India-Sri Lanka Economic Cooperation
Saman Kelegama, Institute of Policy Studies of Sri Lanka
Presentation to the “International Conference on Regional Trade and Economic Cooperation in
South Asia: Trends, Challenges, and Prospects, India Habitat Centre, New Delhi, 2-3 May 2013
Outline
Background
Trade Relations
Investment Relations
Way Forward
Background
Economic relations between India & SL date back to pre-
colonial times
Began to pickup in the 1990s with the liberalization of the
Indian economy
The signing of the ISFTA in 1998 saw the biggest boost in
trade relations
ISFTA formulated based on a “negative list” approach
Asymmetry between 2 countries accommodated by
special and differential treatment (SDT)
ISFTA has also led to significant investment flows
Outcome of 11 years
1999 2005 2011
Exports 1% 9% 5%
Imports 9% 17% 22%
No of Products 505 1062 2100
Type of Exports Primary
products
Vanaspathi &
copper
Value-Added
products
Export
Destination
14 3 5
Investment in SL < 2% 16% 15%
Positives
India-Sri Lanka Trade: 1995-2011
Year Exports
(US$ Mn)
Imports
(US$ Mn)
Trade Balance (US$ Mn)
Import/Export Ratio
1995-1999 average 39 509 -470 13.1:1
2000 58.0 600.1 -542.1 10.3:1
2001 72.0 601.5 -529.5 8.4:1
2002 170.5 852.8 -682.3 5.0:1
2003 245.3 1073.2 -827.9 4.4:1
2004 391.5 1439.1 -1047.6 3.7:1
2005 566.4 1835.4 -1269.0 3.2:1
2006 489.5 2172.9 -1690.4 4.4:1
2007 515.3 2610.1 -2094.8 5.1:1
2008 418.3 3443.0 -3024.7 8.2:1
2009 322.3 1820.1 -1498.2 5.7:1
2010 474.1 2570.3 -2096.2 5.4:1
2011 519.2 4431.2 -3912.3 8.5:1
Source: Central Bank of Sri Lanka
Trade Relations Cont.
Concern
• Lopsided trade
• Trade balance in India’s favour
• Behind-the-border barriers
Argument
• FTA alone cannot be blamed
• Imbalance would have been greater without FTA
• An issue, but being dealt with
Perceived Negatives
Trade Relations Cont.
Concentration of exports in low VA vanaspathi & copper in
2005
Occurred due to short-term tariff arbitration by Indian
manufacturers investing in SL
However, the FTA alone cannot be blamed
Responsibility of investment & industrial promotion agencies
not to provide investment permits for such "fly-by-night"
investors
Also, exports of these low VA products have now ceased, & SL
has moved to exporting high VA manufacturing goods
Lopsided Trade
Top Exports to India: 2007-2011
0
10
20
30
40
50
60
2007 2008 2009 2010 2011
US
$ M
illio
n
Animal feed
Insulated wires & cables
Cloves
Waste & scrap of paper
Garments
Refrigerators & freezers
Woven fabrics
Confectionary & bakery products
Source: Export Development Board, Export Performance Indicators
Trade Relations Cont.
Given India’s size, it is obvious that its exports would exceed
SL’s
In 2011, 83% of SL’s exports were under the FTA, compared
to only 13% of imports (major imports from India such as Oil,
Vehicles, Transport Equipment, Pharmaceuticals, Agricultures,
etc., are in the SL ‘negative list’)
Thus deficit in terms of the FTA has fallen in recent years
FTA has helped in narrowing the trade gap between the two
countries in favour of SL and has contributed towards more
equitable and balanced growth of bilateral trade
Trade balance in India’s favour
Exports and Imports to India, 2006-2011
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2006 2007 2008 2009 2010 2011
Total Exports
Exports under FTA
Total Imports
Imports under FTA
Total trade deficit
Trade deficit under FTA
Source: Department of Commerce, Sri Lanka
US$ M
illio
n
Trade Relations Cont.
Have been an issue for SL exporters
State taxes that vary from state to state
NTBs
Stringent quotas, RoO criteria, testing requirements &
standards on imports from SL
Bureaucratic delays/red tape at customs
But these issues are being dealt with
Important to have regular/continuous meetings between
officials
Behind-the-border barriers
Investment Relations
Indian investment into SL has also increased significantly since
the FTA came into operation
Cumulative Indian investment (realized) has risen from US$
2.5 Mn in 1998 to US$ 146.8 Mn in 2011
India is currently the 2nd largest investor in SL
Indian investments have emerged across diverse sectors
Investment Relations Cont.
No of projects have increased from 18 in 1999 to
119 by 2011
85% of investments are in the services sector
Important investments being negotiated/have come in
recently:
Oil refinery by IOC – US$ 3.6 Bn
Shree Renuka Sugars – US$ 220 Mn
Dabur India Limited – US$ 15 Mn
Indian FDI in Sri Lanka: 1999-2011
0
20
40
60
80
100
120
140
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011
No
. of
Pro
jects
Rs.
