Mithuna Jayadev Unnithan
Research Intern, Jindal Centre for the Global South,
O.P. Jindal Global University, India
The latest economic partnership in the Indian subcontinent is the Trincomalee Oil Farm deal, which was signed between India and Sri Lanka on 6 January 2022. This deal has been in the making for decades. It has its origin in the Indo-Lankan Accord of 1987. Though this historic peace accord itself did not refer to any economic venture, it did mark the beginning of new cooperation between the two states. After the signing of the accord, then Prime Minister Rajiv Gandhi and then President J.R. Jayewardene initiated an exchange of letters and agreed to develop the Trincomalee Oil Tank Farm as a joint venture between India and Sri Lanka (Subramaniam, 2022).
The accord did not achieve its goals and brought about only a temporary truce to the ethnic strife in Sri Lanka. As a result, the Indo-Lankan relationship has been tumultuous ever since. Nevertheless, both states have always found enough common ground to maintain a bilateral relationship. This relationship has had its ups and downs based on the different governments that were in power. However, this Trincomalee Oil Tank Farm deal can be the perfect restart for a relationship that had hit a new low in 2021, when Sri Lanka had unilaterally reneged on the agreement to develop the East Coast Terminal (ECT) of the Colombo port.
Past Indo-Lankan Partnerships
The ECT plan was a 2019 tripartite agreement between Sri Lanka, India and Japan to redevelop the container terminal. Interestingly the ECT is also located right next to the Colombo International Container Terminal (CICT) project (a joint venture between China and Sri Lanka) and is just 3kms away from the China-backed international financial city called Port City (which is a part of China’s Belt & Road Initiative) (Srinivasan, 2019). The strategic location of the container terminal in the Indian Ocean Region (IOR), combined with the fact that over 70 per cent of the terminal’s transhipment business is linked to India, made it extremely important to the Indian state. When the ECT project fell apart, India lost a golden opportunity to expand its influence in a time when China’s footprint in and around Colombo is growing.
The ECT setback was joined by the likes of other Indian investment projects in Sri Lanka like the Mattala Rajapaksa International Airport and the 500MW Sampur Coal Power Plant (which would have become the largest single India assisted projects in Sri Lanka if implemented). Both these projects failed to take off at the last moment due to Sri Lanka’s complicated domestic politics and policy decisions (Mellampatti, 2021) These successive failures in the face of burgeoning Chinese investment in Sri Lanka prompted India to seek out newer opportunities and revisit older ideas.
A new hope to revive Indo-Lankan Relations
The current economic dispensation of the Sri Lankan state seems to have turned the tides in India’s favour. The Covid-19 pandemic has been unkind to the island nation, forcing it into a state of declared emergency since September 2021. The loss of income from tourism has pushed the country into a foreign exchange crisis and it is on the verge of defaulting its debt repayments (most of which is owed to China). The Lankan government has recognised the dangers of putting all its eggs in the Chinese basket and is now actively looking for a financial lifeline from India including lines of credits for fuel and food imports (Dixit,2022). Sri Lanka could hope to procure these lifelines only if it enabled Indian investments again.
The visit of Sri Lankan Finance Minister Basil Rajapaksa in December 2021 proved to be a turning point for Indo-Lankan relations. A ‘Four Pillars’ package was formalised where the government of India agreed to extend a series of aid to the Lankan state. This includes- a USD 1 billion credit line for the purchase of essential food and medicines, USD 500 million for emergency fuel purchase, deferral of USD 515 million in payments owed to the Asian Clearing Union and a currency swap worth USD 400 million (Laskar, 2022) (Srinivasan,2022). The Four Pillars package was agreed upon in exchange for an increase in Indian investments in the island nation.
Within days of this package the Trincomalee Oil Tank Farm development project was approved by the Lankan cabinet. The pre-World War II era oil storage facility, which has a capacity of nearly 1 million tonnes will be refurbished in phases to ensure energy security in the region (Dixit,2022). Trincomalee, located 260 km from Colombo, is also the nearest port to Chennai. The proximity of Trincomalee to India has made this opportunity especially enticing for India (Chaudhury,2022). Since the deal was formalised, the government of India has been working towards keeping up its promises of the Four Pillars.
Clearly, both nations have masterfully leveraged their abilities to reach a mutually beneficial agreement. India has finally gained control over a strategic location in the IOR to counter China (Agence France-Presse, 2022) and Sri Lanka has found a solution to its forex crunch. These advantages, along with the common benefit of a regional petroleum hub, make this deal a perfect opportunity for both countries to move past the ECT setback. Thus, the Trincomalee Oil Tank Deal has the potential to take the Indo-Lankan bilateral relations to new levels and to infuse added vigour into the strategic partnership.
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The opinions expressed in this article are those of the author (s). They do not purport to reflect the opinions or views of the Jindal Centre for the Global South or its members.