Rating President’s visit to India

by Neville Ladduwahetty

Sri Lanka’s credit ratings are somewhat positive, according to Fitch and Moody’s, but the general rating of what was achieved during President Anura Kumara Dissanayake’s India visit is mixed. Nothing of much significance was achieved in respect of Sri Lanka’s interests in comparison with what India gained.

The outcome of President Dissanayake’s visit could be summarised as the signing of two MOUs and the 32 topics that were discussed and incorporated in the Joint Statement (JS) between the two leaders. One MOU is on training public officials and the other is on abolishing double taxation.

ISSUES RELATING to the JOINT STATEMENT

President Dissanayake “acknowledged the positive and impactful role of India’s development assistance to Sri Lanka … and India’s decision to extend grant assistance for projects that were originally undertaken through Lines of Credit, thereby reducing the debt burden of Sri Lanka” (The Island, December 17, 2024),

While such measures benefit Sri Lanka as a whole, projects such as “the timely completion of ongoing projects such as Phase III and IV of Indian Housing Project, 3 Islands Hybrid Renewable Project … and projects for the Indian Origin Tamil community, Eastern Province are specific to the Tamil community, even though the JS also refers to “High Impact Community Development Projects across Sri Lanka and the solar electrification of religious places” (Ibid).

In addition, topic 12 is titled “Building Connectivity”. Topic 12 (1) states: “While expressing satisfaction at the resumption of the passenger ferry service between Nagapattinam and Kankesanthuria, they agreed that officials should work towards the early recommencement of the passenger ferry service between Rameshwaram and Talaimannar” (Ibid).

As the sub-title states, “Building Connectivity” the benefits of these, so called development projects would be to boost the economic growth in the 5 Southern States, namely, Kerala, Karnataka, Tamil Nadu, Andhra Pradesh and Telangana in India and the predominantly Tamil regions in Sri Lanka. The outcome of this skewed growth will serve India’s interests but it will be a fetter to the inclusive growth that the NPP has been harping on during and after parliamentary elections. Furthermore, it was the appeal of this slogan that caused the people to respond the way they did in both elections, and the NPP government should not disappoint the public.

The concept guiding this strategy is the misguided logic that Sri Lanka’s economic growth could be ensured by hitching Sri Lanka’s wagon to the rapidly growing economy of India. Since an array of influential individuals, political parties and think-tanks are convinced by this notion, it appears that the NPP government has fallen victim to those compulsions. However, the disparities between the 5 Southern Indian States and Sri Lanka are such that if most of what is in the JS is adopted by the Sri Lankan government, the outcomes would be not only disappointing but also detrimental to Sri Lanka’s interests to foster an inclusive society.

DISPARITIES BETWEEN 5 SOUTHERN INDIAN STATES and SRI LANKA

TRADE: The JS 17 states: “Underscoring the pace of economic growth and opportunities in India as the growing market size and its potential for enhancing trade and investment for Sri Lanka, both leaders agreed that it is now opportune to enhance the trade partnership by committing to (i) Continuing discussions on the Economic & Technological Cooperation Agreement (ECTA)(ii) Enhance INR-LKR trade settlements between the two countries ….”

While the need to enhance Trade and Investments cannot be denied, the existential realities are such that the expectations are not achievable because of the inherent disparities. For instance, the Imports from India are around $ 4.5 billion and $3.58 billion, depending on the source, while the exports from Sri Lanka to India were only $ 850 million in 2022. Other disparities are that while the per capita GDP of the five Southern States varies from $ 2,500 to low $ 3,000, the per capita GDP of Sri Lanka is more than $ 3,800. Furthermore, the cost of labour in India is lower than in Sri Lanka. This coupled with the fact that nearly 50% of labour in India is engaged in agriculture as opposed to about 30% in Sri Lanka, besides the lower cost of agricultural inputs in India, makes the cost of production in India lower than in Sri Lanka. Consequently, imports from India to Sri Lanka would remain significantly higher than exports from Sri Lanka, thus making the prospect of “enhancing trade and investment for Sri Lanka” JS, 17) a myth.

INVESTMENTS: JS 17 III states “Encourage investments in key sectors in Sri Lanka to enhance its export potential”.

“In the fiscal year 2023, the Reserve Bank of India (RBI) granted permission for international trade for invoicing and payments to be conducted in Indian Rupees. This move allowed for exports and imports to be denominated and invoiced in Rupees, with trade transactions settled in the currency. The RBI’s decision aims to stimulate global trade growth, particularly Indian exports, while also working towards the internationalisation of the Indian Rupee” (Ceylon Today, February 28, 2024).

“Last year, Sri Lanka officially recognised the Indian Rupee as a designated currency, enabling trade settlements between the two countries to be conducted in rupees” (Ibid).

“Currently, Indian Investors typically engage in investments in Sri Lanka using international currencies like the US Dollar. Since this involves additional complexities and conversion costs, the transition to Rupee investments is expected to streamline market entry for Indian companies, with the Ministry of External Affairs reportedly advocating for this transition” (Ibid). The consequence then would be for Indian companies to deploy cheap Indian labour, thus displacing Sri Lankan labour; a fact that would particularly apply to the IT sector.

