Elections, geopolitics and trade: The Sri Lankan twist

No, this one is not about the US Elections, which are still serve their own geopolitical dish of the year. The Sri Lankans just elected a new president! Left-leaning politician Anura Kumara Dissanayake has won Sri Lanka’s presidential election after a historic second round of counting. This result, quite unexpected, may have some profound geopolitical & resulting trade & shipping consequences.

India, China & Regional Challenges

India & China have been locked in a “proxy” geopolitical battle for the region for some time. Indian Prime Minister, Modi & his foreign minister, Jaishankar find themselves in a tough spot and the situation is getting tougher by the day.

Internally, their party, BJP, did not secure an outright majority & therefore must depend on coalition partners, which is always a tightrope to walk.

Externally, the South Asia neighbours who had been closely cultivated by India over the past two terms of Modi, are all turning “hostile.” Myanmar was always tricky with the army & its stronghold being biased towards China. So was the case with Pakistan, which has never been a “friend” to India and therefore leaning towards China was logical. China recently acknowledged the Taliban regime in Afghanistan & has allegedly agreed a “stand-down” agreement with them towards the Chinese interests in the border areas of Pakistan & Afghanistan. Bangladesh has recently seen a bloody regime change, though that seems to be more a pro-US play rather than a pro-China one. Nonetheless, India has lost ground there as well. Maldives’ current government has been clearly pro-China and though their anti-India rhetoric has cooled down, once the Indian tourists threatened to boycott Maldives, the direction of wind has changed for sure.

Related:US to develop $550 million new Sri Lanka Container Terminal

And now come Sri Lanka. By electing a left-leaning politician, who has been a member of a Marxist party since he was a student, the rhetoric for a “fresh start” has gained ground. China already has a huge foothold, having the port of Hambantota for 99 years. During the monetary crisis over the past 2-3 years in Sri Lanka, India gained a lot of ground by supporting Sri Lanka, when both China & IMF had pulled back their support. The challenge is that the previous president had direct memories & linkage with those support measures, the current president will start from a clean slate with “no baggage.”

Economics, Indian Involvement & Investments

Indian companies have made significant investments in Sri Lanka across a range of sectors in recent times, driven by geographical proximity and strong bilateral ties.

Related:Hambantota port starts container handling with MSC calls

Tata Housing Development Co., a subsidiary of Tata Group, made one of the most significant investments in the Sri Lankan real estate sector. They developed a luxury housing complex called "One Colombo" in partnership with Urban Development Authority of Sri Lanka.

The Lanka IOC, a subsidiary of Indian Oil Corporation, has been a major player in Sri Lanka’s energy sector. They operate fuel retail outlets and have invested in petroleum storage and distribution infrastructure.

Airtel Lanka, a subsidiary of Bharti Airtel, entered the Sri Lankan telecommunications market and has been providing mobile and internet services. They have invested heavily in expanding their network infrastructure across the country.

Recently, the Adani Group made a major investment in the Colombo Port’s Western Container Terminal. This partnership is significant for both nations, as it aligns with Sri Lanka’s aspirations to develop its port facilities into a major transshipment hub in the region.

Larsen & Toubro (L&T) has invested in multiple infrastructure projects in Sri Lanka, especially in water management, urban development, and renewable energy sectors.

Tata Communications: Tata Communications has been involved in enhancing telecommunications infrastructure in Sri Lanka, including undersea cables and communication networks.

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Indian IT companies like Infosys, Wipro, and HCL have been increasingly involved in the Sri Lankan market, providing IT services, software development, and outsourcing solutions for businesses.

Mahindra & Mahindra, the Indian automobile giant has invested in Sri Lanka’s vehicle market, primarily in the sale of tractors, vehicles, and commercial transportation equipment. They also have a significant stake in finance services, offering vehicle loans and leasing through Mahindra Finance.

A part of the Aditya Birla Group, UltraTech Cement has made substantial investments in the cement and building materials industry in Sri Lanka.

State Bank of India (SBI) has a significant presence in Sri Lanka’s banking sector. It operates multiple branches across the country, providing financial services to businesses and individuals, which supports trade and investment between the two nations.

These investments reflect the strong economic collaboration between India and Sri Lanka, spanning crucial sectors like energy, telecommunications, infrastructure, real estate, and financial services. The India-Sri Lanka Free Trade Agreement and bilateral economic initiatives have further encouraged this investment flow in recent years.

It is always about the Trade: India’s trade with Sri Lanka & what can China grab?

Over the last few decades, India’s major exports to Sri Lanka have included a wide range of goods, reflecting the close economic ties between the two countries. Key exports from India include Petroleum Products, Automobiles and Spare Parts, Pharmaceuticals, Iron and Steel Products, Agricultural Products, Cement and Building Materials: Textiles and Fabrics Raw Materials such as Cotton Yarn and Fabrics, Chemicals, Food and Beverages and Machinery and Equipment.

With the new government in place, even the Free Trade Agreement may be up for discussion. And therein lies the chance for China to step into a “gap.”

While Agricultural Products & Pharmaceuticals may continue to remain India’s key USPs, most of the other commodities reflect products in which China holds a competitive advantage. Refined Petroleum Products from China are being exported to Asia, Africa, and Europe. With a new BYD EV assembly plant in works in Pakistan, China may look to make a dent in the Indian influence in Sri Lankan automobile markets. China’s ability to dump steel & cement across the globe is well known. With a soft real estate market domestically, it may turn more aggressive on its export strategies.

With a supportive president in Sri Lanka, and his party holding an advantage in the upcoming parliamentary polls to be held shortly as he has promised, China may be looking at huge advantages with this election results. Having its own port helps too.

Every Action has an Equal & Opposite Reaction: What would India do?

India though is not the same country as it used to be, before Modi came into power. Over the past decade, India has not only taken a leading role in the regional geopolitical scene, but it has also taken the same role on the global scene. With a stronger & expanded BRICS alliance, a leader of the Global South movement, other key alliances such as G20 & QUAD, India has a much more diversified market strategy. One of the key changes may also be to increase alliances with ASEAN countries, especially Indonesia & Philippines, who are struggling with Chinese challenges too. From a shipping perspective, India & Philippines are two of the largest sources for seafarers across the globe – a partnership to work together in skills development, digital training & seafarer welfare can be a huge win-win for both countries, cementing India’s influence in the greater Asia region. Simultaneously, India will increase its involvement with the American & European allies too. It has done well in past 10 years and now maybe the time to cash in some favours. Be it Harris or Trump, neither of them can deny the power that India possesses.

Trade & Shipping Consequences: Rewiring trade flows

Challenges between neighbours inevitably mean good news for shipping as they usually need to substitute those trades with countries further away. Steels, Cement, Machinery & Chemicals coming from China, instead of India, to Sri Lanka would mean longer distances & therefore needing more ships to service the same amount of demand. The greater the displacement of exports from India to China, this can bode well for tankers, dry bulkers as well as container ship demand.

Overall, the geopolitical dynamics of the South Asia region will have profound political, economic, trade & shipping implications for the world. These are early days but remember the dawn & its brightness can give an important clue on whether it will be a sunny day or a rainy one! So, watch out for this developing story.