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INTRODUCTION

Economic links between India and Sri Lanka have a long historywith recorded commercial

links going back many centuries. These links strengthened to the point where legal barriers to

movement of goods and labor practically disappeared during the period when both countries

fell under British rule. But in the early years of the post-independence period, both countries

implemented inward-looking economic policies resulting in the weakening of the economic

ties. However, these ties once again started to strengthen when Sri Lanka embarked on a

liberalization policy in 1977, which was followed by India but to a fairly limited extent, but itcoincided with a second wave of policy reforms in Sri Lanka.

The most popular bilateral free trade agreement to emerge in the region was the India-Sri

Lanka Free Trade Agreement signed in December 1998. This was a result of the renewed

political confidence between the two countries as well as the labored progress made through

the South Asian regional initiatives. There were mixed feelings among the business

community regarding the free trade agreement with India. The India-Sri Lanka Free Trade

Agreement aims at promoting economic linkages between India and Sri Lanka through

enhancement of bilateral trade and investment. The Agreement covers only trade in goods

and requires the two countries to offer market access for each others exports on duty free

basis and concessionary tariffs. However, the India-Sri Lanka Free Trade Agreement does not

provide for elimination of non-tariff barriers.

There were concerns that while some Sri Lankan exports (such as rubber products, ceramic

products and leather goods) catering to particular niche markets in India may benefit, some

small and medium industrial enterprises, and producers of livestock and subsidized

agricultural products not protected under the negative list will face stiffer import competition

from Indian exporters, who arguably enjoy the advantages of a relatively sophisticated

industrial and agricultural base, and also the economies of scale provided by the larger

domestic market.

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On the other hand, it was also considered that in some products where current exports are

non-existent or minimal, there may be scope for expansion of Sri Lankan exports to the

Indian market. While it was obvious that the largest gains from trade would likely to come

from opening up precisely those sectors where domestic industries will come under strong

import competition, they were naturally also the sectors where domestic producers felt most

vulnerable, where adjustment costs were likely to be considerable, and where political

resistance the strongest.

Sri Lankas exports to India increased from US$ 164.51 million during the first seven months

of 2009 to US$ 239.2 million during the corresponding period of 2010 registering a 45.4%

growth. This increase was mainly due to a significant increase in exports such as spices

(cloves, nutmeg, mace, pepper etc.), electrical machinery and parts, copper products, sheet

rubber, pulp, confectionery & bakery products, tyres & tubes, glass products, wooden

products, garments, apparel & clothing accessories, furniture, processed fruits & fruit juices,

jewellery items etc. in the first seven months of 2010, when compared to the corresponding

period of 2009. However, exports of certain products such as tea, ceramic products,

cinnamon, gems, boilers & machinery parts, processed food, mineral sand, activated carbon

etc. have recorded a decrease during January to July in 2010 compared to 2009. These

percentages are exaggerated due to the sharp decline in the figures recorded for the year 2009

compared to the year 2008.

While there has been a reduction in major exports such as vegetable oil, primary copper,

margarine, marbles and pepper, a variety of other products have gained market access to

India. They include insulated wires and cables, poultry feeds, pneumatic tyres, ceramics,

apparel, furniture, air conditioners & coolers, measuring and checking instruments, glass

bottles, processed meat products, Medium density Fiber (MDF) Boards, rubber gloves,

thermal papers, tiles, stones and marbles, boilers & machinery parts, iron & steel articles,

panel boards & enclosures, sacks and bags etc. thereby brining about product diversification.

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TRADE BETWEEN INDIA AND SRI LANKA

The ISFTA was formulated based on the negative list approach; each country extending

concessions/preferences to all commodities except those indicated in its negative list. The

two countries agreed for preferential treatment on 5112 tariff lines & an 8-year time table was

devised for phasing out tariffs. The value of bilateral trade increased fromUS$658 million in

2000 to US$ 4.1 billion in 2011.

