Sri Lanka is a country with rich culture, history and traditions background. It is one of the major producers of handicrafts in the world. Before the industrial development, the Handicrafts Industry in Sri Lanka was deemed as a potential economic advantage of the country (Everyculture 2012). And yet, this industry is still playing a major contributor to the development of national economy. Hence, this study strives to assess the competitiveness of Sri Lankan's Handicrafts Industry, using Porter's Diamond Analysis Model. Indeed, the factors conditions demand conditions, related and supporting activities, as well as firm's strategy, structure and rivalry were assessed and discussed critically. Apart of that, recommendations have also been provided and discussed in order to enhance the performance of the industry, in particular recommendations for the Indian government as well as to the handicrafts exporters.