India extends $500-mn Credit to Sri Lanka

Context:

India has extended a $500-million Line of Credit to Sri Lanka for urgent fuel imports, just days after providing $900 million relief to Sri Lanka, which is facing one of its worst economic downturns.

Credit to Sri Lanka

Line of Credit

The Line of Credit is not a grant but a ‘soft loan’ provided on concessional interest rates to developing countries, which has to be repaid by the borrowing government.  

• It is a credit facility extended by a bank or any other financial institution to a government, business or an individual customer, that enables the customer to draw the maximum loan amount.
• The borrower can access funds from the line of credit at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement and meet any other requirements such as making timely minimum payments.

Line Of Credit – Overview

• The Line of Credit – LOCs also helps to promote exports of Indian goods and services, as 75% of the value of the contract must be sourced from India. The projects under LOCs are spread over different sectors (Agriculture, Infrastructure, Telecom, Railway, Transmission/Power, Renewable Energy, etc.).
• The actual implementation of LOC projects in various countries is dependent on local factors, such as prevailing political & social conditions, statutory clearances by the borrowing Governments, making available land, and other infrastructural support.  In many cases, the borrowing governments may not wish to proceed with the LOC or change the purpose or are unable to provide detailed information regarding the project through a proper Detailed Project Report / Feasibility Study.
• The Government has approved the new Indian Development Assistance Scheme (IDEAS) in December 2015. The scheme includes provisions to provide better terms of credit, which will be attractive to many developing countries, who are now seeking alternative means of finance.  
• Several changes have been made in the operational guidelines such as making a DPR, or Feasibility Study essential for project proposals, strengthening of the monitoring system, pre-qualification of competent companies, and requirement of regular reports by the borrowing governments.
• Also, regular monitoring is being carried out by borrowing Governments, Project Management Consultants (PMCs), implementing agency, and Indian Missions abroad to ensure projects are executed promptly. These changes should improve the implementation of projects undertaken through these LOCs.
• It is true that in the past some Indian companies had been awarded a majority of the projects under Lines of Credit, based on requests received from borrowing governments. However, several LOC projects have also been executed by a variety of other companies, especially public sector organisations like RITES, IRCON, WAPCOS, etc.
• PMCs/Contractors are selected by the borrowing Government through an open competitive bidding process, as per the procurement laws of the borrowing country and prescribed LOC Guidelines of the Government of India. Only Indian Companies/firms can bid for executing the LOC projects.

India-Sri Lanka Cooperation: Recent Developments

• Four-Pillar Initiative: Recently, India and Sri Lanka agreed to a four-pronged approach to discuss initiatives on food and energy security to help mitigate Sri Lanka’s economic crisis.
  • This Four-Pillar Initiative comprises Lines of Credit, currency swap agreement, Modernisation Project (like The Indian Housing Project) and Indian Investments.
• Joint Exercises: India and Sri Lanka conducted joint Military (Mitra Shakti) and Naval exercise (SLINEX).
• Participation in Groupings: Sri Lanka is also a member of regional groupings like BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) and SAARC in which India plays a leading role.
• SAGAR Vision: Srilanka supports India’s concern for the security of the Indian ocean with its ‘Neighbourhood First’ policy and SAGAR (Security and Growth for all in the Region).

Issues in India-Sri Lanka Relations

• China’s Intervention: China’s rapidly growing economic footprint (and political clout as a corollary) in Sri Lanka is straining India-Sri Lanka relations.
  • China is already the largest investor in Sri Lanka, accounting for 23.6% of the total Foreign Direct Investment (FDI) during 2010-2019 as against 10.4% from India.
  • China is also one of the largest export destinations for Sri Lankan goods and holds over 10% of its external debt.
  • China is also handling Hambantota Port of Sri Lanka, the port is viewed as a part of China’s String of Pearls Strategy.
• Katchatheevu Island Issue: India ceded the uninhabited island to its southern neighbour in 1974 under a conditional accord.
  • However, many times the fisherman issue arises more out of a domestic tussle rather than the India-Sri Lanka view on the issue.
• 13^th Amendment of the Sri Lankan Constitution: Indo-Sri Lankan Accord was signed in 1987 to provide a political solution to Sri Lanka’s conflict.
  • It envisages devolution of necessary powers to the provincial councils to address the just demand of the Tamil people for equality, justice, peace, and respect within a united Sri Lanka.
  • The provisions of this accord were made in the Sri Lankan constitution, by the Thirteenth Amendment.
  • However, still the provisions are not implemented on ground. Even to this day, s lot of Srilankan Tamils who evaded from Srilankan civil war (2009) are seeking refuge in Tamil Nadu.
• Back Tracing of Sri-Lanka: Recently, Sri Lanka backed out from a tripartite partnership with India and Japan for its East Container Terminal Project at the Colombo Port, citing domestic issues.

Source: The Hindu

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Brief on India – Sri Lanka Relations