Table: 1

Source: Central Bank of Sri Lanka

Trade between India and Sri Lanka: 2000 January to April 2012 (Values in US $ Millions)

Year Exports Imports Total Trade Balance of Trade

2000 55.65 600.12 655.77 -544.47

2001 70.12 601.50 671.62 -531.38

2002 168.86 834.70 1,003.56 -665.84

2003 241.14 1,076.17 1,317.31 -835.03

2004 385.50 1,358.01 1,743.51 -972.51

2005 559.26 1,440.41 1,999.67 -881.15

2006 494.06 1,822.07 2,316.13 -1,328.01

2007 516.40 2,785.04 3,301.44 -2,268.64

2008 418.08 3,006.93 3,425.01 -2,588.85

2009 324.87 1,709.93 2,034.8 -1,385.06

2010 466.60 2,546.23 3,012.83 -2,079.63

2011 521.65 4,338.04 4,859.69 -3816.39

2012

(Jan- April)

207.00 1,346.00 1553.00 -1139.00

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Figure: 1

Figure: 2

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Trade between India and Sri Lanka

Exports

Imports

Total Trade

Balance of Trade

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Exports

Imports

Balance of Trade

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Table -2:

Product Value in US$ Mn

Spices 67.93

Natural Rubber & Rubber products 44.51

Poultry Feed 44.13

Accessories for electrical machinery 44.81

Copper & Copper based products 19.12

Refrigerators, freezers and other refrigerating equipment &Machinery

24.81

Paper & Paper products 39.66

Ships, Boats and floating structures 19.15

Cocoa butter 20.98

Fiber board of wood 17.72

Furniture, bedding, mattress etc 9.28

Apparel 12.92

Source: Sri Lanka Customs Major Exports to India in 2011

Figure: 3

Spices

19%

Natural Rubber &

Rubber products

12%

Poultry Feed

12%Accessories

for electrical

machinery

12%Copper & Copper

based products

5%

Refrigerators,

freezers and other

refrigerating

equipment &

Machinery

7%

Paper & Paper

products

11%

Ships, Boats and

floating structures

5%

Cocoa butter

6%

Fiber board of wood

5%

Furniture,bedding,

mattress etc

3%Apparel

3%

Major Exports to India in 2011

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Table: 3

Product Value in US$ Mn

Motor Vehicles 894.21

Mineral fuels & oils 904.67

Cotton 217.40

Pharmaceutical products 162.33

Refrigerators, freezers and other refrigerating equipment

& machinery

28.18

Electric/power generating sets 39.45

Iron & Steel 115.29

Articles of paper & paper board 100.24

Cement 137.29

Source: Sri Lanka Customs Major imports from India in 2011

Figure: 4

Motor Vehicles

34%

Mineral fuels & oils

35%

Cotton

8%

Pharmaceutical

products

6%

Refrigerator

s, freezers

and other

refrigerating

equipment

& machinery

1%

Electric/power gene

rating sets

2%

Iron & Steel5%

Articles of paper& paper board

4%

Cement

5%

Major Imports from India in 2011

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After the agreement, Sri Lankas exports have increased rapidly. By 2005, it reached a peak

of US$ 566.4 million; a tenfold increase as compared to 2000.India was the 5 th largest

destination for Sri Lankas exports in 2008. The agreement has facilitated increased diversity

and greater value addition in exports from Sri Lanka.

While exports from Sri Lanka peaked in 2005, most of these exports were largely

concentrated in two products-Vanaspati and Copper. This poses a problem because these

exports arose not due to any distinct comparative advantage that SL held, but due to short-

term tariff arbitration by Indian manufacturers investing in Sri Lanka.

Both copper & vanaspathi exports were not seen very favorably in SL as well, since entailed

high import content, limited employment creation & environmental concerns. The collapse of

vanaspathi & copper exports in 2008 led to the substantial decline in total SL exports to India

in 2008 to US$ 418 milliona 26% fall in export value since the peak in 2005.At the same

time, imports from India have increased considerably in recent years. In 2008, imports from

India reached a peak of US$ 3443 billion, a growth of 37% compared to 2007.

Exports are decreased by 24% compared to 2007 as a result of decreasing product

composition export to India under ISFTA. Spices exports have decreased by 9% compared to

2007. Paper Products and Natural Rubber Products also decreased up to 12% and 11%throughout the 5 year period.

However, the major cause for the increase in imports was the increased cost of petroleum

products in global markets. The import of petroleum products from India is not influenced by

the FTA as petroleum imports are in Sri Lankas negative list. In fact, the bulk of Indian

imports into Sri Lanka (petroleum, vehicles, sugar, cotton, iron and steel, pharmaceutical

products) are not subject to reduced tariff through the FTA as over 65% of Sri Lankas import

value from India is from products that are either in the negative list or are exempt from MFN

duty. According to the Department of Commerce, Sri Lankas imports under the FTA were

only about 14% of the countrys total imports from India in 2007.

When compared to 2007, the total imports increased from 2,785.04Mn to 4,338.04 Mn and

that result in increase of bilateral trade deficit by 1548.75 Mn. This is a result of increase in

amounts of Automobile, Mineral Fuel & Oil etc. These are increased by 28% & 14%

respectively.

