India and China are two key pillars of Sri Lanka’s political landscape and economic corridor, underscoring the importance of Sri Lanka’s deepening relationship with both countries. President Anura Kumara Dissanayake’s visit to India and China in December 2024 and January 2025 respectively signals that the NPP (National People’s Power) government, under his leadership, follows an independent and non-aligned foreign policy.
President Dissanayake’s maiden foreign visit was to India soon after assuming office. His intention was to leverage India’s vast market for economic revitalization while strengthening Sri Lanka’s geopolitical ties with its closest neighbour[1]. The key objectives included enhancing Indo-Sri Lankan economic cooperation, attracting Indian investment particularly in the energy sector, developing digital infrastructure, modernising Sri Lanka’s agricultural sector, and boosting tourism. Remarkably, India remains the largest contributor to Sri Lanka’s tourism sector, accounting for 20.3% of total tourist arrivals in 2024, while China holds the fifth place[2].
The energy engagement is crucial, and the public sector plays a role. India and Sri Lanka have an interest in a multi-product petroleum pipeline between the two countries. The Sri Lankan government has already decided to develop the Trincomalee oil tank farm through Trinco Petroleum Terminal Ltd., a joint venture between Lanka Indian Oil Company (IOC) and Ceylon Petroleum Corporation (CPC). Currently, IOC is utilizing 14 out of the 99 oil tanks, which were originally built during World War II. A joint venture for a 120 MW solar power plant project is set to begin in April[3], involving the Ceylon Electricity Board and India’s National Thermal Power Corporation.
Private sector investment is crucial for Sri Lanka’s economic growth. The Adani Group’s $1 billion investment in energy projects in Mannar and Pooneryn was expected to play a key role in addressing the country’s energy challenges and reducing reliance on costly imports. However, the project was withdrawn after the Sri Lankan government sought to renegotiate the power purchase agreement to secure lower electricity rates than those agreed upon by the previous administration.
This withdrawal is a setback for the Foreign Direct Investment (FDI) of Sri Lanka and could raise concerns among potential investors, particularly in government-backed projects. Given India’s growing strategic interests in Sri Lanka, such developments highlight the need for consistent and transparent investment policies to strengthen economic cooperation. reinforcing the importance of a stable and predictable investment environment is critical for long-term growth.
Nevertheless, the President came back from New Delhi with $27 million for development projects in Sri Lanka’s Eastern Province, in education, healthcare, and agriculture. These aim to enhance people-to-people ties and mutual economic benefits and broaden India’s engagement with Sri Lanka beyond infrastructure.
President Dissanayake’s visit to China focused on reinforcing economic ties and securing large-scale investments to stabilise Sri Lanka’s fragile economy, Beijing reaffirmed its commitment to Sri Lanka’s economic recovery and development, particularly through high-quality Belt and Road Initiative (BRI) projects. Talks centred on new opportunities, including the Colombo Port City and the integrated expansion of the Hambantota Port, and an agreement for an oil refinery project under SINOPEC for $ 3.7 billion, the largest FDI in five decades, was signed.[4] China pledged $10 billion in investments over the coming years, but it is unclear whether these projects have been officially finalized or are still under negotiation. The exact timeline and scope of implementation are yet to be confirmed.
An MOU to restructure Sri Lanka’s debt to China was signed, but it is a reality that the Chinese-funded projects are financially not viable for the Sri Lanka economy. Large-scale projects such as Hambantota Port, Colombo Lotus Tower, and Hambantota International Airport have struggled to generate returns due to the high costs associated[5]. The heavy debt burden from these projects has strained Sri Lanka’s economy, with 45% of Sri Lanka’s bilateral debt owed to China, as illustrated in the table below.
Yet President Dissanayake intends to pursue a comprehensive free trade agreement with China, with potential benefits for Sri Lanka’s economy. It could offer Sri Lankan exporters better access to the Chinese market but will not address Sri Lanka’s immediate economic crisis or its debt obligations.
| Composition of Sri Lanka’s bilateral position with India and China | ||||
| Country | Import ($ Mn) | Export ($ Mn) | Total Trade ($ Mn) | Debt % of Bilateral Creditors (2022) |
| India | 3,172 | 830 | 4,001 | 10 |
| China | 3,090 | 258 | 3,347 | 45 |
| Sri Lanka’s (total) | 16,811 | 15,106 | 31,917 | 17.5 (% of GDP) |
| Sources: Export and Import – Export performance indicators 2023- EDB, Debt- Foreign debt summary, Central Bank of Sri Lanka, | ||||
India and China collectively account for over 10% of Sri Lanka’s total trade volume, but Sri Lanka’s imports from these nations significantly exceed its exports
This imbalance is being addressed: Colombo is re-negotiating the Indo-Lanka Free Trade Agreement (ISFTA), signed in 1998 and implemented in 2000, to boost Indian investments and expand Sri Lanka’s access to the Indian market, especially in areas of comparative advantage like apparel.
As a strategic maritime hub in the Indian Ocean, Sri Lanka has tremendous potential for advancing maritime trade and activities. Both India and China closely monitor developments in Sri Lanka’s territorial waters due to their competing geopolitical interests. President Dissanayake has strongly reaffirmed that Sri Lanka will not allow its land or territory to be used in a manner that threatens India, while simultaneously maintaining a neutral stance toward China.
Sri Lanka’s strategic location and deepening ties with India and China are shaping its economic recovery and future growth. However, persistent challenges remain particularly in managing foreign debt, ensuring project sustainability, and maintaining geopolitical neutrality. Sri Lanka must implement strategic economic policies to maximize the benefits of the partnerships with both the Asian giants while ensuring geopolitical balance and long-term economic stability and growth.
Kamalaharan Shanmugam is Research Assistant, Gateway House.
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References
[1] Ministry of Foreign Affairs. (2024, December 16). India – Sri Lanka Joint Statement Fostering Partnerships for a Shared Future . Retrieved from Ministry of Foreign Affairs, Government of Sri Lanka: https://mfa.gov.lk/en/india-sri-lanka-joint-statement/
[2] Sri Lanka Tourism Development Authority. (2024). Year in Review. Colombo: Sri Lanka Tourism Authority
[3] President Dissanayake emphasis the joint venture solar energy project; source https://www.ft.lk/front-page/President-says-120-MW-solar-power-plant-in-Sampur-to-commission-in-April/44-773302
[4] Sri Lanka signed the oil refinery project for $ 3.7 billion with China, by leading Chinese global petroleum firm Sinopec was formalised with the signing of an agreement with the Ministry of Energy Sri Lanka
[5] Wignaraja, G., Kannangara, P., Panditaratne, D., & Hundlani, D. (2020, December 11). Chinese Investment and theBRI in Sri Lanka. Retrieved from Chatham House: https://www.chathamhouse.org/2020/03/chinese-investment-and-bri-sri-lanka-0/1-introduction