On March 19, after more than a year in limbo, the Sri Lankan government announced it had officially given the go-ahead to resume work on Colombo Port City (CPC). A massive $1.4 billion, 575 acre project that combines port facilities with residential and commercial development, CPC is being built as a joint venture between the Sri Lankan government and China Harbour Engineering Company (CHEC), a Chinese state-owned construction company. The decision has rekindled alarm in India that the project will give China a naval base just 150 miles off India’s southeast coast.
CHEC’s status as an arm of the Chinese state, Indian concerns about China’s increasing activity in the Indian Ocean, and Sri Lanka’s strategic positioning between the Strait of Malacca and China’s new base at Djibouti make CPC more than a construction project; it has become a barometer of Chinese influence in South Asia. Conversely, the tangled history of CPC shows the limits of India’s ability to project power in its immediate region. India’s concerted attempt to bring Sri Lanka more firmly back into its orbit have been no match for China’s greater economic power.
CPC was the brainchild of previous Sri Lankan president Mahindra Rajapaksa. During Rajapaksa’s administration, China became Sri Lanka’s largest investor and largest creditor: in 2013 China provided 21 percent of foreign loans and grants to Sri Lanka, and by 2015 Sri Lanka owed China between $3.8 and $5 billion dollars. In 2014 Sri Lanka repeatedly allowed Chinese subs to dock at Colombo without giving India prior notification, as Sri Lanka had agreed to do. One such port call took place during a state visit to Sri Lanka by Japanese prime minister Shinzo Abe.
The sub visits crystalized Indian concerns about Rajapaksa’s shift toward China, and India appears to have taken steps to help Rajapaksa’s opponents win the presidential election held in January 2015. The month before the election Reuters reported that Colombo had expelled the station chief for the Research and Analysis Wing (RAW), India’s foreign intelligence agency, on the grounds that he had been meeting with opposition political leaders. After his defeat (but while he was campaigning for parliamentary elections held later the same year), Rajapaksa accused RAW of helping to rally multiple opposition parties to create a united front in the elections.
The election of Maithripala Sirisena as Sri Lanka’s president seemed at first to be a victory for India; Sirisena met with India’s high commissioner just hours after results were announced but took six days to find time for China’s ambassador. Within two months of the election, the CPC project was also put on hold amid reports that under the terms of the deal, China would own the airspace above the port. And during a visit to Sri Lanka by Indian prime minister Narendra Modi—the first in decades—the two sides agreed that India would develop a strategic oil storage hub at Trincomalee. The previous Sri Lankan government had blocked that project in 2013.
Given this promising beginning, India likely did not expect to be back at square one: work on CPC has restarted, with only minimal changes to the deal. Under the new terms, China will lease all of the land rather than acquire perpetual title to 20 acres of the project. Sri Lanka has also reiterated its desire to sign a free trade agreement with China while at the same time rejecting a Comprehensive Economic Partnership Agreement (CEPA) with India in favor of a weaker Economic and Technology Cooperation Agreement. Modi has pushed hard for the CEPA, which has been on the table since 2008, but Sri Lanka is wary of expanding its trade deficit with India, which is already over $3 billion.
The Sirisena administration’s decision to balance India and China rather than side decisively with India is a result both of China’s economic allure and India’s diplomatic missteps. Despite a projected growth rate of 7 percent in 2016, Sri Lanka is struggling economically. In February, as Sri Lanka sought a loan from the International Monetary Fund to help shore up its currency, the Fitch credit rating agency downgraded the country’s sovereign debt rating to B+ with a negative outlook. Borrowing has become more expensive, and the billions Sri Lanka owes China will start to come due in five years. In early March, the country’s cabinet unveiled an emergency budget that increased tax rates in order to meet Sri Lanka’s debt servicing burden of $8.2 billion a year. In this environment, it proved difficult for the government to turn down a major investment in infrastructure.
But it was also wishful thinking to assume that any Sri Lankan government would be comfortable remaining entirely in India’s orbit. The long, fraught history of relations between the two states includes assassination and quasi-invasion. More recently, Prime Minister Modi, under pressure from powerful Tamil political parties whose support he needs in Delhi, has publicly intervened in the Sri Lankan political process. During his March 2015 visit, Modi called for Sri Lanka to implement the 13th amendment to its constitution, which guarantees a federal structure that would preserve the rights of the Tamil minority.
This is not India’s first attempt to interfere in a neighbor’s constitutional process in order to protect a cross-border ethnic group. After India asked Nepal to make seven alterations to its draft constitution, protesters on the Indian side of the India-Nepal border in Bihar shut down a key border crossing for five months. Indian authorities at best stood by and at worst helped to close the border. With India no longer supplying gasoline, Nepal was forced to impose fuel rationing—although it did receive nearly 350,000 gallons of free gasoline from China. There can be little doubt that Sri Lankan leaders are carefully observing this example of strong-arm diplomacy.
Sri Lanka’s reversals on CPC are a reminder that India can’t assume that its neighbors will welcome its dominance in South Asia. India is surrounded by countries that are hungry for development dollars, whatever the source, even as they are occasionally made uneasy by China’s demands. India has the potential to offer an alternative: transparent, sustainable, and mutually beneficial development. But to achieve this equilibrium it will have to deal with its neighbors as equals, not as subordinates. India’s history in Sri Lanka and Nepal shows that it is still adjusting to this reality.