In early 2025, Tata Electronics made a strategic move by acquiring a 60% stake in Taiwanese electronics giant Pegatron’s India-based iPhone manufacturing facilities in Tamil Nadu (TN) and Karnataka. This acquisition, which included three plants across the South, culminated in the purchase of Pegatron’s Chennai facility that employs over 10,000 employees. This plant is one of the largest iPhone production centres in the region, with an output of five million units annually.
According to a report in Nikkei Asia, the deal also involved the transfer of key Pegatron executives, technicians, and skilled labour, bolstering Tata Electronics’ expertise and operational capabilities in the high-tech sector.
Tamil Nadu is poised to further benefit from India’s burgeoning electric vehicle (EV) sector, which is expected to create a $ 20 billion opportunity by 2030, according to Times of India. This growth will be fuelled by the state’s existing ecosystem of production and manufacture of EV components, batteries, motor telematics, and software, positioning the state as a key player in the transition to sustainable transportation.
On a broader scale, India’s research and development investments in its own EV space are set to expand dramatically, from a $ 5 billion market in 2023 to a projected $ 16 billion by 2030. Tamil Nadu, with its robust industrial infrastructure and skilled workforce, is set to capture a significant share, estimated at 30% of this rapidly growing market. Multinational automakers like Ford, Renault, and Nissan, along with domestic giants such as Mahindra and Mahindra, have heavily invested in Tamil Nadu’s EV research and development ecosystem.
In a conversation with The Daily Morning Business, EY Director and IMF Columnist Talal Rafi highlighted the potential for Sri Lanka to tap into similar lucrative segments of the value chain, in the closest neighbouring state in India.
He emphasised the importance of Sri Lanka focusing on sectors where it holds both a comparative advantage and has the ability to seamlessly integrate into becoming important proponents to the existing successes of growing markets in the South of India, and even specifically Tamil Nadu.
“South India is the industrial powerhouse of India, with Tamil Nadu being the second most industrialised state. The region excels in sectors such as IT/BPM, automobiles, and pharmaceuticals. Sri Lanka needs to mirror this industrial approach, developing its own expertise in sectors that complement India’s strengths,” Rafi noted.
Rafi drew parallels to Vietnam’s success in integrating into the global electronics supply chain. Vietnam’s transformation into a global tech manufacturing hub was catalysed by the establishment of Samsung’s production facilities in the country.
“When Samsung set up in Vietnam, it didn’t just bring manufacturing, it brought an entire ecosystem of local suppliers, technology transfers, and managerial expertise. This helped Vietnam emerge as a $ 300 billion export powerhouse. Sri Lanka, too, should consider facilitating foreign direct investment (FDI) in sectors where it can build a competitive advantage, particularly in collaboration with neighbouring countries like India,” he explained.
While Tamil Nadu’s IThub may rank behind Bangalore and Hyderabad in terms of size and conglomerates working within the state, local and multinational IT giants Cognizant, HCL Tech, Tech Mahindra, Zoho and PayPal are among the leading IT companies that operate out of the state. Opportunity also lies in other Southern states for Sri Lanka, such as in Bangalore, that houses India’s lion share of IT investments, with multinationals like Infosys, Wipro, Accenture, Amazon, Google and Microsoft operating out of the city.
As India’s IT sector, which boasts millions of highly skilled professionals, has become deeply integrated with global multinationals and serves as a key supplier for major tech companies, Sri Lanka with its more modest size has the opportunity to carve out its own space in areas where it can offer distinct advantages. Sri Lanka’s growing IT sector, slated to grow up to an estimated 200,000 professionals by 2029, holds considerable potential for integration with India’s thriving tech ecosystems, particularly in cities like Bangalore and Chennai.
Rafi emphasises the need for fostering stronger ties through mutual skills recognition agreements, which could be a pivotal step in this direction, enabling Sri Lanka’s talent pool to tap into the opportunities available in one of the world’s leading tech hubs.
“Sri Lanka needs to focus on sectors where it can provide niche skills that complement India’s growing tech needs. For instance, India is experiencing a significant shortage of AI professionals, with only half of the demand being met, and projections showing a 53% gap by 2026, according to The Economic Times.”
“Sri Lanka can use this gap as an opportunity to focus on high-skill education and training programmes in artificial intelligence (AI) and related fields.” According to Rafi, This strategic focus on AI, alongside other emerging technologies, would allow Sri Lanka to support India’s tech industry while fostering its own specialised workforce, enabling a two-way street beneficial opportunity.
He also suggested Cloud computing as another area where Sri Lanka can align its expertise with India’s growing demand. As the global cloud computing market continues to expand, particularly in India, Sri Lanka has the opportunity to position itself as a valuable player by providing trained professionals capable of supporting both local and multinational companies operating in India, given the skills demand for such professionals.
Rafi harkened back to his example of Vietnam, which strategically integrated into the global value chain of electronics. “As Vietnam developed its manufacturing ecosystem to cater to global giants like Samsung, it reaped the benefits of technology and knowledge transfers, creating a robust tech ecosystem that now exports more than $ 300 billion worth of products annually.”
“Sri Lanka, by focusing on sectors where it can develop a competitive edge, such as AI, cloud computing, and other niche technology areas, could replicate this success and become an integral part of India’s tech landscape.”
On the front of exploring the avenues in which small medium enterprises (SMEs) would be able to avail to, in bridging trade with the southern states, Rafi acknowledged that Sri Lanka would face a fundamental challenge in integrating with South India’s booming manufacturing ecosystem, due to its sheer scale. As Indian SMEs inherently benefit from a vast domestic market, giving them cost and volume advantages in sectors like textiles and electronics components, he suggests that competing directly on price or production capacity would not be a viable strategy for Sri Lankan firms.
