongoing attempts at connectivity has to be viewed in the same vein as past threats which were to contain and colonise Sri Lanka. However, unlike in the past, today’s attempts to control and colonise Sri Lanka are based on modern techniques of Financial Control and Physical Connectivity that decidedly are to India’s advantage. It is therefore imperative that Governments of Sri Lanka exercise extreme caution in its Financial and Economic relations with India if it holds in trust the best interests of its People.