India Sri Lanka Trade

India is Sri Lanka`s largest trading partner. It is also the third largest market for Sri Lanka, after the European Union and the United States. However, in the recent years, particularly after the implementation of the ISFTA (Indo-Sri Lanka Free Trade Agreement), the bilateral trade balance has significantly increased in India`s favour.

This very large adverse trade balance is portrayed as an example of unbalanced nature of the ISFTA. For example a widely circulated booklet titled `CEPA Givisuma Indiyanu Maraugulaki` (CEPA is an Indian Deathtrap) by Mawbima Lanka Padanama states in its introduction `We know that Sri Lanka is implementing a free trade agreement with India for the last ten years. By now we are also aware of the benefits of this agreement. As a result of the agreement Sri Lanka`s exports have increased from US$ 40 million to US$ 325 million and Indian exports increased from US$ 500 million to US$ 3500 million. These numbers confirm who has benefited from this free trade agreement`.

Then there are those of us, including the officials responsible for monitoring the agreement, who have repeatedly argued, though there are number of weaknesses in the agreement, the results of the ISFTA have remained balanced. If the readers are confused by these different interpretations of the trade data I do not blame them. The purpose of this this article is to clarify the issues related to the ISFTA trade, so that the readers will be in a position to understand why I say that the trade under the agreement remains nearly balanced.

The ISFTA, which was signed in December 1998, entered into force in March 2000. During that year Sri Lanka`s exports to India were valued at US $ 56 Million. This increased to US$ 466 million by 2010. During the same period, India`s exports to Sri Lanka grew from US$ 600 million to US$ 2546 million. Since 2000, in certain years Sri Lanka`s exports have registered over US$ 500 million and Indian exports have gone over US$ 3.5 billion. Therefore it is easy to argue that India`s exports to Sri Lanka have substantially increased under the ISFTA and the agreement is not balanced.

However, a closer examination shows that thoughSri Lanka`s exports growth, during the period, had largely been under the ISFTA, India`s exports have remained mostly outside the agreement.That is to say, while the growth of Sri Lanka`s exports to India resulted from the ISFTA concessions, most of the Indian exports to Sri Lanka, which is up to 70% or more, consist of products which are not covered by the ISFTA concessions. India became the largest supplier to Sri Lanka by surpassing Japan in 2001, due to her growing economic power and not simply due to the ISFTA. With or without ISFTA, most of these products would have been imported, if not from India from elsewhere, presumably at a higher cost and paying a similar duty rate. For example we import cheaper Suzuki- Maruti cars from India in place of more expensive Suzuki cars from Japan. It is also necessary to mention that Sri Lanka`slargest import from India is refined petroleum products. Petroleum products have to be imported, if not from India, from somewhere else. These goods are imported from India because it is cheaper to do so.

As against this the growth of Sri Lanka`s exports to India, since year 2000, in some years up to 90% or more were under the ISFTA preferential tariffs. Some may argue that the high utilization rates of preferences, around 2005, were due to products such as Vanaspathi, which did not contribute much to the island`s economy. One cannot blame the agreement or India for such developments. It is the responsibility of the investment and industrial promotion agencies not to provide investment permits for such `fly-by-night` investors and polluting industries. Fortunately,since then, the exports of these low value added products have ceased.

Though the exports have come below US$ 500 million range, nearly 70% or more of exports remain under ISFTA. As a result, India has emerged as the second largest preferential market for Sri Lanka, after the European Union.It is also possible to argue that India is the most important preferential market for Sri Lanka.

Though Sri Lanka`s preferential exports to the European Union under GSP are higher than the value of preferential exports to India, the EU GSP only provides limited level of preferential access to Sri Lankan exports. In the EU, most of Sri Lanka`s competitors receive a similar or better level of preferential access. This weakens the competitiveness of Sri Lankan exporters in that market.

In India, the preferential access available under the ISFTA for Sri Lankan exporters is better than what is available, to most, if not all of their competitors. As a result Sri Lankan exporters have a privileged position in the Indian market. The success of some of the Sri Lankan exporters in the Indian market is a direct result of this advantage. Unfortunately, this position may slowly erode due to more comprehensive FTAs India is negotiating with other countries.

The growth of the export product diversification under the agreement is also significant. The exports to India, under the ISFTA, include, among other products garments, furniture, MDFboards, bottles, sausages, poultry feed, insulated wire, spices, tableware, paints, roof tiles, tires,strawberries, jams and fruit juices and even waste paper. Sri Lanka`s exports under all other preferentialarrangements, during the last 50 years, have remained limited to few products. The ISFTA is Sri Lanka`s first successful experience in product and market diversification.

When a trade agreement generates nearly US$ 500 million of exports it would generate problems and disputes. It is only natural that ISFTA has created its own share of controversies. For example, the Indian MDF boards` manufacturers had complained that a Sri Lankan exporter is dumping MDF boards in the Indian market. Such developments are common in the international trade and should be resolved through established institutional arrangements. These issues cannot be resolved on the Liberty Roundabout or Lipton Circle.

It has also been pointed out that though the duties are eliminated India imposes Para-Tariffs as well asNon-Tariff Barriers, including Custom delays, Quotas, Testing requirements, standards etc., on imports from Sri Lanka. India too has raised a number of issues irelated to the implementation of the agreement, such as Para-Tariffs.These are issues to be settled through engagements between the trade officials of the two countries. Some of these issues have already been settled. The main difficulty in addressing these issues was the absence of regular and continuous meetings between the officials after mid-2008, largely due to the very vocal opposition to any engagement with India.

The movements against trade agreements, like the Anti- CEPA movement is not unique to Sri Lanka. There are people with vested interests who would oppose any trade agreement. In addition to them there are extreme nationalists who are opposed to improving relations with India.Similarly we see an anti-Sri Lanka movement on the other side of the Palk Strait which calls for the boycott of Sri Lankan products.

Fortunately, these movements do not represent the majority in the two South Asian neighbors and should be treated accordingly. The misrepresentation of the facts by these groups should not hinder the closer economic integration of the two countries for the mutual benefit.The ISFTA is not a big bad wolf or an Indian deathtrap. So is the proposed CEPA between the two nations. The ISFTA has benefited both countries in a balanced manner. It has been the first successful experience in products and market diversification for Sri Lanka. The real potential of the agreement is yet to be fully explored by the Sri Lankan exporters and also the negotiators.