Date : 18/11/2023

Relevance: GS Paper 2 – International Relations

Keywords: IMF, India-Sri Lanka Relations, Palk Strait, Tamil Ethnic Conflict:

Context-

Sri Lanka, a nation that pioneered economic liberalization in South Asia in 1977, stands at a crucial juncture in its economic journey. Despite its early start, the country has faced numerous challenges, leading to its 17th IMF program, in contrast to India, which has not sought IMF assistance since beginning its economic reforms in 1991. As Sri Lanka emerges from its worst economic crisis since independence, it is imperative to explore the potential benefits of closer economic ties with its neighbor, India, particularly the rapidly growing state of Tamil Nadu.

Economic Growth in India and Tamil Nadu

India's economy is on a remarkable growth trajectory, currently the fastest-growing major economy globally. With a significant demographic advantage and a strong position in terms of purchasing power parity, India is projected to become the third-largest economy by 2035. Tamil Nadu, sharing close geographical and linguistic ties with Sri Lanka, is a key player in this growth story. The state's economy, on track to reach a US$1-trillion valuation by 2034, offers a unique opportunity for Sri Lanka, especially given Tamil Nadu's industrial prowess.

Benefits for Sri Lanka through Closer Integration

Sri Lanka can greatly benefit from enhanced economic integration with India. This includes technology and skills transfer, and increased investment flows. The disproportionate concentration of Sri Lanka's GDP in its Western province highlights the need for regional economic balance, which can be addressed through increased trade and connectivity with South India, potentially transforming the northern parts of Sri Lanka.

Investments from India in Sri Lankan ports and the potential for Sri Lanka to become a logistical hub are promising developments. Additionally, the possibility of integrating the national electricity grids presents an opportunity for Sri Lanka to secure energy at lower costs and even become an energy exporter, leveraging its potential in renewable energy.

Trade and Investment Opportunities

India, as Sri Lanka's largest trade partner, offers a vast market for Sri Lankan exports. The proposed Economic and Technical Cooperation Agreement (ETCA) between the two countries aims to boost trade, investment, and service sector cooperation. Despite concerns about competition from the larger Indian market, historical data from the India-Sri Lanka Free Trade Agreement suggests that Sri Lanka stands to gain significantly from such agreements.

Challenges for Sri Lanka in Economic Integration with India

• Competition with Larger Indian Market: Sri Lankan industries, accustomed to a protected domestic market, may face intense competition from larger, more established Indian companies. This could lead to short-term disruptions in local industries and potential job losses in sectors unable to compete effectively.


• Balancing Economic Benefits: Ensuring that the benefits of closer economic ties with India are evenly distributed across various sectors and regions within Sri Lanka is a significant challenge. There is a risk that only certain urban or industrial areas might reap the advantages, exacerbating regional economic disparities.


• Managing Public Perception and Political Sensitivities: There is a degree of apprehension and resistance within Sri Lanka regarding opening up markets to a large neighbor like India. Addressing these concerns, managing public perception, and navigating political sensitivities are crucial for smooth economic integration.


• Infrastructure and Regulatory Hurdles: For effective economic integration, Sri Lanka needs to upgrade its infrastructure and align its regulatory frameworks with international standards. This includes improving port facilities, transportation networks, and regulatory policies to facilitate smoother trade and investment flows.


• Skilling and Workforce Adaptation: As industries adapt to new market dynamics, there will be a growing need for re-skilling and up-skilling the workforce. Preparing the Sri Lankan workforce for new opportunities and challenges in a more open economic environment is essential.

Path Forward

• Strategic Economic Reforms: Sri Lanka needs to implement strategic economic reforms that focus on enhancing competitiveness, fostering innovation, and encouraging the development of new industries. This includes policy measures to support sectors where Sri Lanka has a comparative advantage.


• Investment in Education and Skill Development: Investing in education and vocational training programs is crucial to prepare the workforce for new opportunities in a liberalized economy. This will help in mitigating the impact of job losses in traditional sectors and in harnessing the potential of new industries.


• Strengthening Regional Connectivity: Enhancing connectivity with India, especially with Tamil Nadu, through improved transport links, such as the proposed land bridge, can open up new avenues for trade and tourism. This will also help in the economic upliftment of the northern regions of Sri Lanka.


• Leveraging Geographic and Cultural Ties: Sri Lanka should capitalize on its strategic geographic location and cultural ties with India to become a hub for logistics, tourism, and services. This includes promoting itself as a gateway to India for global firms.


• Fostering a Favorable Business Environment: Creating a business-friendly environment is key to attracting foreign investment. This involves streamlining regulatory processes, ensuring policy stability, and providing incentives for investment in key sectors.


• Engaging in Regional Economic Agreements: Actively participating in regional economic agreements like the ETCA and RCEP can provide Sri Lankan businesses with access to larger markets and help integrate them into regional supply chains.


• Balanced Approach to Trade Liberalization: While moving towards greater trade liberalization, it is important for Sri Lanka to adopt a balanced approach that safeguards vulnerable industries and sectors during the transition period.

Conclusion:

For Sri Lanka, a closer economic relationship with India, particularly with the economically vibrant state of Tamil Nadu, appears to be a strategic imperative. The recent economic crisis in Sri Lanka underscores the importance of this relationship, with India's significant aid playing a crucial role in stabilizing the Sri Lankan economy. Embracing economic integration with India offers a pathway for Sri Lanka to not only recover from its current challenges but also to secure a more prosperous and stable economic future.

Source- Indian Express