By Owen Jollie

President Maithripala Sirisena hosted a banquet during Prime Minister Narendra Modi​’s visit on March 13, 2015. Source: President of Sri Lanka’s flickr photostream, used under a creative commons license.

In January, Sri Lankan voters ousted former president Mahinda Rajapakse in favor of a candidate of the united opposition, Maithripala Sirisena. With this change Sri Lanka began moving away from a strong-handed government to a more democratic and inclusive one. This did not go unnoticed by the island nation’s many partners. India was quick to congratulate and welcome President Sirisena, and Prime Minister Narendra Modi has swiftly engaged the new Sri Lankan government in an effort to deepen economic ties, and offset China’s growing influence in Sri Lanka and the Indian Ocean region. President Sirisena travelled to Delhi for the first official state visit of his presidency, and now, a month later, Modi has reciprocated with a visit to Colombo.

To gain an understanding of the opportunities for Indian engagement with Sri Lanka, it is important to understand the investment and trade climate in Sri Lanka. Regional neighbors India, China, and Japan as well as the United States all have a presence in the country, but show unique strengths and weaknesses. During the Rajapakse years, China became the largest lender of funds for Sri Lanka’s infrastructure development – notably ports, highways, and a new international airport. But trade continues to be heavily weighted toward Sri Lanka’s traditional partners – India, the United States, and the EU. The chart below (Figure 1) compares the areas of cooperation each regional partner has with Sri Lanka.

Figure 1: Comparing Regional Partners Trade, Investment, and Engagement with Sri Lanka by Sector. Prepared by Owen Jollie and CSIS Wadhwani Chair.

As Figure 1 shows, the vast majority of infrastructure development has recently been concentrated in Chinese government funded construction companies. Sri Lanka’s largest total trade partner is India, although the United States is their main export destination with a 40 percent share of garment exports going to the United States alone. Adding to the trade relationship between Sri Lanka and the United States is a strong relationship between USAID and Sri Lanka. According to the State Department, USAID has disbursed $2 billion to projects in Sri Lanka since Sri Lankan independence, and the potential for greater U.S. engagement has increased significantly with a new government in place.

Regarding the issue of human rights in Sri Lanka from the closing days of its civil war, the new government has promoted the idea of reconciliation and invited the UN High Commissioner for Human Rights to visit. The government has said, however, that the process of determining accountability should be a Sri Lankan, not a United Nations, process. Foreign Minister Mangala Samaraweera, recently addressed the UN Human Rights Commission and said, “We are firm in our belief, that, to be successful, the journey of reconciliation and accountability is one that the people of our country must embark upon, on their own. (…) But we recognize that in this journey, there is much that we can draw from the experience of others in the international community.”

Subsequent action on this issue by Sirisena’s government could eliminate what has been a major point of contention between Sri Lanka and the United States.

India, for its part, has already begun to intensify engagement with the new Sri Lankan government. The week following President Sirisena’s election, Sri Lanka and India agreed to exchange captive fishermen—a sign that the two countries can work together. When President Sirisena met with Prime Minister Modi in New Delhi last month, they signed four agreements, one of which was an important nuclear energy agreement that expands bilateral cooperation in the energy sector. During meetings in Colombo, Modi and Sirisena have continued this positive trend. They signed four additional agreements, one of which was an agreement on customs duties that Modi said represented a considerable step toward elevating the trade relationship by reducing non-tariff barriers. He also discussed ongoing energy projects including the Sampur project (included in chart), and intentions of making similar investments in Sri Lanka in the near future.

Conversely, China’s relationship with Sri Lanka has moved from a climate of heightened and privileged engagement to uncertainty. A year ago, a Chinese PLA Navy submarine accompanied by warships docked in the port of Colombo without any prior notification to New Delhi, which raised concerns. This year, however, work has been halted at the site of the Colombo port city construction project. The construction project represents $1.5 billion in Chinese investment, and is a significant strategic location—it is the same port where China has docked submarines and warships. The current government is expected to allow work to resume after the permits, which were issued under the former government, are reviewed. This is the first major setback China has faced in Sri Lanka and appears to be an indication that attitudes are changing.

With a new India-friendly government in power in Sri Lanka, there is room for increased cooperation between both countries. China still occupies the main role in infrastructure development, and will continue to do so for the near future. While it remains unlikely that India will supplant China’s footprint anytime soon, Modi’s trip to Sri Lanka has provided the basis for an improved relationship. The amount of investment and loans China has extended to Sri Lanka is simply too large for India to match, but India has a unique opportunity to leverage these favorable conditions and build a stronger regional alliance with its southern neighbor.

Mr. Owen Jollie is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.