Under Bandaranaike the country became a republic, the Free Sovereign and Independent Republic of Sri Lanka, the Senate was abolished and the position of Sinhala as the official language (with Tamil as a second language) was confirmed. Full independence was established as the last remaining ties of subjection to the UK were broken (e.g. the Privy Council was no longer a body of appeal above the Supreme Court). The British-owned plantations were nationalised in order to fulfil the election pledges of the Marxist program and to "prevent the ongoing dis-investment by the owning companies".

An attempt was made at economic independence, with a five-year plan to achieve industrial development. However, this was stymied due to a shortage of foreign exchange, a very expensive welfare program, and the oil crisis of 1974. These were combined with an unprecedented drought which severely affected the harvest of rice, the staple food of the people. Strides forward were made in the fields of heavy industry, automotive spares and electronics. The strongly centralized economy, functioning via a set of state corporations grew very sluggishly.

In 1971 a group variously labelled Maoist or Guevarist, the People's Liberation Front (JVP) launched a rebellion. It was led by Rohana Wijeweera, a marxist who had his education at the Lumumba University in the Soviet Union. This movement was not connected with the traditional Sri Lankan Marxist parties which were then in power. Most of the "insurgents" were unemployed literate youth who were the product of the post-independence population explosion. Although the JVP rebellion was brutally suppressed, the JVP found a place in Sri Lankan politics as a voice of leftist Sinhalese nationalism, along with the right-wing movement in the UNP associated with Cyril Matthew. Militant Tamil Chauvinist movements, e.g., the Pulip Padai, had been launched in Trincomalee in 1965. The Jaffna university was "ethnically cleansed" of non-Tamils in 1976, and the city itself began to be subject to similar "ethnic cleansing", eliminating Muslim and Sinhala residents.

The extreme-Tamil groups rejected and physically eliminated the main Colombo-Tamil leadership of the Tamil United Liberation Front (TULF). Tamil public servants or members of parliament working with the government were harassed. The mayor of Jaffna was assassinated in 1975. The militants claimed their independence, their rights, and their "traditional homeland", and formed armed separatist groups such as the Liberation Tigers of Tamil Eelam ('Tamil Tigers'), demanding an independent Tamil state called Eelam. Much of this had the implicit and material support of politicians in India. The country began to slide towards a civil war in which a unique cyanide-carrying suicide brigade appeared.