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China is one of Sri Lanka's largest creditors, holding 52% of its total foreign debt (Times Online, 2022). The country has heavily invested in Sri Lanka's infrastructure and economic development. In recent years, China has furnished loans and investments for large-scale infrastructure projects in Sri Lanka, including ports, airports, and highways. This has sparked concerns about China's escalating influence in Sri Lanka, especially as the nation grapples with repaying its debt to China.

India, the United States, and Japan have been closely observing China's expanding presence in Sri Lanka, voicing concerns about the potential implications for their strategic interests in the region. While these three countries have supported Sri Lanka's efforts to stimulate economic growth and alleviate poverty, they remain cautious about the potential risks of Sri Lanka becoming overly reliant on Chinese investment. In the future, India, the United States, and Japan may coordinate their efforts to support Sri Lanka's economic development and debt management, aiming to counterbalance China's influence in the country. Given its historically strong relationship with Sri Lanka, India, in particular, has expressed concern about China's growing influence.

The US and Japan have also expressed concern about China's 'debt-trap diplomacy' (Rajah, R., Dayant, A., & Pryke, J., 2019), a strategy where it provides loans to developing countries to secure strategic advantages. All three countries - the US, Japan, and India - have been vocal about promoting transparency and good governance in Sri Lanka's debt management. They have also promoted their alternatives to Chinese investments in Sri Lanka, such as through the US's 'Blue Dot Network' initiative, Japan's 'Free and Open Indo-Pacific' strategy, and India's 'Neighbourhood First' policy. Notably, Sri Lanka has struggled to repay its Chinese loans, leading to the handover of control of the strategically important Hambantota port to China on a 99-year lease in 2017, which is considered the first sign of a debt crisis (Stacey, 2017). This development has further intensified concerns among other countries about China's expanding influence in the region.

India has historically played a significant role in Sri Lanka's debt considerations, providing both financial and technical assistance. This support has come in the form of loan agreements, lines of credit, and training aimed at bolstering Sri Lanka's economic development. India has also been supportive of Sri Lanka's efforts to address its debt issues and stimulate economic growth, emphasizing the importance of transparency and good governance in debt management. Encouraging Sri Lanka to tackle its debt challenges and promote economic growth, India is likely to continue closely monitoring the situation. Given its past involvement, it may consider providing further financial assistance to support Sri Lanka's economic development and debt management in the future.

India has also participated in regional initiatives such as the South Asian Association for Regional Cooperation (SAARC) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) to provide both financial and technical assistance to Sri Lanka. Historically, India has extended sector-specific aid to Sri Lanka, encompassing areas such as agriculture, education, health, housing, and infrastructure. Beyond providing financial assistance, India may consider fostering measures to enhance trade and investment between the two nations as a means to bolster Sri Lanka's economic recovery.

As a member of the international community, India can collaborate with other countries and international organizations to assist Sri Lanka during times of crisis. Historically, high-level visits by Indian leaders to Sri Lanka have been aimed at strengthening bilateral ties and formulating strategies to address economic and regional issues. A recent example is the visit by Dr. Jaishankar, Foreign Minister of India, to Sri Lanka amidst the debt crisis. The visit focused on discussing potential strategies for India to assist Sri Lanka in managing its economic challenges. The dialogue also covered other significant topics of mutual concern, such as the ongoing ethnic reconciliation process, human rights, and the increasing Chinese influence in the region.

India's 'Neighbourhood First' policy is a foreign policy initiative aimed at strengthening India's relations with its neighboring countries. The policy underscores the importance of building a stable, secure, and prosperous neighborhood through increased engagement in areas such as trade, investment, infrastructure, security, and fostering people-to-people ties. As a tool for foreign policy engagement (Sajjanhar, 2021), India's 'Neighbourhood First Policy' is particularly relevant in the context of Sri Lanka, as it serves to counterbalance China's growing dominance in the Asian region.

India has been promoting its 'Neighbourhood First' policy as a counterweight to the growing Chinese influence in the region. India has repeatedly expressed concern that China's dominance in the region not only poses a threat, but also opens a debt trap for smaller countries. Despite cooperating with China on several fronts, such as BRICS, the relationship remains fraught with tension. India sees an opportunity to secure the strategic alignment of smaller countries by providing support in times of crisis. This was evidenced during the COVID-19 pandemic when India supplied free vaccines to smaller countries in both the Asian and African regions. In 2021, India provided half a million free doses of vaccines to Sri Lanka to strengthen its relationship, reflecting a strategic policy to increase its influence and dominance in the region (Miglani, 2021). In line with this policy of seizing opportunities, India is committed to financially supporting Sri Lanka in managing its debt crisis.

