Sri Lanka: Storm Signals Across The Palk Bay – Analysis

By Col R. Hariharan

Some of the recent policy decisions of Sri Lanka affecting Indian commercial interests are sending disturbing signals that have the potential to affect Indo-Sri Lanka relations. Will these storm signals add to the political stress created by the non implementation of the much maligned 13^th Amendment to the Constitution?

Sri Lanka watchers are probably already debating this question. (For an analysis of the rationale behind 13A stress see South Asia Analysis Group Sri Lanka Update No: 225 December 7, 2012 – “Sri Lanka: Consolidation of Rajapaksa Inc ” at http://www.southasiaanalysis.org/node/1083 )

India-Sri Lanka relations, despite occasional hiccups have remained cordial all along because a sense of pragmatism among the national leadership in both countries prevailed over petty agendas and emotional hang-ups. This has given the relationship a unique character in South Asia. However, this had not precluded stress building up in times of national crisis in either country. The Eelam War IV (2006-09) was a recent example of when the two countries successfully managed it, though Indian government’s credibility within India had suffered because of it. (For a detailed analysis of this narrative see South Asia Analysis Group Paper No: 5294 dated Nov 13, 2012 “Adding substance to SAARC: India-Sri Lanka experience”).

If the present policy trend is left unchecked, it could affect Sri Lanka’s credibility among the Indian non-political segment particularly the trading community. The loser would be Sri Lanka, as it needs India’s whole-hearted economic support to keep a burgeoning economic down slide within manageable proportion in the coming months. Of course, this is in addition to the need for India’s political support to handle when the ghosts of Sri Lanka’s aberrations of governance catch up at the UN Human Rights Council session in April 2013.

The first issue relates to the Sampur thermal power project hanging fire since December 2006 when the governments of India and Sri Lanka, and National Thermal Power Corp (NTPC) of India and Ceylon Electricity Board (CEB) signed a memorandum of understanding to construct a coal-fired 500 Mega Watt power plant in Eastern Province.  The time-plot of the disastrous progress which has not yet left its paper trail is given below. It shows how casually such a huge project has been handled:

• Up to September 7, 2011: Sampur is chosen as site for the plant but discussions go on a number of issues including technology, pricing, acquisition of 500 acres of land, and organizing coal supply for the plant carried on in interim etc.
• Sept 7, 2011: NTPC and CEB sign the agreement to set up a joint venture – Trincomalee Power Company to manage the project.  The partners to contribute $75 million each towards equity and rest was to be met from borrowings. According to CEB website the Project started in Sept 2011 was expected to complete it by July 2014. Now it will be behind schedule by one year as the project has not started on ground.
• May 10, 2012: Power and Energy Minister Patali Champika Ranawaka announces in parliament “decision to set up the plant.” [This internal decision has taken 8 months!] He adds “the new Sampur power plant is not an Indian project. It is done by us. We have taken measures to acquire [emphasis added] 500 acres of land.”
• June 21, 2012: On India’s concern at the delay in the project taking off, Minister Ranawaka explains to the Indian Prime Minister Dr Manmohan Singh that the project was awaiting approval by the new board, jointly appointed by India and Sri Lanka, and “the ball was now in India’s court.”
• December 2012: A Sunday Times report quoted Power and Energy Secretary that the CEB wanted the NTPC to lower its operation and maintenance cost estimates. Engineers were also urging the Indians to reduce the “heat rate” so that less coal would be burned up per unit of electricity. The CEB would have to bear these expenses. Minister Ranawaka says the CEB was concerned about some interest rates cited in NTPC’s feasibility report. Power sector officials said the NTPC wanted an “exorbitant” return on investment while quoting steep rates of interest on loans for the project. He further says discussions were still going on. “The CEB and NTPC must reach a consensus. Otherwise it will be a huge loss for the CEB and the country and will create a bad name for the Indian government as well.” The land in Sampur has been sectioned off. Result: Construction cannot start till the power purchase and the implementation agreements are signed.

The surprising thing is that nobody is worried about the paper war continuing without productive results when Sri Lanka is facing a crippling power shortage. Not the least Champika Ranawaka, the Minister responsible for this Sri Lankan project.

What could be the real reason for the delay? Minister Ranawaka, an electrical and power engineer by qualification, provides the answer in one of his interviews:  “My reading is that an assortment of reasons has contributed to this development.  They range from India’s general antipathy towards Sri Lankan nationalist movement, to a fear psychosis that I am backing the Chinese against the Indians, the latter mainly due to the Norochcholai power plant.”

