A little history
THe clash between Sri Lanka's two largest ethnic groups, the Sinhalese and the Tamils resulted in a civil war in Srilanka in 1980s. On couse of time, Tamil militant groups developed strong relationships with political parties in South India. These Tamil parties firmly backed the militants' cause of creating a separate Tamil Eelam within Sri Lanka and allowed establishment of their training camps within Tamil Nadu state.

Although Sri Lanka was a key member of Non-Aligned Movement during Nehru's time, Government of Sri Lanka's policies became pro-western as J. R. Jayewardene was elected prime minister with his landslide victory in 1977 parliamentary election. Subsequently he introduced a new constitution and Open economy to Sri Lanka. Sri Lanka is the first South-Asian country to adopt Liberal open economy. Together with these developments, India was also concerned about Srilanka's growing military co-operation with United States, Irasel and China. Further, President J.R. Jayewardene of Sri Lanka did not enjoy with Premier Indira Gandhi the same warm relationship he had with her father, Premier Jawaharlal Nehru. After Premier Indira Gandhi, Rajiv Gandhi, took a policy decision to support Sri Lankan northern insurgency from 1983.

Because of all these reasons, beginning from 1983, till May 1987, India, through its intelligence agency Research and Analysis Wing (RAW), provided arms, training and monetary support to 6 Sri Lankan Tamil militant groups including LTTE. The LTTE's rise is widely attributed to the initial backing it received from RAW. It is believed that by supporting different militant groups, the Indian government hoped to keep the Tamil independence movement divided and be able to exert overt control over it.

In 1987, at a time when the Sri Lankan government stated they were close to defeating the LTTE, India dropped 25 tons of food and medicine by parachute into areas held by the LTTE in a direct move of support toward the rebels. Negotiations were held, and the Indo-Sri Lanka Peace Accord was signed on July 29, 1987, by Indian Prime Minister Rajiv Gandhi and Sri Lankan President Jayewardene. Under this accord, the Sri Lankan Government made a number of concessions to Tamil demands including official status to Tamil language. India agreed to establish order in the North and East (militant areas) through a force - Indian Peace Keeping Force (IPKF), and to cease assisting Tamil insurgents. While most Tamil militant groups laid down their weapons and agreed to seek a peaceful solution to the conflict, the LTTE refused to disarm its fighters. Keen to ensure the success of the accord, the IPKF then tried to demobilize the LTTE by force and ended up in full-scale conflict with them. Although the LTTE was at war with India, Tamil Nadu still remained LTTEs main source of supplies. Through Operation Pawan, IPKF took control of Jaffna from the LTTE in late 1987.

Following the defeat of Rajiv Gandhi in Indian parliamentary elections in December 1989, the new prime Minister V. P. Singh ordered the withdrawal of the IPKF, and their last ship left Sri Lanka on March 24, 1990. In the long term, the Indian intervention in the Sri Lankan Civil War was a tactical victory for the Sri Lankan Government. The Indian intervention angered the Tamil Tigers who retaliated by killing over a thousand IPKF soldiers as well as assassinating Rajiv Gandhi which in the long term effectually ended Indian government co-operation with the LTTE and instead initiated close co-operation between the Indian and Sri Lankan governments to defeat the Tamil Tigers.

Recent Developments
Now India is no longer viewed as a domineering neighbour, and the bitter memories of the 1980s had faded from the collective memory of Sri Lankans. In 2000, India signed FTA with Srilanka to promote through the expansion of trade and economic relations between two countries. Since the bilateral free trade agreement, Indo-Sri Lankan trade rose multiple times. Both nations are also signatories of the South Asia Free Trade Agreement (SAFTA). Negotiations are also underway to expand the free trade agreement to forge stronger commercial relations and increase corporate investment and ventures in various industries. Currently India is active in a number of development activity in Sri Lanka like lines of credit for capital goods, consumer durables, consultancy services and food items, funding small development, education and health projects.

Problem Areas
Fishermen Issue : There have been several alleged incidents of firing on Indian fishermen in Palk Bay by the Srilankan navy. India was keen on a formal document with legal implications to solve this issue. Sri Lanka did not express its reluctance in as many words, but favoured informal solutions to start with. Several Tamil Nadu politicians like Vaiko and Jayalalitha have condemned the federal government for not doing enough to stop the killing of Indian Tamil fishermen. Vaiko has also said that TN will separate from Indian Union if the barbaric act of SL Navy does not stop.

Nuclear Power Plant : Recently Sri Lanka has raised its concerns over nuclear power plants located in southern India. In the event of a nuclear disaster in India, the Sri Lankan authorities feel the northern town of Mannar will be the hardest hit.

UN resolution : In 2011, India voted against Srilanka in the UN resolution for the implementation of Lessons Learnt and Reconciliation Commission. BUt Srilanka has reiterated that Indo-Srilankan ties remains intact eventhough there was a wide protest from the Srilankan media.

PS : Based on Civil Service Mains General Studies Paper 2 syllabus : Foreign Affairs with special emphasis on India’s relations with neighbouring countries and in the region.

sources
1. http://sundaytimes.lk/970119/plus4.html
2. http://en.wikipedia.org/wiki/India%E2%80%93Sri_Lanka_relations
3. http://www.thehindu.com/news/national/article2832484.ece