India proves diplomatic heft in Sri Lanka’s $700M deal

The Gotabaya Rajapaksa government needs an outside investor also because the country is dealing with a dire economic crisis

India’s front-channel economic diplomacy has paid dividends.

The Adani group on Thursday signed a $700-million agreement with the Sri Lanka Ports Authority (SLPA) and conglomerate John Keells Holdings, to develop and manage the Colombo West International Container Terminal. The three parties have signed a build-operate-transfer (BOT) agreement spanning 35 years.

With this deal, the Adani group becomes the largest foreign investor in the island nation’s ports sector.

The move comes after intense lobbying by India, which began in January this year, when Foreign Minister S Jaishankar impressed upon the Gotabaya Rajapaksa government to expedite finalising the deal.

``This is a brilliant diplomatic triumph. Indian diplomacy is not abrasive even when harsh words were said about India in Sri Lanka. It is paying dividends now,” former Indian Ambassador Deepak Vohra said.

``The Indian Ocean is India’s, not China’s sphere of influence,” he told Moneycontrol.  

Within two weeks of Jaishankar’s visit, President Rajapaksa publicly announced in Colombo that 49 per cent of the investment will come from the “Adani Group and other stakeholders”.

That was said earlier this year, in January. At the time of signing of the deal, after the passing of these many months, the share of investment from Adani and its local partner has gone up to 85 percent with SLPA bringing in the remaining 15 percent. 

India for long has deeply resented China’s attempts to make its presence felt in the Indian Ocean. Sri Lanka has proved to be the principal conduit for Beijing’s trepidations in an area which New Delhi regards as its own sphere of influence.

While the main bone of contention has been Colombo’s handing out the Hambantota International Airport to China by the previous Maithripala Sirisena government on a 99-year lease, India and Japan have also conveyed their displeasure earlier this year over being ejected out of a project to jointly develop the East Container Terminal (ECT). It was seen in conjunction with the Rajapaksa government’s decidedly pro-China tilt. 

Since then, New Delhi has worked up channels in Colombo, using close ethnic ties between the two countries to clinch the deal.  

Besides the diplomatic push, Sri Lanka’s dire economic situation was also a reason to get Adani on board. President Rajapaksa declared an 'economic crisis' on September 1 amid an unprecedented inflation and plummeting currency and forex reserves.  

In the midst of this, the Hambantota Airport deal with China can be a particularly bad reminder. According to a 2020 article by the Lowy Institute, the airport deal has been portrayed as the "case par excellence" for China's debt-trap diplomacy.

The term `debt-trap diplomacy’ describes China's predatory lending practices in which poor countries are overwhelmed with unsustainable loans and forced to cede strategic leverage to China. Sri Lanka already owes more than $5 billion to China from past loans.