By Ankit K – Asst Professor in International Relations, National Defence University, India
India–Sri Lanka economic relations have evolved from a security-driven partnership into a comprehensive framework for shared prosperity. Anchored by the 2000 India-Sri Lanka Free Trade Agreement, bilateral trade, investment, tourism and development cooperation have expanded steadily. India’s USD 5 billion in assistance, crisis support, and growing trade and investment flows underscore its role as a trusted first responder. Going forward, connectivity, energy, digitalisation and climate cooperation will shape a resilient, future-oriented partnership.
From Strategic Partners to Partners of Prosperity
After independence, India and Sri Lanka gradually transformed their relationship from a Cold War–shaped security engagement into a broad-based partnership for development and shared growth. India’s early diplomatic support fostered trust, and cooperation expanded into defence, development projects, education, health, and capacity-building. During crises, India emerged as a first responder through credit lines and essential supplies. Over time, strategic proximity evolved into an economic partnership focused on connectivity, energy cooperation, and human capital development.
India’s development cooperation is one of the most significant aspects of bilateral ties, amounting to USD 5 billion in concessional assistance and USD 600 million in grants, including large-scale projects in housing, health, railways, digital identity, and renewable energy. During Sri Lanka’s 2022 economic crisis, India extended emergency assistance of nearly USD 4 billion, reaffirming its role as a reliable first responder and trusted partner.
FTA 2000: Rewriting the Economic Playbook
The India–Sri Lanka Free Trade Agreement (ISLFTA), which entered into force on 1 March 2000, was a landmark for both countries: India’s first bilateral FTA and Sri Lanka’s most significant market-opening move at the time. The agreement phased out tariffs on a wide range of goods and provided predictable market access, encouraging exporters and investors to plan long-term engagements. In the years following its operationalisation, trade between the two nations expanded dramatically, and the FTA proved instrumental in integrating supply chains and fostering cross-border business linkages. The India-Sri Lanka FTA remains the bedrock of bilateral trade policy and a reference point for subsequent economic negotiations.
Trade Ties Anchoring Economic Interdependence
India–Sri Lanka economic ties are a core pillar of the bilateral relationship, shaped by geographic proximity, historical linkages, and complementary market structures. India remains Sri Lanka’s largest trading partner, with bilateral merchandise trade reaching around USD 5.8 billion in FY 2024–25. Indian exports, valued at nearly USD 4.5 billion, significantly exceed imports of about USD 1.3 billion, reflecting India’s role as a key supplier of essential goods to Sri Lanka. Beyond merchandise trade, India is also among the leading sources of foreign direct investment in Sri Lanka, with Indian enterprises active across ports, energy, tourism, manufacturing, and financial services, thereby deepening long-term economic interdependence.
Petroleum products, pharmaceuticals, automobiles and two-wheelers, iron and steel, machinery, cement, and essential agricultural commodities such as rice and sugar dominate India’s export basket to Sri Lanka. Petroleum and energy-related supplies remain critical for Sri Lanka’s transport and power needs. At the same time, Indian generic pharmaceuticals and medical equipment play a vital role in supporting the country’s healthcare system. The prominence of these categories highlights India’s industrial capabilities and the advantages of regional supply chains, where shorter distances reduce logistics costs and ensure timely delivery, making Indian firms competitive and reliable partners.
In recent years, India has also expanded exports of higher-value industrial machinery, electrical equipment, and construction-related inputs that support Sri Lanka’s infrastructure development and urban expansion. As a result, Indian exports increasingly contribute not only to consumption needs but also to productivity enhancement, public welfare, and industrial capacity-building within Sri Lanka.
Sri Lanka’s exports to India, in contrast, are concentrated in sectors of comparative advantage. Tea, spices such as cinnamon and pepper, rubber and rubber-based products, copper items, apparel, and select processed foods form the backbone of Sri Lankan shipments to the Indian market. These exports sustain livelihoods across plantations, factories, and small enterprises, while benefiting from access to India’s vast and diversified consumer base. Additional supplies of coconut products, scrap metals, and specialised rubber goods cater to Indian industrial demand. Under the India–Sri Lanka Free Trade Agreement and subsequent trade engagements, Sri Lanka has sought to gradually shift toward more processed, higher-value exports, leveraging quality, branding, and niche specialisation to strengthen its position in the regional value chain.
Tourism: A Bridge of People and Prosperity
Tourism has re-emerged as a vibrant dimension of India–Sri Lanka engagement, with India remaining the single largest source market for Sri Lanka. Sri Lanka recorded about 2.05 million tourist arrivals in 2024, marking a strong recovery after the pandemic and economic disruptions. India alone accounted for roughly 417,000 arrivals that year, about 20–21% of total inbound visitors, underlining the centrality of Indian travellers to Sri Lanka’s tourism revival. Religious tourism (Buddhist circuits), leisure travel, health tourism and short-break packages attract substantial Indian footfall, driven by geographic proximity and cultural affinity. The tourism revival generates employment across hotels, restaurants, transport and small businesses, delivering inclusive benefits in Sri Lanka.
Investment Flows Strengthening Economic Foundations
Investment cooperation has grown more sophisticated: India is among the largest investors in Sri Lanka, with cumulative investment running into the low billions of dollars (official estimates indicate cumulative Indian FDI of more than USD 2 billion, driven by substantial project-level investments in energy, ports, manufacturing, hospitality, and banking. Indian corporates have participated in port development, renewable energy projects, and retail and IT services. That commitment was visible during Sri Lanka’s economic stress, when India provided project finance, credit lines, and equity support to stabilise essential imports and infrastructure activities. Investment linkages deliver technology transfer, managerial expertise and jobs, and when regulated through transparent PPPs and safeguards, they present a long-term avenue for mutual gains.
A Shared Vision for a Future-Oriented Partnership
Looking ahead, India–Sri Lanka relations are poised to deepen through maritime cooperation, energy connectivity, digitalisation and climate resilience. The institutional framework established by the ISLFTA and subsequent dialogues offers a platform to expand into services, investment facilitation and technology partnerships. Renewable energy projects, grid connectivity, fintech linkages and logistics corridors can create new value chains in the Indian Ocean region. India’s “Neighbourhood First” and Sri Lanka’s interest in balanced, diversified partnerships create an opportunity to build a future orientation focused on resilience and sustainability.
Cooperation on disaster management, blue economy initiatives, climate adaptation and skill mobility will be central as both nations navigate global economic shifts. The priority will be inclusive policies that spread benefits widely: regulatory predictability, joint investments in human capital, and targeted support for SMEs and exporters will ensure that prosperity is both durable and broadly shared.
In conclusion, India–Sri Lanka relations combine ancient ties with contemporary pragmatism. Trade, tourism, investment, and special assistance are the practical pillars of bilateral relations. The ISLFTA of 2000 provided the initial legal framework and strengthened bilateral relations over the years. Recent trade and tourism developments, the depth of engagement, investment flows, and financial assistance during crises have demonstrated India’s role as a stabilising partner. Going ahead, by harnessing complementarities and investing in connectivity, skills, and climate resilience, India and Sri Lanka can translate geographic proximity into shared prosperity and regional leadership in the Indian Ocean fordecades to come.
