Indo-Sri Lanka trade: Hype and
reality By Durgadas Roy
Since
independence in 1947, India and Sri Lanka, two
neighboring countries in South Asia, have concluded
three major treaties: the Sirimavo-Shastri Pact (1964),
the Indo-Sri Lanka Peace Accord and the Indo-Sri Lanka
Free Trade Agreement (ISFTA, 1998). While the first two
were political treaties in character, the third one was
an economic accord signed on December 28, 1998. Although
ISFTA was supposed to come into effect on March 1, 1999,
actually it came into operation one year later, on March
1, 2000.
While ISFTA was aimed to create a
free-trade zone between India and Sri Lanka by removing
trade barriers, complete removal of tariffs on trade
could not take place immediately after the accord came
into effect. Both countries, therefore, agreed to remove
tariffs within a three-year time frame. After the
signing of the agreement, Colombo had eight years to
allow tariff-free access of Indian commodities to its
market. However, the agreement did not cover all
tradable commodities for tariff reduction - certain
product lines were marked out in order to protect
internal production and safeguard domestic markets.
Thus, both countries identified certain commodities for
the "negative list".
ISFTA would result in
significant improvement in bilateral trade between the
two countries by allowing both countries preferential
access to each other's market, a scenario that would be
of great advantage to exporters of the partner
countries. However, the agreement has been vehemently
opposed by a segment of people in both India and Sri
Lanka for various economic and non-economic reasons. It
is, therefore, obvious that the free-trade agreement
would have varying effects across regions and sectors in
both countries. In India, for example, plantation crops
would be adversely affected and for this reason most of
the opposition comes from southern states, especially
the state of Kerala.
Sri Lankan exports to India
reached the highest ever value of IRs16.1 billion
(US$167.7 million) in 2002 - far exceeding IRs6.266
billion ($69.4 million) in 2001 - an impressive rise of
158 percent. Thus, the following questions might be
raised:
Was this achievement an outcome of ISFTA?
If so, what export items contributed to this growth?
What progress has been made in ISFTA and what are
the existing impediments?
How will ISFTA look to the future when there is
movement towards closer economic cooperation between the
two countries?
While Sri Lankan exports have
been experiencing an impressive increase, imports from
India have too, increasing by 49 percent. Moreover, the
import-export ratio has improved from 16.1 in 1998 to
5.1 in 2002. It has ben estimated that Sri Lankan
exports to India accounted for 3.6 percent of overall
Sri Lankan exports in 2002 in comparison to 1998 when
Sri Lankan exports to India accounted for 1.0 percent of
overall exports. Consequently, there has been a
repositioning of Sri Lanka as the fifth largest import
supplier to India in 2002 compared to a rank of 20th in
the mid-1990s. This means that the proportion of
preferential exports amounted to IRs10.9 billion, 68
percent of total exports to India. Further, preferential
exports have grown at 62 percent in 2002 compared to 54
percent in 2001. Thus, the answer to the first question
is that the Sri Lankan export outcome of 2002 was indeed
a result of ISFTA.
ISFTA has paved the way for a
large number of copper industries to mushroom in Sri
Lanka to cater to the growing Indian demand. At least 30
projects in copper are currently operating in the
country mostly controlled by India entrepreneurs. The
Indian government has also relaxed market access
restrictions on garments and tea consequent upon the
last Joint Ministerial Meeting in New Delhi in June
2002. But a number of impediments still prevail. It is
reported that a number of non-tariff and para-tariff
barriers acted as constraints to exporters in Sri Lanka
under the ISFTA
The nature of India's official
and unofficial trade with Sri Lanka follows a different
pattern. Unofficial trade estimates between the two
countries are available only for the year 1991, and are
carried out both by air and sea. While there is hardly
any passenger traffic by ship between India and Sri
Lanka, a number of regular boats ply between the two
countries purely for contraband purposes. India's
official trade with Sri Lanka is similar to that of
Bangladesh on one count, but India has had a trade
surplus with Colombo. However, unofficial trade accounts
with Sri Lanka are more or less balanced.
India's unofficial trade with Sri Lanka has
certain salient features. First, the contraband trade
between India and Sri Lanka is a two-way operation, ie
goods are smuggled from India to Sri Lanka and vice
versa. The value of such trade in both directions seems
to be only marginally different. In fact, India's
unofficial imports are at least 10 times as great as the
official imports. Second, the total two-way contraband
trade between the two countries amounts to more than the
official trade between them. Third, the two-way
contraband trade between the countries is perhaps the
largest of its kind in South Asia.
But there can
be no two opinions about the fact that ISFTA has
strengthened economic cooperation between the two
countries and many feel that the area of coverage should
be significantly increased. It is suggested that the
first step toward that end would be to expand the scope
and coverage of goods under the ISFTA and then proceed
to the harmonization of customs procedures, implement
standardization measures, and then introduce other
measures that would facilitate trade in many other
commodities. Concurrently, areas such as services,
investment, intellectual property rights etc could be
considered under the economic cooperation umbrella.
Durgadas Roy was professor of
economics at the State University of New York and is now
director of the Indian Council of Economic Research.
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