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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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  • Mar 12, 2004



    Reluctant India drawn toward Sri Lanka (Feb 10, '04)

     

         
             
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