Actually the better way to go about this would be through non military leverage. Sri Lanka's navy and air force are a pittance compared to India; the blockade and the no fly zone could be established in the time it will take to write this post. Confrontational approaches are counterproductive, and this is not how good diplomacy works.
However if Sri Lanka's future military officer cadre were trained in India and if the rising middle class sent its children to India for higher education and if Indian conglomerates had a heavy presence in the Sri Lankan economy it would be far easier to attain the same objective with better results.
I agree with you. Confrontational approaches do not work. My only concern is India has been seen as a 'soft' state by many. India is powerful, but India needs to growl once in a while. While I will always prefer non military leverage, as you suggested, India should be able to send the message across to the Sri Lankans, not publicly, but in discrete company, that India will not hesitate to setup a naval blockade or no-fly zone, if it feels threatened in any way. The reason is, knowing that SL Army and LTTE collaborated and conspired together to kill IPKF soldiers, India should trust neither party, but seek tangible assurances - in other words, ask SL to take one step first, as an insurance against an Indian military action. SL should know, in no uncertain terms, that any possibility of refusing to give autonomy to the SL north, any possibility of SL dragging its feet on war-crimes investigations, any attempt to have the PRC setup a base, will draw India closer to some kind of preventive military action against SL.
Specific to the second paragraph, frankly, I am not very hopeful that SL will stop sending their troops for training to PRC, even if they sent many to India, but yes, we should encourage SL and Indian military level interaction.
Personally, I am categorically against boots on the ground, or arming a proxy. Such tactics never work, and almost certainly backfire.
Just IMHO.