India, Sri Lanka push for ‘Early Harvest’ investment pact

• Eye full FTA by 2026
• Investment deal seen as a precursor to a comprehensive FTA by 2026, covering goods, services, investment, and trade facilitation
• Initial investment agreement aims to enhance investor protection in Sri Lanka, attracting Indian investment 
• To address Sri Lankan concerns, the report suggests India could offer asymmetrical treatment and ‘aid for trade’ within the new agreements

By Nishel Fernando

Top economists are strongly advocating for Sri Lanka and India to conclude an ‘early harvest’ investment agreement within this year, viewing it as a critical first step towards a comprehensive Free Trade Agreement (FTA).

This urgent call for fast-tracked investment protection is a central theme in the new report, “The New Geopolitics and South Asia’s Trade Architecture - What Next?” by Gateway House, authored by Dr. Ganeshan Wignaraja, Amit Bhandari, and Aliasger Bootwalla.

The report emphasises that such an agreement is pivotal for bolstering investor confidence and paving the way for deeper economic integration.

The authors assert that “stronger investor protections in Sri Lanka are crucial to attracting Indian foreign investors in the country’s ports, renewable energy, and privatisation of state-owned enterprises.” 

While acknowledging that talks for an India-Sri Lanka FTA had resumed previously with an ‘expectation of an early harvest investment agreement in 2024’, the report now urges that “India’s commerce ministry can restart bilateral FTA talks with a view of concluding an investment agreement in 2025 and a comprehensive trade deal in 2026, covering expanded goods coverage, services trade, investment, and trade facilitation.”

“There can also be a built-in agenda for including new trade issues such as intellectual property, competition policy and government procurement, when the conditions are right,” it added.

This push for a revitalised trade framework is seen as a cornerstone for Sri Lanka’s economic recovery and long-term growth. The report suggests that “to alleviate domestic Sri Lankan concerns about opening up trade, India can maintain asymmetrical treatment for Sri Lanka in the new deal—and consider providing some aid for trade.” This approach, the authors believe, “will help to foster B2B ties, stimulate inward investment, and provide for market access and regulatory cooperation.”

Beyond the critical FTA and investment pact, the May 2025 report outlines several other crucial steps for Sri Lanka. These include improving physical connectivity, building on recent enhancements such as increased flights and the recommencement of ferry services, with the report specifically pointing to “Indian finance for a multi-product fuel pipeline between India and Sri Lanka” as an important next step.

The paper also acknowledges Sri Lanka’s new government under President Anura Kumara Dissanayake and its commitment to an IMF programme, anti-corruption measures, and economic modernisation. It notes India’s pledge to assist Sri Lanka in the digitalisation of its public services and its potential role in developing Trincomalee as an energy hub. Crucially, the report highlights Sri Lanka’s reiterated commitment to respecting India’s security concerns.

The report notes that Sri Lanka faces a serious risk of repayments (capital) on its external debt starting from 2028 if the country fails to generate sufficient foreign exchange through trade-led growth. In such a scenario, the authors insisted that India should stand ready to support the island nation for a second time.

“Working in partnership with the IMF and World Bank, India should stand ready to help if Sri Lanka falters a second time. Such enhanced cooperation with Sri Lanka is almost a necessity. India is facing a hostile neighbourhood in 2025,” it said.

Further, it noted that following Prime Minister Narendra Modi’s historic visit to Sri Lanka in April 2025, enhanced India-Sri Lanka connectivity and trade offers a possible model for regional economic cooperation.