Sri Lanka’s growing vulnerability in a volatile global economy has renewed calls for a deeper trade partnership with India, as experts warn that hesitation could leave the country exposed to trade diversion, missed investment, and long-term strategic risks.
Sri Lanka should significantly strengthen its trade relationship with India to reduce economic and geopolitical risks, according to Ganeshan Wignaraja, former Director of Research at the Asian Development Bank Institute. Speaking at a forum held in Colombo last week, Wignaraja argued that upgrading the existing Indo Lanka Free Trade Agreement is no longer optional but a strategic necessity.
Sri Lanka and India have for decades attempted to expand their 1998 Free Trade Agreement into a broader and more comprehensive economic framework. While technical negotiations for two key agreements, the Comprehensive Economic Partnership Agreement and the Economic and Technology Cooperation Agreement, were completed, neither was signed due to sustained political resistance and domestic opposition within Sri Lanka.
Wignaraja warned that Sri Lanka now faces a growing risk of trade diversion as global supply chains realign and India deepens its integration with other regional partners.
“So, the short answer for Sri Lanka I think is that you know there is this risk of trade diversion,” Wignaraja said.
Despite political resistance, trade data highlights the importance of India as a market for Sri Lankan exports. In 2025, Sri Lanka’s merchandise exports to India stood at 1.04 billion US dollars. Items traded under the Indo Lanka FTA have consistently generated higher exports than imports, indicating a structural advantage that remains underutilized.
Wignaraja emphasized that Sri Lanka must rethink its approach to India and treat the relationship as strategic rather than transactional.
“We have to really take a strategic view of India. We have a very limited trade agreement signed; you know decades ago. But there was a discussion on an investment agreement to build in the bits. I think we better do all that rather quickly,” he said.
CEPA, negotiated between 2005 and 2008, was designed as a natural extension of the existing FTA, expanding cooperation beyond goods into services, investment flows, and technology transfer. However, strong opposition from professional associations, including doctors, engineers, and lawyers, stalled the agreement. Critics feared Sri Lanka’s smaller economy would be overwhelmed by Indian professionals and lower cost labor, resulting in widespread unemployment.
Nationalist political pressure further intensified during the Mahinda Rajapaksa administration in 2008, with critics framing the agreement as a threat to sovereignty.
Wignaraja noted that even the current FTA contains significant limitations that restrict trade growth.
“What is it that we can do in India given the way in which that earlier trade agreement was done? Lots of exclusions such as the quota on garments, there are lots of regulations that affect our primary agriculture stuff that can go to India,” he said.
He pointed to services, finance, and investment zones such as GIFT City as immediate opportunities.
“I think it really means stuff in services where there is less regulation right. It means for instance in Gift City there are opportunities for our companies to participate in ventures with them.
“Also, it means I think trying to talk with Indians much more, and getting Sri Lankan labor to work in Mumbai and in important centers in India, otherwise we risk trade diversion which is what the model shows,” Wignaraja said.
With Sri Lanka navigating debt recovery, geopolitical competition, and fragile export growth, the India trade question is fast becoming a defining economic choice.
