The long-standing relationship between Sri Lanka and India has always oscillated between strategic cooperation and subtle tension. While both nations share deep historical, cultural, and religious ties, the socio-economic impact of this bilateral relationship has been complex—particularly for Sri Lanka. In recent years, geopolitical shifts, trade dynamics, and economic dependencies have reshaped how this relationship influences the island nation’s internal development, sovereignty, and regional diplomacy.
Historical Ties and Emerging Economic Realities
India has always been Sri Lanka’s largest and most accessible neighbor, and by extension, one of its most important trading partners. From ancient maritime trade routes to post-independence diplomatic alliances, the two countries have maintained an interdependent, albeit at times asymmetrical, relationship.
However, modern Indo-Sri Lanka relations have evolved beyond mere diplomatic formalities. India’s growing regional influence, its strategic interest in the Indian Ocean, and China’s increasing footprint in Sri Lanka have created a new context. The socio-economic fallout of this evolving dynamic is felt most visibly in trade, employment, local industry, and investment dependency.
The Trade Balance and Domestic Industry
One of the most pressing concerns is the growing trade imbalance between Sri Lanka and India. In 2023 alone, Indian exports to Sri Lanka reached $4.5 billion, while Sri Lankan exports to India stood at less than $900 million. While bilateral trade agreements under the Indo-Sri Lanka Free Trade Agreement (ISFTA) have facilitated the free movement of goods, they have also resulted in market saturation by Indian products, often undermining local producers.
For example, Indian pharmaceuticals, FMCGs, textiles, and even agricultural goods dominate Sri Lankan markets, making it difficult for small and medium Sri Lankan enterprises to compete. This has led to the erosion of domestic industries, growing unemployment in manufacturing sectors, and increased dependency on imports—an unsustainable trend for a country grappling with economic recovery.
Indian Investments and Infrastructure Diplomacy
Indian investments in Sri Lanka are significant, especially in sectors like petroleum, telecommunications, hospitality, and renewable energy. The Trincomalee Oil Tank Farm deal and recent Indian-led renewable energy projects in the Northern and Eastern Provinces are clear examples of India’s growing economic footprint.
While such investments bring in much-needed capital and technology, they often come with geo-strategic strings attached. There’s growing concern that Sri Lanka’s economic sovereignty may be diluted by foreign-led infrastructure diplomacy, particularly when strategic national assets are involved.
In the public eye, these deals can appear opaque or tilted in favor of Indian interests, leading to social discontent and suspicion about national decision-making processes. Critics argue that such arrangements can resemble neo-colonial economic relationships, where the smaller partner is dependent on the goodwill and strategic ambitions of the larger neighbor.
Labour and Migration: Human Impact of Economic Policy
Another fallout of this unequal dynamic is seen in labour migration and workforce displacement. With limited local job creation and shrinking industrial output, many Sri Lankans seek employment in India, particularly in the informal sector. Simultaneously, the influx of Indian labor—especially in service industries—has raised concerns about job competition and wage suppression in local markets.
Furthermore, the growing dependency on Indian medical education and services among Sri Lankans, while offering opportunities, also speaks to failures in domestic policy, where basic services are outsourced across the Palk Strait instead of being developed locally.
Socio-Political Sensitivities and Cultural Backlash
The India-Sri Lanka relationship is also fraught with political sensitivities, especially concerning Tamil Nadu and Sri Lanka’s Tamil minority. Political pressure from Tamil Nadu has often influenced India’s diplomatic posture, especially in international forums like the UNHRC.
In Sri Lanka, this external pressure is sometimes perceived as interference in domestic affairs, which fuels nationalist sentiment and anti-India rhetoric, particularly during election cycles. This can create social divisions and further complicate bilateral cooperation, even in sectors that might otherwise benefit from integration.
Balancing China, India, and National Interests
Adding another layer of complexity is Sri Lanka’s balancing act between India and China. While Indian diplomacy emphasizes cultural and geographic proximity, China’s offers of fast-track financing and infrastructure investments (as seen in Hambantota and Colombo Port City) present an alluring alternative.
This triangulated diplomacy has put Sri Lanka in a tight geopolitical bind, where choosing one power over another risks economic retaliation or strategic isolation. The real socio-economic cost is borne by ordinary citizens—through inflation, policy inconsistency, and stalling reforms, all of which have become more visible during the recent economic crisis.
Toward a More Equitable Future
To navigate this complex relationship, Sri Lanka must reassess its trade and investment frameworks to ensure mutual benefit and transparency. Strengthening domestic industries, encouraging value-added exports, and promoting Sri Lankan innovation should take precedence over dependency on Indian or Chinese capital.
Moreover, regional cooperation frameworks like BIMSTEC or SAARC 2.0 must be revived with a focus on equitable development, not just strategic alliances. For the Sri Lanka-India relationship to evolve into a win-win scenario, mutual respect, fair policy dialogue, and community-level engagement are critical.
