FTA transforms India-Sri Lanka relations | P.K. Balachandran

Published on 01-02-2008 In Business

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FTA transforms India-Sri Lanka relations

The free trade agreement (FTA) between India and Sri Lanka has radically transformed their relationship, replacing mutually debilitating confrontation by peaceful co-existence, trade, investment and tourism.

Thanks to the phenomenal successes of the FTA signed in 1998, relations between New Delhi and Colombo have ceased to be overly political.

India is no longer a significant player in the bitter ethnic conflict, which is the main political issue in Sri Lanka. India's energies are now directed towards building economic bridges with its southern neighbour for mutual advantage.

The growth in trade between the two countries has been remarkable since 2000, when the FTA became operational.

In 2000, India sold $600 million worth of goods to Sri Lanka. Sri Lanka in turn sold $58 million worth of goods to India. But in 2007, till September, India had sold $1.88 billion worth of goods and Sri Lanka $400 million.

Sri Lanka is now India's biggest trading partner in South Asia. India is the largest source of imports into Sri Lanka. In 2006, India became the third most important export destination for Sri Lanka. In 2000, it was only the 16th.

India sells to Sri Lanka vehicles, minerals, fuels/oils, medicines, machinery and mechanical appliances. Sri Lanka exports to India, vegetable fats and oils, copper and copper products, aluminum wire, spices, marbles, travertine and alabaster, insulated plastic and rubber winding wire.

Although India's exports to Sri Lanka had gone up three-fold and Sri Lanka's exports to India nine-fold since 2000, the trade gap is still a yawning one. It rose from $542 million to $48 billion in seven years in absolute terms, becoming an eyesore for Sinhalese nationalists.

But Indians would like Sri Lankans to note that the ratio has come down from 10.3:1 in 2000 to 3.7:1 in 2006.

Indians say that Sri Lankans should also realise that many of the things Colombo would like to sell are grown or made in India. Tea, rubber and garments are Sri Lanka's major exports, but India has its own thriving tea, rubber and garment industries to safeguard.

The FTA had recognised the asymmetry between the two economies and adjusted the negative lists accordingly.

India had given Sri Lanka 4,150 zero duty tariff lines, and Sri Lanka gave India 1,208. Sri Lanka was to take eight years to put another 2,724 tariff lines on the zero duty list.

As of now, 1,180 tariff lines remain on the Sri Lankan negative list. On the Indian side the number is 429. Among the items on Sri Lanka'a negative list are: agricultural and livestock items; rubber products; iron and steel; machinery and electrical goods.

The Indian negative list includes garments, plastic goods and rubber products.

Recently, as a gesture of friendship, India overlooked the fact that it was also a producer of tea and garments and agreed to take a limited quantity of these items from Sri Lanka.

India has given Sri Lanka an annual quota of 15 million kg of tea besides eight million pieces of garments. In October 2007, India undertook to lift the restriction on the port of entry for garments.

Of the quota of eight million pieces, three million would be exempt from the requirement to source the basic fabric from India.

Experts say that there is still a lot that Sri Lankans can do even under the existing FTA. Most of the 4,150 tariff lines remain unutilised. Much can be done to fully exploit the mammoth Indian market of over one billion people.

There is a crying need to widen the basket of goods for export. There is now a preponderance of non-ferrous metals and vanaspati, which account for more than 50 percent of the exports to India.

Sri Lankan exports are also restricted to the south Indian market. Expansion to the rest of India will have to be contemplated if Sri Lanka wants to get the maximum out of the FTA.

Buoyed by the overall success of FTA, the two countries are thinking of expanding it to include more items and to remove some non-tariff barriers, liberalise the Rules of Origin and undertake trade facilitation.

The lifting of the restriction on the port of entry in the case garments is a step India has taken in that direction. It has facilitated freer movement, and also weakened the hold of corrupt and difficult officials at the Indian end.

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