Modi’s visit has deepened support to Sri Lanka with debt relief and interest rate cuts. Besides this, in a landmark gesture, India has turned its $100 million loan into a grant. The agreement stands out in the international landscape, where creditors often offer only maturity extensions and modest rate reductions.
In a powerful symbol of regional solidarity and renewed diplomacy, Indian Prime Minister Narendra Modi announced a significant debt restructuring deal with Sri Lanka during his two-day state visit to the island nation. The landmark agreement includes sharply reduced interest rates and the outright conversion of $100 million in loans into grants – offering a much-needed lifeline to Sri Lanka as it recovers from an unprecedented economic collapse.
Standing alongside Sri Lankan President Anura Dissanayake at the Presidential Secretariat in Colombo, Modi highlighted the depth of India’s commitment to its closest maritime neighbour. “Our bilateral ‘Debt Restructuring Agreement’ will provide immediate assistance and relief to the people of Sri Lanka,” he said.
The Indian High Commission confirmed that “bilateral amendatory agreements on debt restructuring” had been finalised during the visit. This restructuring includes around $1.366 billion in loans from India’s Export-Import Bank and the State Bank of India – excluding additional interest arrears – according to Sri Lanka’s September 2024 debt bulletin.
Importantly, India played a key role as a co-chair in Sri Lanka’s overall debt restructuring discussions, making it a critical diplomatic player in the island nation’s path to financial recovery. The agreement stands out in the international landscape, where creditors often offer only maturity extensions and modest rate reductions.
“Today we have also decided to reduce interest rates,” Modi stated, calling the gesture a symbol of India’s continued support. “Even today, India stands with the people of Sri Lanka.”
Turning Debt into Development: $100 Million in Grants
One of the most remarkable aspects of the announcement was Modi’s revelation that India has written off over $100 million in loans in the last six months alone, converting them into grants. This act of financial generosity – relatively rare in sovereign-to-sovereign relations – comes at a critical juncture in Sri Lanka’s economic recovery.
“In the last six months alone, we have converted loans worth more than $100 million into grants,” Modi noted. “This is more than just financial assistance – it is a message of trust, partnership, and regional solidarity.”
This move goes beyond the standard playbook of debt restructuring, which typically involves extended repayment schedules and lower interest payments. Instead, India’s decision to outright convert loans into grants underscores its evolving strategic posture in South Asia – one that combines hard-nosed geopolitical calculation with soft power diplomacy.
India had previously extended large volumes of credit to help Sri Lanka import essential goods such as fuel, food, and medicine during the peak of its economic crisis. The rupee, due to excessive money printing and monetary mismanagement by Sri Lanka’s central bank, lost its credibility as a medium of exchange, resulting in what economists termed a “sudden stop” event – a total freeze of foreign exchange inflows.
While much of India’s financial support was made through credit lines and emergency forex injections, the decision to restructure official debt and write off loans now formalises that assistance and strengthens long-term bilateral ties.
Provincial Council Polls and Reconciliation in the Spotlight
Beyond economics, Prime Minister Modi’s visit has rekindled dialogue on another longstanding issue: political reconciliation and the status of Sri Lanka’s Tamil population.
“We also talked about reconstruction and reconciliation in Sri Lanka,” Modi said, reaffirming India’s position that Sri Lanka must implement meaningful political devolution. “President Dissanayake appraised me of his inclusive approach. We hope the Sri Lankan Government will meet the aspirations of the Tamil people and fulfil its commitment towards fully implementing the Constitution, and conducting Provincial Council Elections.”
These councils were established under the 13th Amendment to the Sri Lankan Constitution, a result of the 1987 Indo-Lanka Accord. The amendment was designed to address the grievances of the Tamil minority by granting a degree of political autonomy to provinces, especially the Tamil-majority North and East. However, elections have not been held for years, and successive governments have either postponed or defanged the powers of these councils.
Interestingly, the Janatha Vimukthi Peramuna (JVP), the Marxist party that forms the backbone of President Dissanayake’s National People’s Power (NPP) alliance, had strongly opposed the Indo-Lanka Accord at the time. The party’s opposition to Indian involvement in Sri Lanka’s internal affairs even led to a violent insurrection in the late 1980s, where thousands of civilians, including politicians and officials, lost their lives. The rebellion was ultimately crushed by the military.
Now, with the JVP in power and Modi calling for elections that stem from a deal they once opposed, the dynamics are complex. Still, Modi’s words may nudge Colombo closer to fulfilling promises made decades ago.
Strategic Calculations Behind Modi’s Colombo Diplomacy
Modi’s visit to Colombo is not just a humanitarian gesture – it is also a carefully timed diplomatic initiative with wide-ranging geopolitical implications. It comes as Sri Lanka navigates a fragile economic recovery following its 2022 default on foreign debt and amid rising concerns about China’s growing footprint in the Indian Ocean.
New Delhi has long viewed Beijing’s strategic inroads – especially the 99-year lease of the Hambantota port and Chinese-funded infrastructure projects – as a challenge to regional balance. Modi’s visit aims to reassert India’s historical influence and present it as a more transparent and accountable development partner.
India’s assistance to Sri Lanka during the crisis – estimated at nearly $4 billion – was unmatched by any other single nation, reinforcing its image as the first responder in regional crises. Discussions during Modi’s visit are also expected to include forward-looking projects in energy cooperation, such as the development of a regional energy hub in Trincomalee and the export of liquefied natural gas (LNG) from India to Sri Lanka.
India and Sri Lanka are also discussing enhanced defence ties, particularly naval cooperation. As maritime security becomes a bigger concern in the Indian Ocean, India’s offer of cooperation in surveillance, training, and joint exercises is seen as a stabilising factor.
