FTA with India narrowed trade gap in favour of Sri Lanka - Study

A new study shows that the India-Sri Lanka Free Trade Agreement (ISFTA) has helped narrow the trade gap between the two South Asian neighbours in favour of Sri Lanka while attracting more Indian investments into the country.

"An FTA in the region that has experienced significant benefits of trade creation for both parties involved is the FTA between India and Sri Lanka, which was an early experiment towards regional economic integration in South Asia…which provides useful lessons for other South Asian economies in terms of the progress in strengthening trade and economic linkages," said a study titled ‘Regional Economic Cooperation and Connectivity is South and South-West Asia: Potential and Challenges’ edited by Dr. Saman Kelegama, Executive Director, Institute of Policy Studies of Sri Lanka and released by the UN-ESCAP in September 2012.

"Over 70 per cent of Sri Lanka’s exports have been undertaken within the framework of FTA preferences, compared to around 30 per cent of India’s exports.22 On the other hand, only around 14 per cent of Sri Lanka’s imports from India have been under the FTA. Therefore, the FTA has assisted in narrowing the trade gap between the two countries in favour of Sri Lanka and has contributed towards more equitable and balanced growth of bilateral trade.

"Although the FTA covers only liberalization of goods, it has indirectly led to a significant amount of Indian investments in Sri Lanka, which has in turn strengthened Sri Lanka’s supply capacities. Cumulative Indian realized investment which was a mere US$ 2.5 million in 1998 increased to US$ 146.8 million in 2011, recording the second highest FDI inflows into Sri Lanka."

The study said that the outcomes of the ISFTA have been impressive for both countries.

"Between the year 2000 when the FTA became effective and 2005-06, India’s exports to Sri Lanka recorded an average annual growth of 34.5 per cent, while those of Sri Lanka to India grew at an average rate of 132 percent.

"In the period 1995-2000 immediately preceding the agreement, average annual exports from Sri Lanka to India were US$ 39 million. By 2005, Sri Lanka’s exports to India reached a peak of US$ 566.4, a tenfold increase compared to 2000, and stood at US$ 519 million in 2011.

"While the peak in 2005 was due to a large concentration of exports in 2 products – vanaspathi and copper - owing to tariff arbitration by Indian exporters, since then there has been a rise in high value-added exports to India. The number of Sri Lankan export items has increased from 505 in 1999 to 1050 in 2009 and 2100 in 2011, with a visible shift from low value-added agricultural products to high value added manufacturing goods including insulated wires and cables, intimate garments, value-added tea, furniture, tableware, machinery, rubber gloves and refined copper products. India, which ranked 14th in terms of export destinations in 1999 has climbed up to the 5th position by 2011."

"Indian investments in Sri Lanka have emerged across diverse sectors – from oil exploration by Cairn India, telecom services by Bharti Airtel and Tata Communications, petroleum distribution by Indian Oil Corporation (IOC), manufactures by Piramal Glass, Ultra Cement, Ceat-Kelani Tyres, L&T Cement, and Asian Paints, leisure services by Taj (Vivanta) Hotels, transport by Ashok Leyland, and banking and financial services by the State Bank of India, Indian Overseas Bank, Indian Bank and ICICI.

"While Sri Lankan investments in India have been limited compared to Indian investment in Sri Lanka, certain Sri Lankan companies such as Ceylon Biscuits, Carsons, Damro (furniture), Hayleys, Brandix and John Keells Holdings have made inroads into India. Further, the Colombo Port’s largest volumes of shipments are transshipment volumes to and from India."

The study said the agreement was not without its problems.

"Sri Lankan exporters have complained of nontariff barriers in entering the Indian market such as state taxes, quality requirements and administrative procedures, which have at times nullified the benefits of the FTA. Delays at customs and bureaucratic red tape have also been cited by Sri Lankan exporters as constraints in trading with India. However, such issues are being gradually addressed with India agreeing to remove taxes and para-tariffs."

Encouraged by the success of the FTA and realising the potential for both countries to enter into a more comprehensive agreement, a Comprehensive Economic Partnership Agreement (CEPA) is being formulated.

"The two countries are seeking to expand the scope of the FTA to cover trade in services and investments under CEPA. The CEPA also proposes measures to remove impediments encountered in the ISFTA by addressing issues on rules of origin and implementing dispute settlement and mutual recognition agreements and a close cooperation mechanism between Customs Authorities," the study said.

The study goes on to show that seamless regional integration could help alleviate poverty, ensure food security and uplift the lives of the people; but this would require bold and committed policy measures from governments in the region.

Last week the government announced that with a view of promoting mutual trade between India and Sri Lanka and to promote Indian investments in several key sectors including pharmaceuticals, textiles and auto accessories it had decided to establish a Joint Task Force representing public and private authorities of both the countries.

As previously highlighted in these pages, several business leaders who had staunchly opposed the CEPA with India have now expressed a willingness to deepen ties with the South Asian giant.