The report finally states: “The push for rupee investments aligns with India’s broader vision to elevate its currency to the status of hard currency in the future, potentially leading to inclusion in the IMF’s SDR basket and bolstering its foreign exchange reserves. This move is anticipated to benefit Indian firms with significant investments in Sri Lanka, such as the Adani Group’s development projects in the country’s port and power sector” (Ibid).

THUS, the compulsion to convert TRADE and INVESTMENTS to Indian rupees is entirely driven for the benefit of India.

MPACT of UPI on TOURISM

A former State Minister is reported to have stated: “The UPI is beneficial to both countries. If you look at the events in Sri Lanka and what took place one and a half years ago, it mainly started out as a foreign exchange crisis mainly due to lack of dollars. So, we have to ensure that our dollar dependency is reduced. Now, for example, our biggest tourist market is from India and if we can collect the tourist remittances from India and we import about $ 5.5 billion worth of goods from India and we use those …to pay in Indian rupees for the Indian imports, then we will reduce our dollar dependence. And it also becomes very flexible and very easy for the Indians to travel to Sri Lanka and then they pay in Indian rupees”. (Sunday Island, February 25, 2024).

Despite this misguided understanding of the former State Minister, the fact is that out of a total of 1.48 million tourists that arrived here in 2023, Indians numbered only 302,844. This represents 20 % of the total. The revenue from tourism for the year 2023 was USD 2.1 billion. Therefore, on an average, earnings from Indian tourists would be 20% of USD 2.1 billion. Although this amounts to only USD 420,000, since Indian tourists pay in Indian rupees, UPI favours the Indian tourist over other tourists who pay in international currencies. Consequently, at current levels of tourist arrivals from India, Sri Lanka is at a loss of $ 420,000 and growing because of UPI (ECONOMYNEXT, January 1, 2024 & January 5, 2024).

INVESTMENTS IN INDIAN RUPEES

When Sri Lanka calls for competitive bids for projects it is understood that bids would be based on international currencies so that all bids are evaluated on a level playing field. If an Indian investor such as Adani or any other, is given a special privilege and permitted to submit proposals based on Indian rupees which is still not recognised as an internationally recognised currency, it would amount to an act of discrimination. Furthermore, it would amount to an unsolicited offer that puts other bidders at a disadvantage.

In addition, any dollar inflows into Sri Lanka would add to the reserves of Sri Lanka and could be used for debt payments. On the other hand, any Indian rupee inflows, even if considered to be part of Sri Lanka’s reserves, would serve little or no purpose for international transactions.

Therefore, if Sri Lanka fails to recognize these implications and caves under Indian pressure to recognize Indian Rupees for investments in Sri Lanka for the sake of connectivity, it would be a grave injustice to the sovereign rights and independence of the People of Sri Lanka with consequences to Sri Lanka’s relations with other countries.

FISHERIES ISSUES

Topic 27 of the JS states: “Acknowledging the issues faced by the fishermen on both sides and factoring the livelihood concerns, the leaders agreed on the need to continue to address those in a humanitarian manner”. It is extremely disappointing that Sri Lanka’s President capitulated and agreed to address issues relating to fisheries in a “humanitarian manner” when what is at state is the impact on the livelihood of the Sri Lankans engaged in fishing and the rampant destruction of Sri Lanka’s resources by resorting to bottom trawling that belong to the whole nation driven by the greed of the politically backed Indian fishing community.

According to the Northern Province Fisheries Association Chief M.V. Subramanium the financial loss to Sri Lanka amounts to Rs. 900 Billion (approximately USD 3.0 Billion) annually due to pillage by Indian fishing vessels operating illegally in Sri Lankan waters. Similarly, it costs Indonesia and Malaysia annually, $2 Billion and $1,4 Billion respectively from illegal fishing.

The NPP Government must get real and stop attempts to explore “humanitarian” approaches and seek the assistance of the International Court of Justice to establish International Maritime boundaries and Reparations for the damages inflicted because no amount of talking would resolve this issue.

CONCLUSION.

Issues of consequence to Sri Lanka presented in the Joint Statement (JS) following the inaugural visit of Sri Lanka’s President to India are: No double taxation; Enhancing Trade with India; ECTA; Use of Indian Rupees for investments by Indian companies; Use of Unified Payments Interface (UPI) and its impact on tourists; Fisheries Issues. As far as these issues are concerned India the gain to India far outweighs gains to Sri Lanka. As for issues relating to Fisheries, the outcome was a disaster because of the misguided notion that issues relating to it could be resolved in a “humanitarian manner”. Therefore, the collective rating has to be that what was achieved during the President’s visit was far from hoped for expectations.

Another issue that is of relevance is the practice of Governments to grant aid projects to specific communities as reflected in the JS. This habit undermines the much touted slogan of this Government to foster an inclusive Sri Lankan society. This Government has to vigorously oppose the practice of gaining advantages by exploiting “division”; a practice that that continues to haunt Sri Lanka .