As India is on the verge of becoming the third-largest economy globally, Sri Lanka should view its closest neighbor not as a competitor in trade but as a vital market for exports.
Key Insights:
- India is no longer just an option for Sri Lanka; it has become a crucial necessity. The recent decline in access to the US market, with tariffs now set at 20% compared to previous near-zero rates, alongside the loss of the EU’s GSP+ advantage due to the EU-India Free Trade Agreement (FTA), has eliminated other strategic choices. Given that Sri Lanka has a binding treaty with India, a favorable geographic location, and access to a market growing at a rate of 6-7%, India now stands as the primary large-market opportunity.
- Sri Lanka is significantly underachieving in its trade potential with India. In 2024, exports to India were a mere $1.07 billion compared to imports worth $4.32 billion. This trade deficit is attributed to poor execution rather than structural issues. The 48% year-on-year export growth observed in February 2026 indicates that with the right approach, progress is possible.
- The focus should be on value addition rather than volume. Currently, Sri Lanka exports bulk commodities when it could be offering branded products at two to three times the unit price. The EU-India FTA heightens the urgency of this shift: Sri Lanka should aim to provide high-quality inputs for India’s EU market, rather than competing with India in Europe.
- The opportunity is present, but effective execution is now the critical factor. The necessary structures are established: ISFTA, SAFTA, close geographic proximity, and a tariff advantage that competitors cannot match. What is lacking is a coordinated effort to certify exporters, address logistical challenges, and enhance Sri Lankan brand recognition in India. The decisive question is whether Sri Lanka will take advantage of this or remain passive.
India, with a population of 1.455 billion and a projected GDP growth of 6.5-7.6% by 2026, is a booming market that Sri Lanka cannot afford to overlook. The proximity of Sri Lanka, located less than 30 kilometers across the Palk Strait, offers a unique opportunity for overnight shipping to Indian ports.
Reasons for Strategic Alignment with India:
Sri Lanka’s rationale for strengthening ties with India has always been sound, but circumstances have made it essential. Three key changes in global trade have diminished the importance of Western markets and elevated India’s strategic significance.
- The introduction of tariffs by the US in April 2025 has imposed a 20% rate on Sri Lankan exports, effectively doubling costs. The apparel sector, which constitutes the majority of exports to the US, is particularly affected, with potential revenue losses of around $634 million and the risk of 15,000 jobs.
- The EU-India FTA, announced on January 27, 2026, is a significant development, eliminating duties on nearly 99.5% of Indian exports to the EU and nullifying Sri Lanka’s GSP+ zero-tariff advantage. However, this also opens up new opportunities as India seeks premium inputs like Ceylon tea and specialty spices to boost its exports to the EU. Instead of competing with India, Sri Lanka should collaborate by supplying high-quality goods into India’s EU market.
These developments have transformed Sri Lanka’s relationship with India from a choice to a necessity. The US market has become unpredictable without a free trade agreement, and the advantages in Europe have diminished. India remains the only large market where Sri Lanka has a binding treaty, favorable geographic access, and a steadily growing economy.
In 2025, Sri Lanka’s total exports reached $17.2 billion, with textiles making up 52%, tea 17%, and other agricultural products 15%. Despite this, Sri Lanka exported only $1.07 billion to India in 2024, while importing $4.32 billion, highlighting a deficit resulting from execution challenges rather than structural barriers. The recent increase to $264 million in February 2026 exports, up 48% year-on-year, indicates potential for growth.
The ISFTA, active since 2000, facilitates over 60% of Sri Lanka’s exports to India, while the SAFTA lowers tariffs on most goods to between 0% and 5%. However, the Sensitive List poses challenges, with Sri Lanka’s list containing 1,058 product lines compared to India’s 614, limiting opportunities in key sectors.
Priority Sectors for Expansion:
- Textiles and Apparel: Sri Lanka can leverage its ethical production credentials to target the premium segment of India’s garment market.
- Agricultural Products and Processed Foods: High-quality tea, spices, and coconut products have a strong demand in India, where branded Ceylon tea can fetch significantly higher prices.
- ICT and BPM Services: With a proficient English-speaking workforce and strong educational standards, Sri Lanka can carve out a niche in legal process outsourcing and financial services.
- Shipbuilding and Maritime Logistics: Increasing vessel exports to India highlight a growing yet underutilized opportunity for Sri Lanka to become a logistics hub in the region.
To maximize growth, Sri Lanka must shift its focus from raw commodities to value-added products. By upgrading its certifications and addressing administrative delays that hinder exports, Sri Lanka can enhance its competitiveness in the Indian market. Proximity to Indian ports facilitates just-in-time supply chain integration, provided that trade diplomacy is effectively utilized.
The need for action is clear. Sri Lanka’s trade strategy has been largely reactive, responding to external pressures instead of proactively positioning itself within regional value chains. To capitalize on the opportunities with India, a long-term, coordinated effort is required to certify exporters, improve logistics, and establish brand recognition. The necessary frameworks are in place; now, unified action from both the private sector and trade institutions is essential. India is set to emerge as a major global economy, and the pivotal question remains: will Sri Lanka be an active participant in this growth or merely an observer?
The Palk Strait should not be viewed as a barrier but rather as Sri Lanka’s most underutilized asset for trade.
(The author has a background in banking and has transitioned to education since 2007. He has held leadership roles, including Regional Director of CIMA and Executive Director of IIHE, and has taught MBA programs at various universities. He has also contributed to national education policies through his involvement in two Education Reform Commissions. His work focuses on integrating strategic leadership with educational transformation. He can be contacted via email at brad.emerson1406@gmail.com)
Financial Chronicle Biz English | Sri Lanka Business News.
