In June 2009, when Sri Lanka officially celebrated the defeat of the Liberation Tigers of Tamil Eelam after a bloody war that lasted 25 years, the victory parade, which included tanks, fighter jets and artillery pieces, made India sit up: most of the military hardware on display was of Chinese make. China had played a key role in making that victory possible, and the Mahinda Rajapaksa government made no attempts to hide its gratitude. India has since watched with increasing concern, and some helplessness, China's growing presence in the island nation which sits barely 31 km across the Palk Strait from the southern tip of India. The wave of protests in Tamil Nadu against the Sri Lanka government's alleged atrocities on Tamils and India's vote in favour of the US resolution against Sri Lanka at the United Nations Human Rights Council in Geneva on Thursday is further working towards China's advantage. The sentiment is not limited to the country's leaders, who obviously know that gains can be made by playing one country against the other; it now runs deep. An assessment report of a political analyst to a company with business interests in Sri Lanka, which Business Standard has accessed, points that Lankan society is now vehemently arguing that it should lean towards China - a "friendly nation" - and not rely on India, particularly on the economic front. The speculation that India played a key role in watering down the resolution hasn't allayed the disgruntled sections of Lankan society, the report says. Thus, Sri Lankan Airlines has cut its flights to Chennai by half, to 14, following the attacks on Sri Lankan tourists, including two monks. There are reports that Sri Lanka has decided to partially take over a strategic oil storage depot in Trincomalee from Indian Oil Corporation's Sri Lankan arm, Lanka IOC. India has denied the reports. A day before this news broke, Lanka IOC Chairman Makrand Nene had said that there was no competition from China "but we have no plans to expand in Sri Lanka at the moment."
* * *Recent events show how close China and Sri Lanka have become. A few days ago, Rajapaksa inaugurated the country's second international airport, the $206-million Rajapaksa International Airport in Mattala built with money from China's Export-Import Bank. Some Chinese officials were present at the function. Some 40 km to the south is the China-funded $1 billion Hambantota Port. Why not India? "It's not that China is getting preference; it was always India first. We invited India first to build our ports, including the Hambantota port, but it rejected it saying it's not viable, so we invited China," Rajapaksa had said earlier. A senior official from the shipping industry in India says the port project "is really a great miss and India will regret it on all fronts, be it security or trade". The Hambantota Port is located on a key shipping route which sees around 300 ships, mostly oil tankers, passing through every day. Ironically, when the deep-water port formally opened for international shipping in June last year, the first consignment it moved was 1,000 Hyundai cars from Chennai, outbound for Algeria. If you look at it from the commercial point of view, then the port is meant to provide docking and refuelling facilities to the thousands of ships that ferry oil and raw materials from Africa and the Persian Gulf to China every year. But, this also happens to be a geo-strategically convenient location. It is a crucial link in the "string of pearls" which China is building in the region through a network of ports to consolidate its economic and military influence in the Indian Ocean: Sittwe in Myanmar, Chittagong in Bangladesh, Hambantota in Sri Lanka, Gwadar in Pakistan and Marao in the Maldives. Chinese money is pouring into Sri Lanka. From 2007 to 2011, while India extended aid of $298.1 million to Sri Lanka, China gave $2.126 billion to become the largest foreign aid provider to the country. While Indian aid has been for "soft" purposes like healthcare and education, the Chinese have funded highly-visible infrastructure projects. As on today, reports say, China has pledged more than $3 billion for infrastructure development in Sri Lanka. Some industry watchers have expressed concern that China might even be getting contracts for mega projects by bypassing tender procedures. Its engineers are building roads, railway lines, telecommunication links, dams, hospitals, expressways like the one between Colombo and Katunayake, stadiums, schools, hotels and power plants. Last year, Sri Lanka launched its first communications satellite with the help of China Great Wall Industry Corp, China's state-owned space technology firm. It has since signed a string of satellite deals with Sri Lanka. It's also helping build a space academy. Deals are being struck between the two countries to build telecommunication and information technology networks. The two have also pledged to improve their defence ties. Two years ago, China had gifted Sri Lanka Nelum Pokuna, a state-of-the art theatre and convention hall in the heart of Colombo. And now, Lotus Tower, a 350-meter multi-functional telecommunication tower and entertainment centre, is being constructed in Peliyagoda, near Colombo, with financial assistance from the Export-Import Bank of China. Sri Lanka's defence secretary, Gotabaya Rajapaksa, has justified China's increasing presence in the Indian Ocean saying that "the safety and stability of the Indian Ocean is critical for China's energy security and its increasing interest and increasing naval presence in this region is quite understandable." Some of the gains to China are clearly at India's expense. Last year, a plot of land in the heart of Colombo earmarked for an Indian cultural centre (the Indian High Commission had completed all formalities) was sold to Chinese aircraft manufacturer, China National Aero Technology Import and Export Corporation, at the eleventh hour. The incident brought an uneasy feeling of being elbowed out to make way for China. M Rafeeque Ahmed, president of the Federation of Indian Export Organisations, fears that India is missing opportunities which are now favouring China and this "will make Sri Lanka economically colonised". India's national security agencies have expressed concern over these developments.