According to Rafi, the key lies in innovation and niche specialisation. A compelling example is Sri Lankan entrepreneur Rohan Pallewatte, whose firm carved out a global niche in automotive sensors. “Rather than trying to match large-scale Indian manufacturers, Pallewatte focused on high-precision, high-value components, securing contracts with major global automakers.”
“His success demonstrates that Sri Lanka’s path into South Indian (and global) value chains depends on identifying gaps in precision manufacturing, specialty textiles, or tech components, leveraging agility to serve just-in-time demand from Tamil Nadu’s auto, electronics, and apparel hubs, and building partnerships with Indian firms for research, development and supply chain integration.”
For Sri Lanka’s SMEs, opportunity lies in specialty textiles and technical fabrics, a field in which Sri Lanka has a pre-existing successful home-grown ecosystem. Pairing Sri Lanka’s edge in textile technological innovation, it could stand to benefit from the demand Tamil Nadu’s garment industry garners, as the largest source for garments in India- leveraging Sri Lanka’s expertise in high-performance fabrics (e.g. moisture-wicking, sustainable materials) where bulk production isn’t the priority, Rafi says.
Another aspect Sri Lanka could bank on in the opportunity it has with South India include its skilled workforce. With Chennai’s growing EV and electronics manufacturing needs for precision parts (e.g. circuit boards, sensor modules), Sri Lanka’s skilled workforce is positioned to benefit from windows of collaboration and integration. Further, Sri Lanka’s own expertise and pre-existing capacity in food processing industries, particularly for spices and organic extracts, makes the industry an attractive segment for value addition and integration with those of the Southern states which also export across the world.
Suggesting Sri Lanka shifts its focus from traditional trade models, Rafi says Sri Lanka has an opportunity in looking towards ASEAN's intra-industry trade model, of which countries have thrived on specialisation and supply chain complementarity. “South Asia’s regional trade remains dismally low at just 6%, the weakest globally, while Southeast Asia has flourished by prioritizing value chain integration over isolated industrial development.”
“A key lesson from ASEAN is the importance of infrastructure that enables seamless trade. South India, home to Bangalore’s $ 85 billion IT hub, Chennai’s automotive and electronics clusters, and Hyderabad’s pharmaceutical dominance, offers vast opportunities for Sri Lanka in sectors like logistics, component manufacturing, and IT services.”
Rafi however conceded that Sri Lanka’s inefficient ports, cumbersome customs procedures, quotas and poor trade facilitation are likely to be bottlenecks in such ventures. He explained that Sri Lanka ranks below many Sub-Saharan African nations in trade facilitation indicators, a troubling gap for a middle-income economy. “Streamlining processes, digitising documentation, and investing in port connectivity with Tamil Nadu and Kerala could replicate the success of ASEAN’s cross-border supply chains, such as Malaysia’s integration into Singapore’s electronics value chain,” he suggested.
According to Rafi, the path forward is clear: Sri Lanka must shift from competing with South India to complementing it. By adopting ASEAN’s playbook of infrastructure-driven connectivity, trade facilitation reforms, and value chain specialisation, Sri Lanka can transform its proximity into prosperity, becoming a vital node in South India’s economic ascent.
Historically, Sri Lanka’s protected economy has long resisted open trade, but gradual liberalisation, through phased tariff reductions, subsidies for SMEs, and improved trade facilitation, could help ease domestic opposition while fostering deeper integration with South India, Rafi says. “Only 20% of Sri Lanka’s imports are consumer goods, while the remaining 80% consist of intermediate and capital goods essential for export industries. For instance, the apparel sector, which generates around $ 5 billion in exports, relies on $ 3 billion worth of imported materials.”
Sri Lanka’s high tariffs and para-tariffs (such as PAL and CESS) typically inflate production costs, eroding the competitiveness of Sri Lankan exports, many of which operate on thin margins, adding to the tedious nature of trade. To this end, Rafi also suggests simplifying customs procedures and reducing delays in importing supplies would further enhance efficiency, ensuring smoother cash flows for businesses.
When asked if a critical step in this integration could be a bilateral Economic and Technical Cooperation Agreement (ETCA) with India, particularly in high-potential sectors like IT, healthcare, and logistics, Rafi suggested a need for a shift in mindsets. “While trade liberalisation inevitably creates winners and losers, the net effect is a more dynamic and productive economy. Sri Lanka’s IT sector, for example, could fill India’s growing skills gap, but this requires a shift in mindset, from viewing foreign direct investment (FDI) merely as capital inflow to recognising its role in boosting exports.”
As Rafi points out that 82% of global exports are driven by multinational companies, yet Sri Lanka has been slow to attract export-oriented FDI. Thailand’s automotive sector, which exported $ 12 billion worth of cars in 2023, equivalent to Sri Lanka’s total exports, demonstrates how FDI can transform an economy without requiring domestic brands to lead the charge.
While Rafi acknowledged that concerns about over-reliance on India are valid, given past tensions in fisheries and politics, he said that they should not overshadow the immense potential in availing opportunities within the South of India.
“Rather than framing this as dependence, Sri Lanka should approach it as a strategic economic partnership with a future global powerhouse. India is on track to become the world’s third-largest economy, and even capturing a small share of its market could accelerate Sri Lanka’s growth.”
By leveraging geographic proximity and aligning with South India’s booming value chains, particularly in manufacturing, technology, and services, Sri Lanka can position itself as a competitive player in regional trade, turning historical apprehensions into a forward-looking economic vision.