He goes on further: “As for the nationalist movement in Sri Lanka, it is no exaggeration that there’s a JHU supporter in every patriot. Ours is not just a political party with paltry three seats in parliament but a massive effort that leads the patriotic movement and especially the Sinhala consciousness. The Indian agencies and the section of the media backed by it are alive to this reality. They hate Sri Lanka’s patriotic movement as it strongly resists any form of Indian intervention – be they political ones in the form of forced policy, economic pressure in the form of CEPA or any other. Hence they see a need to malign me, the general secretary of the party and perhaps many others.”

If the key minister responsible for the project has this underlying mindset about India, how could this Indian-assisted project progress? Logically, with the present set up the whole the future looks bleak for the project. President Rajapaksa is fully aware of India’s concern at the highest level on the delay. India cannot advice him on his course of action on a matter that could be interpreted as internal. So there is no need for India to politicise this issue at all, as some would like to do, but take a call on commercial merits of the investment.

India must take action to ensure its investment in this public sector project funded by Indian tax payers’ money is productively used. Already the project is one year behind schedule and delay means wasted interest cost of investment. India cannot afford to incur this cost on a non-starter project due to the pet aversions of a Sri Lankan minister. The least India can do is to make known its deadline to go ahead with the project or pull out of it.

Tata’s did this after their investment proposal for a 4 billion plus was incubating with Bangladesh government for four years. And after incurring a loss while waiting for a decision, they pulled out to make profitable investment elsewhere. With the signing of the Free Trade Agreement with ASEAN yesterday,   investment opportunities in Indo-ASEAN trade will increase.

The second irritant relates to India’s automobile exports.  India is a dominant player in Sri Lanka’s automobile industry for some time now. Indian cars, particularly in the subcompact category, have 80 percent market share. They have established themselves both on competitive price and quality. Indian motor cycles and three wheelers are equally popular.

According to LiveMint report datelined New Delhi “Through 2012, Sri Lanka has made it difficult for Indian auto exporters, first by increasing import duty significantly in April, and following up with the increase in excise duty. Sri Lanka has increased excise duty on utility vehicles to 173% from 100% previously. Total duty on cars less than 1,000cc increased from 120% to 200%, including a 47% increase in excise.” Sri Lanka business media quoted the managing director of Associated Motorways Pvt Ltd, Colombo to say that “A 50% drop on sales came in style after April, not only in automotive sales but a tremendous slowdown in the industry itself.”

According to him a Maruti 800 cc that cost SL Rs 1.25 million increased to SL Rs 1.6 million after April 2012. But after the increase in excise duty imposed in November 2012, the price of the same car went up further to SL Rs 1.75 million. The same is the case with three-wheelers and motorcycles. The import duty increase in April 2012 also killed the second hand Japanese imported car business and the dealers suffered heavy loss.  The price increases have now placed the most popular subcompact cars out of the reach of common man.

Even as the excise duty in November was crippling Indian automobile business, it was amusing to see Sri Lanka ministers and bureaucrats promoting Sri Lanka as a business destination while receiving a 13-memebr high power Indian business mission (the fourth one this year!) in Colombo.   The delegation headed by Adi Godrej and included doyen of Indian automobile industry Rahul Bajaj. They would not have failed to notice the glaring disconnect between Sri Lanka’s talk and action.

The anachronism is that even while Indian cars were being elbowed out of the market by fiscal measures, the government had cleared a Chinese proposal to set up car assembly plants in Hambantota and Gampaha with an investment of $ 20 million.

India-Sri Lanka bilateral trade is now worth $5.1 billion in 2011-12, with India exporting $4.3 billion worth of goods to Sri Lanka in 2011-12 (over 22% of Sri Lanka’s imports.) Indian investment in Sri Lanka has doubled from $ 78 million in 2009 to $ 147 million. Tata, Bajaj, Godrej, Bharti, and RPG are already well established in Sri Lanka. It makes sense for India and Sri Lanka to further their business and trade links so that investment flow from India would increase economic opportunities for the people of Sri Lanka just as India benefits from Sri Lanka’s strengths. But it is for Sri Lanka to take a call on this as India’s options as a fast growing economic power are many more.

There is no point in either blaming China for this development or Sri Lanka’s kid glove treatment of China in comparison with India. Chinese style of operation makes it free from political issues that usually clutter up any deal between India and Sri Lanka. Moreover, China is Sri Lanka’s is biggest creditor while India is a large benefactor of Sri Lanka’s grants. It is natural for the creditor to get preference over donor when it comes to deal making. Otherwise, the lender would demand his pound of flesh; and probably China is already doing it.

To put it in a nutshell, probably time has come for Government of India to carry out a serious reappraisal and review of its policy options in Sri Lanka.

(Col R Hariharan, a retired Military Intelligence specialist on South Asia, is associated with the Chennai Centre for China Studies and the South Asia Analysis Group. E-Mail: [email protected] Blog: www.colhariharan.org )