Millio
n
FDI
No. of Projects
Source: Board of Investment of Sri Lanka
Investment from Indian Companies, 2011
Sector No. of
Projects
Share of
Investment (%)
Food, Beverages & Tobacco 9 2.9
Textile, Wearing Apparel & Leather 15 1.8
Wood & Wooden Products 5 0.4
Paper & Paper Products 4 0.2
Chemicals, Petroleum, Coal, Rubber & Plastics 9 0.3
Non-Metalic, Mineral Products 10 2.0
Fabricated Metal, Machinery & Transport
Equipment
16 4.2
Manufactured Products 8 2.6
Services 43 85.6
Total 119 100.0
Source: Board of Investment of Sri Lanka
Investment Relations Cont.
IOC – which already has a venture in SL – plans to set up a
refinery at Sapugaskanda in a joint venture with the GoSL
IOC operates 10 refineries in India and this will be its 1st
outside India
Capacity of the refinery is expected to be 5-9 MT p.a.
SL’s current refinery has a capacity of 2 MT p.a., while fuel
consumption is 4.5 MT p.a. 2.5 MT p.a. of imports
This potential refinery can cater to rising fuel needs in SL
New Investments
Investment Relations Cont.
Renuka Sugars (RS) is currently the 5th largest sugar producer
in the world & the leading sugar manufacturer in India
Investment in SL will build a sugar refinery in Hambantota Port
Investments by RS & three other companies are expected to
generate 915 direct employment opportunities
Particularly important given the deteriorating local sugar
industry:
Sugar production has decreased from 54,000 mt in 2005 to
35,000 mt in 2011
New Investments
Investment Relations Cont.
Dabur India (DI) is the 4th largest FMCG company in India
An export-oriented beverage manufacturing plant will be set
up in Gampaha with a monthly capacity of 280,000 cases
Will be commissioned in Aug-Sept 2012
Other projects in the pipeline:
US$ 400 mn real estate project by Indo-Ocean Developers next
to the Beira
US$ 400 mn real estate project by Tata
US$ 120 mn hotel project by ITC
New Investments
Investment Relations Cont.
SL investments in India have been limited compared to
Indian investment in SL
But certain SL companies have made inroads into India:
Damro, Ceylon Biscuits, Carsons, Hayleys, Brandix and John
Keells Holdings plc
Colombo Port’s largest volumes of shipments are
transshipment volumes to & from India:
78% of Colombo Dockyard’s revenue comes from India
Potential Areas for Trade in Services
Tourism:
India is SL’s largest source of tourists
Accounted for 20% of market share in 2011
Health & education:
India offers a much cheaper alternative to developed countries
India's emergence as a major centre of IT
Financial services
Construction services
Current Situation – A Concern
Share of SL exports to India has declined from 5.6% in
2010 to 4.9% in 2011
Decline of both exports & imports in 2012:
Exports – 9%
Imports – 12%
Penetrating the dynamic Indian market important, given
the crises in the US & EU
Thus strengthening trade & investment linkages crucial
Strengthening Trade/Investment Relations
Leverage ISFTA to develop strong regional consumer brands
Compete on quality & differentiated goods
Learn from those who have been successful
Better Utilization of ISFTA
Strengthening Relations Cont.
Liberalization of trade in goods should be expanded to
cover investment and services
Investments capital for industrialization
building export capacity
Services sector liberalization essential given that over
55% of GDP in both countries constitute services
CEPA negotiations were initiated to address these needs
Moving Beyond ISFTA
CEPA
But negotiations have stalled due to reservations of certain
groups
Concern
• Threat to domestic market
• Drawbacks of FTA should be addressed 1st
Argument
• Most concerns misplaced
• CEPA a means of addressing drawbacks
CEPA Cont.
CEPA based on a positive list approach – more phased-out
liberalization
CEPA also offers SDT to SL – India has agreed to liberalize
more sectors than SL:
SL will remove 32 sectors from negative list compared to 114
by India
SL will open 20 services subsectors compared to 80 by India
Professionals can come from India only with investment
SL has signed SATIS under SAFTA, so why not CEPA?
Most concerns misplaced
CEPA Cont.
CEPA contains clear provisions to remove NTBs through
signing of MRAs & harmonization of standards
India has agreed to ease RoO criteria for 346 products
Also provides for a close cooperation mechanism
between customs authorities to deal with delays in
clearance:
Innovative means to facilitate swifter passage of consignments
Bilateral working group on Customs that would meet once a
year
A means of addressing drawbacks
CEPA Cont.
More public awareness
Dialogue between officials
Replace apprehension
with trust
Opportunities Outweigh Challenges
Challenges Opportunities
Opportunities Outweigh Challenges Cont.
No bilateral trade agreement can be perfect - problems
are bound to emerge as trading progresses over the years
Despite some limitations, India has emerged to be SL’s
largest & most balanced trading partner
But time is running out for SL – India negotiating trade
deals with other nations:
CECAs with Singapore & South Korea
Trade in Goods Agreement with ASEAN
Negotiations on FTAs with GCC & EU
Way Forward
Best use of opportunities to
overcome challenges
Implement CEPA
• Deeper goods liberalization
• Investment/services liberalization
Thank you