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These observations suggest that the growth of the trade deficit between India and Sri Lanka is

not largely a result of the FTA between the two countries, since most of the major traded

items are not subject to the FTA. Normal trade patterns between the two countries are likely

to have resulted in an even wider trade deficit since the FTA has provided some scope for Sri

Lankan exports to India.

FUTURE OF THIS AGREEMENT

During the Comprehensive Economic Partnership Agreement (CEPA) held in Colombo from

July 9 to July 12, India offered to reduce the number of items on the negative list by about 8o

items. Sri Lanka, on the other hand, agreed to remove around 50 items from its list. India had

suggested a list of 139 items which it wanted to remove from Sri Lankas negative list while

Sri Lanka had suggested a list of 118 items. But a consensus was not reached and the lists

were unchanged. Both the countries need to understand each others demand and supply

conditions and work together to create a synergistic situation.

Another issue which the countries need to look at is the trading in services. Since beginning,

Sri Lanka has been apprehensive about opening up its services sector to Indian competition as

most of its professional services sectors are unorganized and hence are at risk by Indianservices. The major unresolved issue, however, is that of allowing the Indian financial

services sector to enter Sri Lanka.

SOUTH ASIAN PREFERENCIAL TRADE

AGREEMENT (SAPTA)

As a part of the SAAARC process the South Asian Preferential Trade Agreement (SAPTA)

was implemented in 1995, and in 1996 it was agreed in principle to convert it to South Asian

Free Trade Area (SAFTA) and the focus appeared to implement measures to improve intra

South Asian economic links The SAPTA process offered only very limited liberalization

although this was a period of general policy liberalization and also regional and bilateral

initiatives to foster economic partnerships. With the heightening of political tensions between

India and Pakistan in the late 1990s the transition to SAFTA stalled. However, as an

important result of the limited achievements of the SAPTA process was that the membercountries became interested in moving into liberalized bilateral arrangements. It was

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envisaged to permit countries willing to proceed at a faster pace to do so within the

SAPTA/SAFTA framework.

However, from the latter half of 1998 official activities of SAARC came to a virtual

standstill, giving way to bilateral foreign trade agreements between the member countries,

which were totally outside the SAARC process. In fact, there is little evidence of similar

trends in other regional groups. The vast majority of regional blocs began from an agreed

base on the degree of cooperation and has progressed from there, taking collective decisions

with regard to either the speed of integration or admission of new entrants.

CONCLUSION

It is important to remember that free trade agreements have become essential especially for

the smaller countries like Sri Lanka which have opened up their economies which may not be

that successful in facing up to the high competition in the global market. We should not

forget that all parties to an agreement would aim to get the best for their own country and it is

up to us to negotiate what is best for Sri Lanka.

The key opportunity for Sri Lanka is to tap into the large and dynamic Indian market, by

moving beyond the ILFTA towards broader economic integration. The bilateral trade

agreement that Sri Lanka has implemented with India, providing analysis on the structure of

the respective agreement and its trade impact.

It was found that although the agreement has provided significant market access to Sri Lanka,

full advantage has not been taken of this market access for a combination of reasons. Certain

impediments to trade remain despite the existence of the FTAs.

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RECOMMONDATIONS

Reduce unnecessary volumes of imports from India to Sri Lanka.Under ISFTA Sri Lanka is importing unnecessary automobile, food items,

cement etc. There are so many domestic industries in Sri Lanka which can

produce enough products and services for local consumption. This can be used

to reduce imports of automobile from 34% to at least 20%.

Redesign taxation policy in India - Lanka free trade agreement.The products which can manufacture domestically are most of the timeimported from India under FTA because of the tax exemptions. It is favorable

for Sri Lanka if we could increase taxes for those goods and services and

decrease the taxes for local exports. This way we can reduce the trade deficit

by a considerable margin.

Attracting more foreign investments to Sri Lanka.Investments in Sri Lanka are pretty less compared to India and other regional

countries. Under ISFTA we can attract more Indian investors using

appropriate promotional tools to Sri Lanka. This could result in increasing

exports and reducing the imports. Trade imbalance will be eventually

narrowed down to an acceptable level.

Utilizing natural resources of Sri Lanka to startup new business indifferent industry.

This is the most preferable way to increase countrys exports in the future.

Trade deficit generated through ISFTA in theses years can be reduced by

utilizing natural resources to its optimal level. This can be carried out through

the support of Sri Lanka government by creating an investor friendly

environment. The interest rates, inflation and government policies need to be

controlled in order to get the full impact of starting up new businesses.

Increasing more opportunities for export industry in Sri Lanka.