Sri Lanka is currently seeking a $2.9 billion bailout package from the International Monetary Fund (IMF), a move that requires the backing of India, China, and the US. While China's role remains uncertain, India has pledged full support for the program at the IMF (Shalal & Shakil, 2023). This much-needed backing could provide a lifeline for Sri Lanka, especially given that the island nation was declared bankrupt last year and defaulted on its $51 billion foreign loans for the first time since its independence (First Post, 2023).

India is likely to use this leverage to increase its dominance in Sri Lanka, extending beyond economic association to a military and strategic alliance. As India prepares for a possible confrontation with China in the near future, it wouldn't be surprising if it uses this opportunity to tarnish China's image among neighboring countries and within the region. With Prime Minister Modi and the ruling BJP party facing elections in 2024, a strong response to China's growing influence will need to be demonstrated to the public to secure the next term. While a military conflict between India and China in the near future seems remote, the only avenue left for India to assert its regional dominance is by showcasing the assistance and cooperation it provides to neighboring countries in contrast to China's dominance. This approach could help garner public support for Prime Minister Modi.

India, the United States, and Japan have all voiced concern about Sri Lanka's debt crisis and have each provided financial assistance in various forms to support the country's economic development and debt management. Aside from the support from India discussed previously, the United States has also extended financial assistance to Sri Lanka, including through institutions like the International Monetary Fund (IMF) and the World Bank.

Japan is actively helping Sri Lanka overcome its economic crisis, including through the assistance of the Japan International Cooperation Agency (JICA). Japan has also been instrumental in coordinating with the Paris Club of creditor nations and the International Monetary Fund, ensuring the participation of China and India in efforts to restructure the debt (Sri Lanka Mirror, 2023). All three countries - India, the US, and Japan - have shown keen interest in supporting Sri Lanka's development in specific sectors such as agriculture, education, health, housing, and infrastructure.


References

Rajah, R., Dayant, A., & Pryke, J. (2019). China, the Pacific, and the "debt trap" question. The Interpreter, 23 Oct, 2019. Retrieved from https://www.lowyinstitute.org/the-interpreter/china-pacific-debt-trap-question

Stacey, K. (2017). China signs 99-year lease on Sri Lanka's Hambantota port. Financial Times, December 11, 2017. Retrieved from https://www.ft.com/content/e150ef0c-de37-11e7-a8a4-0a1e63a52f9c

Sajjanhar, A. (2021). Neighbourhood Policy of Modi Government: Challenges and Opportunities. India Foundation, November 1, 2021. Retrieved from https://indiafoundation.in/articles-and-commentaries/neighbourhood-policy-of-modi-government-challenges-and-opportunities/

Miglani, S. (2021). India sends free AstraZeneca vaccines to Sri Lanka for Friday rollout. Reuters, January 28, 2021. Retrieved from https://www.reuters.com/world/india/india-sends-free-astrazeneca-vaccines-sri-lanka-friday-rollout-2021-01-28/

Shalal, A., & and Shakil, I. (2023). India commits to help Sri Lanka on debt in prospective IMF program. Business Standard, January 24, 2023. Retrieved from https://www.business-standard.com/article/international/india-commits-to-help-sri-lanka-on-debt-in-prospective-imf-program-123012400036_1.html

First Post. (2023). Explained: India's big role in helping Sri Lanka tide over its worst-ever economic crisis. First Post, January 16, 2023. Retrieved from https://www.firstpost.com/explainers/india-role-in-helping-sri-lanka-tide-over-its-worst-ever-economic-crisis-china-imf-debt-11994432.html

Sri-Lanka Mirror. (2023). "Japan working hard to help SL to overcome economic crisis". Sri Lanka Mirror, 26 January, 2023. Retrieved from https://srilankamirror.com/news/japan-working-hard-to-help-sl-to-overcome-economic-crisis/

 

India's Response to Sri Lanka's Debt Crisis: A Geostrategic Game in the Indo-Pacific?

The Turkish Center for Asia Pacific Studies - March 23, 2025

Professor Badar Alam Iqbal
APAC Non-resident Distinguished Fellow,   e-mail: badar.iqbal@fulbrightmail.org