Economic links between India and Sri Lanka go back to the dawn of history. After both countries came under British rule during the 19th century, these links strengthened as legal barriers to movement of goods and labour practically disappeared. Trade expanded, many Indian firms became active in both foreign and domestic trade in Sri Lanka, and there was large-scale migration of Indian labour into tea and rubber plantations. However, after independence from British rule, despite close political ties, economic links gradually weakened as both countries implemented inward-looking, import substitution industrialization (ISI) economic policies. By the mid-1970s, bilateral economic links had reached a nadir. However, a re-invigoration of economic relations commenced with the progressive implementation of more liberal, outward oriented policies in the South Asian region — a process that started with Sri Lanka’s policy reforms of 1977/78, which then spread to India and other neighbouring countries. This trend has been further encouraged by the South Asian regional integration initiatives, and by recent bilateral Indo-Lanka trade agreements. This study reviews the historical background, analyses trends in trade in goods and investment, and discusses these in the broad economic, policy and political context. Special emphasis is placed on the policy liberalization process and moves towards regional integration. It examines the nature and impact of regional initiatives under SAARC (SAPTA/SAFTA) and bilateral agreements, in particular, the Indo-Lanka Agreement. It also discusses the potential and prospects for further expansion of economic links.
Indo-Sri Lanka Trade and Investment Linkages