A senior diplomat says the government recognises the importance of latching on to India’s economic growth. This is despite the fact that President Mahinda Rajapaksa failed to sign a comprehensive economic partnership agreement with the sub continent in 2008 caving in to pressure from domestic businessmen and professionals who feared Indian goods and services would flood the market.

"We recognise in India the opportunities available to economies of its neighbouring countries. India’s economy is growing rapidly and there is going to be an increase in consumer demand and this is where Sri Lanka can benefit.

"Sri Lanka should look for ways in which to take advantage of India’s economic growth by discovering those areas in which we have a comparative advantage in production and skills," Foreign Affairs Secretary Romesh Jayasinghe said recently when Colombo Dockyard PLC flagged off a passenger cum cargo ship built in Colombo for the Indian government earlier this month.

Jayasinghe said in light of India together with China being growth engines of the World economy, "Sri Lanka recognises their importance."

The ship was one of two vessels commissioned by the administration of the Lakshwadeep islands of India.

"We dispelled the myth that working with the Indian bureaucracy was difficult," the Managing Director of Colombo Dockyard, Mangala Yapa, said then.

A Comprehensive Economic Partnership Agreement was discussed with India for several years seeking to liberalise trade in goods and services between the two countries. But the agreement was not a free for all; only specific sectors and areas where negotiated for trade while mechanisms would have been in place to settle disputes.

According to reports done by the Sri Lanka Institute of Policy Studies, India had offered to open up more tariff lines than Sri Lanka had offered, although by July 2008, discussions still had not been finalised when the 15th SAARC Leaders’ Summit was held in Colombo where Rajapaksa wanted to sign a draft agreement with India.

But opposition from local businessmen and professionals forced the president to fall back.

"The argument that was raised was that the partnership would make Sri Lanka’s domestic industries vulnerable to an influx of cheaper Indian goods. The call was for the protection of domestic industries was based on patriotism and so it was difficult to see reason and the benefits to both consumers and businesses alike was overlooked," an analyst told the Island Financial Review.

"But the fact of the matter is the agreement had adequate safeguards in place and it would actually benefit Sri Lanka because a formal agreement would be in place to protect domestic industries already competing with Indian and Chinese goods," he said.

The agreement would by no means be irrevocable either.

Economists say the most important thing for Sri Lankan industries is to bear in mind India’s rapidly growing economy and burgeoning middle-class.

Many economists argue for a case for greater economic ties with India, especially if Sri Lanka is to develop job generating industries.

"There is a limit to how much an industry can provide for a small market such as Sri Lanka with 20 million people. India’s population is over a billion; the scope and potential is endless," an economist said.

The CEPA with India is on hold, and last year politicians said another was being discussed with Pakistan.

"This is political speak. Sri Lanka would not want to antagonise India by signing an agreement with Pakistan without signing one with India, after all, a lot of time and energy has been spent on both sides on negotiations," an official of the Department of Commerce said.

China is the other destination economists prescribe our exporters should venture in to.

And China...

"We have paid far too much attention to the export markets in the US and now we need to move towards the Asian giants and India and China. We have had an over dependence in the US market for our exports for too long," Prof. A. D. V. De S. Indraratna, President, Sri Lanka Economic Association said recently.

Due to falling demand caused to the global financial crisis, Sri Lankan exports took a big hit, dipping by 18 percent during the first half of 2009. The bulk of Sri Lanka’s exports are to the US and the European region.

According to available statistics from the Export Development Board, in 2008 the US was ranked number one export destination with 23.2 percent of all exports, UK is second with 13.41 percent while Italy follows with 5.47 percent.

R. M. B. Senanayake, Vice President of the Sri Lanka Economic Association said Sri Lanka’s export sector has no other hope but latch on to India and China.

"In China, savings is about 40 percent so there is a lot of room for China to build its own consumer market, and this is something Sri Lankan exporters should take note of," Senanayake said.

China and India have a steadily growing middle class providing enough opportunities for Sri Lankan exporters to grab niche markets in these countries.

"China and India would become the leading economies of the world so we need to get closer to them. We need to latch on to their economies if our economy is to grow," Prof. Indraratna said.

Vital statistics...

The Department of Commerce website has trade statistics with India from 2002 to 2007.

Imports from India to Sri Lanka during this five year period amounted to US$ 834million in 2002, US$ 1,076 million in 2003, US$ 1,357 million in 2004, US$ 1,440 million in 2005, US$ 1,822 million in 2006 and US$ 2,784 million in 2007.

Exports from Sri Lanka to India for each of these five years amounted to US$ 168 million, US$ 241 million, US$ 385 million, US$ 559 million, US$ 494 million and US$ 516 million respectively.

The trade deficit with India during this period was the lowest in 2002 at US$ 665 million steadily rising to US$ 2,268 million in 2007.