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Sri Lanka and India will sign a pact to link their power grids and start negotiations on an upgraded trade agreement within two months, a Sri Lankan diplomat said on Wednesday, as the island nation seeks a way out of its worst economic crisis in decades.

India has provided some $4 billion in assistance to its southern neighbour since the crisis hit early last year, but Sri Lanka is now seeking to enhance trade and investments as it moves to close a $2.9 billion loan from the International Monetary Fund, the country's envoy to New Delhi told Reuters.

"We have to have growth, otherwise basically the economy will shrink," Milinda Moragoda said.

"As far as growth is concerned, India offers that prospect. So we will have to move on that. Tourism from India, investment from India, integration with India. That's what we have to do."

A key part of Sri Lanka's economic recovery plan rests on developing its renewable energy resources in the island's north, from where power can be transported into southern India through a cross-border transmission cable.

The two countries resumed talks on linking their electricity grids last year, and Moragoda said a memorandum of understanding on the project would be signed within two months, which will be followed by a feasibility study.

First proposed more than a decade ago, the project has made little progress so far. But Moragoda said Sri Lanka hoped to get the transmission line in place within two to three years so that renewable power produced on the island can be sold to India.

"We need to have more sources of foreign exchange and electricity will be ideal," he said.

The neighbours will also start negotiations within weeks on enhancing an existing free trade agreement, Moragoda said, as part of a push by Sri Lanka to seal deals with key trading partners, including China and Thailand.

"On our side, we are just about to nominate the (negotiations) team," he said, adding that the focus would be on enhancing trade in sectors including textiles and garments, a major foreign exchange earner for Sri Lanka.

India is Sri Lanka's biggest trading partner accounting for about $5 billion each in bilateral trade in 2021.