The United Progressive Alliance (UPA) government approved Rs 2,427 crore for the Sethusamudram Ship Canal Project (SSCP) in June 2005. On 2 July 2005, Prime Minister Manmohan Singh laid its foundation in Madurai and this project is expected to be completed within three and a half years. The objective is to link Palk Bay with the Gulf of Mannar on India's east coast by building a shipping canal through Rameswaram. The project would be within Indian waters.

The canal is expected to provide substantial benefits to India, including berthing facilities for international vessels at Tuticorin port. It would promote economic development of the backward areas of Tamil Nadu; preclude circumnavigation of ships around Sri Lanka, thus saving fuel costs and standing charges associated with extra period of voyage, and improve operation of fishing vessels. It would promote coastal shipping and generate employment opportunities. India can also collect toll tax from foreign ships, which form 50 per cent of the traffic. Tuticorin would regain its old commercial glory. The port can be used to transport coal from Haldia, Paradip, and Vishakapatnam ports to thermal power plant located in Tuticorin.

Though India has 7,500 km of coastline, it does not have a continuous navigable sea-lane running within its territorial waters. Consequently, ships sailing from the east coast of India to Tuticorin have to go around Sri Lanka. This canal would reduce the distance between the east and the west coasts: between Tuticorin and Chennai from 769 to 335 nautical miles (nm); Tuticorin to Vishakapatnam from 1,028 to 652 nm; Tuticorin to Kolkata from 1,371 to 1,031 nm; Kanyakumari to Kolkata from 1,377 to 1,098 nm; Kanyakumari to Vishakapatnam from 1,014 to 719 nm; and Kanyakumari to Chennai from 755 to 402 nm. The SSCP will also serve as a strategic base and reduce the response time of the Indian Navy and Coast Guard vessels.

There are attendant disadvantages as well. The government of India maintains that once the SSCP is completed, ships would save 36 hours of voyage time. However, there is a view that only ships of 30 feet draft can cross the SSCP because of its narrow depth. Hence, for safety, ships would have to reduce their speed to half while crossing the SSCP. Manitham, an NGO, argues that a ship would take at least 20-24 hours to cross the SSCP. According to a retired marine engineer who worked at the Tuticorin port, hardly two or three ships would cross daily.

However, fishermen, along with scientists, economists, environmentalists and human rights activists from Tamil Nadu are opposing the project. The livelihood of five lakh fishermen in 138 fishing stations along the five coastal districts would be severely affected. There is also concern over the impact on the environment. It involves extensive dredging of the Pamban channel where coral reefs are in abundance. This will lead to the depletion of fish reserves and destruction of the marine ecology. The Gulf of Mannar area (10,500 sq. km) is home to about 3,600 species of plants and animals. The National Environmental Engineering Research Institute (NEERI), Nagpur, examined the viability of the project; and its May 2004 report states that the project was environmentally safe. It was silent on the impact of the project on the lives of fishermen. However, its report mentioned that "there is hard strata under the soft sediment and may require blasting if the strata encountered during dredging were to be hard rock, which may cause marine death."

Sri Lanka has reservations about India's proposed project as dredging of the sea might have an adverse impact on the environment and it could mean an intrusion into Sri Lankan territorial waters. There submersion of many islands in the west and northern coasts of Sri Lanka is a possibility. Once the construction of the canal is completed, it would break the continuous limestone formation. This would cause sudden tilting drifts, and gravitational pull on various other violent processes. It seems that the Indian government has taken only the economic benefits of the project into consideration, ignoring the ramifications, consequences and calamities that Sri Lanka would experience.

India and Sri Lanka are signatories to the UNCLOS-III. India should have obtained "no objection" from Sri Lanka as per UNCLOS. However, the Sri Lankan government was not taking the issue too seriously as it did not want to compromise the prevailing cordial relations with India, which is critical to counter threats from the LTTE. Sri Lanka may also have been glad to accept adverse impact on the LTTE, as the Indian security activities will have to be increased once the canal begins to function. Increased Indian surveillance has the potential of preventing illegal smuggling activities of the LTTE. Therefore, the general feeling among the people in Sri Lanka, specially the Tamils, is that the canal project has Sri Lankan consent, expressed indirectly.