But it is not clear what the government is doing to consolidate India's economic position in Sri Lanka. All that Foreign Ministry spokesperson Syed Akbaruddin is willing to say is: "When we have to, we will issue a press release." But companies with business interests in Sri Lanka want to hear more than that. Sri Lanka says there is no threat to Indian investments. Sam Wijesekara, counsellor (Commercial), Sri Lanka Deputy High Commission, says: "It is wrong to say India does not have any role to play in the Sri Lankan economy. Today India is on top of the list when it comes to private investments." Official data shows that in 2011, investment worth $98 million came to Sri Lanka from India as compared to $3.5 million from China. Leading Indian companies in Sri Lanka include the Tata group, Ceat, Nicholas Piramal, Ashok Leyland, SBI, ICICI Bank, Axis Bank and LIC. Somi Hazari, managing director of the Shosova group of companies, who trades in textiles with Sri Lanka, however says business has come down drastically. "Business is moving towards China, and it's not just because trade with China is cheaper. The Tamil issue is playing out in China's favour." From 2001 to 2011, India's textile exports (mainly from the southern districts of Tamil Nadu and Punjab) to Sri Lanka have increased about three-folds. But China has during the same period increased its textile exports to Sri Lanka by almost eight times. In the cement market, too, India is losing share to China and Pakistan. India-Sri Lanka trade has increased by one per cent per annum on an average from 2007 to 2011. On the other hand, average growth of China-Sri Lanka trade has been 32 per cent annually.
* * *There are other areas of concern too. Sri Lanka is believed to hold sizeable deposits of natural gas and fossil fuels. For India's energy security, the country is extremely important. As of now, Cairn Lanka, a subsidiary of Cairn India, is the only company from outside Sri Lanka which is actively involved in hydrocarbon exploration here. It has so far drilled four exploration wells in the block in the Mannar basin. This has resulted in two discoveries: natural gas deposits in Dorado and Baraccuda. But there could be competition soon. "I understand that China is also looking at exploration opportunities in Sri Lanka," says R S Sharma, former chairman and managing director of Oil and Natural Gas Corporation and ONGC Videsh Ltd. Sri Lanka has already announced the second round of bidding for licences for the remaining blocks in the Mannar basin. China, it is believed, will be a major contender and a strong competitor in the bidding. Industry watchers say India's position has become shaky after the recent incidents in Tamil Nadu. If China wins the bid to drill in the Mannar basin, it will be positioned right under the nose of Tamil Nadu, a few kilometers away from the Indian coast. The way things are going, it won't come as a surprise if China bags several of these blocks. Colombo's leading newspaper, Sunday Times, has reported that the Lankan government has decided not to consider international companies and their "key shareholders" who have "known alignment in world politics" when offers are invited to assess its offshore petroleum data. The decision, it said, was taken on a recommendation by Rajapaksa who also looks after the petroleum resources development secretariat which handles the country's hydrocarbon exploration. This was after the Sri Lankan government ran into trouble with the Norway-based TGS Nopec to analyse Sri Lanka's offshore petroleum data. The decision could impact Indian companies too, given that the Cabinet, as reported by Sunday Times, has also decided that companies should not in any way impair Sri Lanka's national interest. Recently, India's National Thermal Power Corporation also faced hurdles and considered pulling out of Sri Lanka, its maiden overseas venture, following fresh terms set by the Ceylon Electricity Board. The board wanted downward revision of operations and maintenance cost to Rs 20.5 lakh per MW each year from the current Rs 38.92 lakh. Officials at NTPC now say the issue has been resolved and the 500-MW coal power project at Sampur in the Trincomalee district is on track. China, meanwhile, is sending just the right feelers to Sri Lanka on the Tamil issue. Last week, the newly-elected Chinese president, Xi Jinping, telephoned Rajapaksa to say that China supports Sri Lanka's efforts to protect its national sovereignty and would continue to offer assistance. In Tamil Nadu, Dravida Munnetra Kazhagam is, meanwhile, determined to wrench back its core issue - of the rights of the Tamils - which it feels is being hijacked by fringe elements. With the Lok Sabha elections just a year away, DMK's chief, M Karunanidhi, is going all out on this. And in doing so, the man who turns 90 next year is pushing Sri Lanka deeper into the arms of China.