Free Trade between India and Sri Lanka

ABSTRACT THE FREE TRADE AGREEMENT between India and Sri Lanka came into full existence from 1st March 2000.This FTA basically deals with the modalities of the Duty Free Import of the goods manufactured in Sri Lanka which exempts specified goods imported under Indo- Sri Lanka Free Trade Agreement from the Import Duty up to 100%. There is a clear business opportunity for manufacturers from India to set up unit in Sri Lanka so that the goods produced in Sri Lanka can be brought to India duty free availing the exemption provided in the Free Trade Agreement. Since there is no Excise Duty in Sri Lanka or Import Duty the goods produced there would be cheaper. Establishment of free trade arrangements between India and Sri Lanka has accelerated the development of national economies, promoting mutually beneficial bilateral trade and strengthening intra-regional economic cooperation. Both sides have recognized that the expansion of their domestic markets through economic integration is a vital pre-requisite for accelerating their processes of economic development and have further recognized that comprehensive reductions and elimination of obstacles to bilateral trade through a bilateral free trade agreement would also contribute to the expansion of world trade.

INTRODUCTION The free trade agreement between India and Sri Lanka came into full existence from 1st March 2000. Under the agreement Zero duty on around 1000 items has been provided by India with. 50 per cent margin of preference on all items, except for those in the Negative List. Tariffs have been brought down to zero over a period of three years. Concessions on textile items have been restricted to 25 per cent. India has retained less than 400 items in its Negative List. These mainly include garments, petro-chemicals, alcoholic spirits and coconuts and coconut oil. Sri Lanka has around 1200 items in its Negative List. Items in the Negative List do not enjoy tariff concessions. Domestic value-addition requirements have been kept at 35%. If the raw-material/inputs are sourced from each others country, this is reduced to 25% within the overall limit of 35%. The criterion of substantial transformation has been provided in the Rules.

Free Trade between India and Sri Lanka

Since the coming of the FTA in March 2000, trade has grown rapidly. Bilateral trade exceeded US $ 1.7 billion in 2004 and rose to US $ 2.025 billion in 2005. Exports from India to Sri Lanka in 2004 amounted to US$ 1350 million, while exports from Sri Lanka to India in the same year amounted to US$ 382 million. It rose to further US $ 1.437 billion and US $ 588 million respectively in 2005. The FTA prompted a 257 % increase in bilateral trade between 2001 and 2004. At 15% of the total, India is the biggest source of Sri Lankan imports. It is also the 3rd largest destination for Sri Lankan exports. With FDI approvals of US $ 450 million, India is the 4th largest investor in Sri Lanka. Indian Oil Corporation, Taj Hotels, Apollo Hospitals, L & T, Abujas, Tatas and Ashok Leyland are among the prominent Indian companies operating in Sri Lanka. Connectivity between the two countries is at an all time high with approximately 100 flights per week, including Indian private airlines, to and from 10 destinations in India. India is a keen partner in developmental activities in Sri Lanka. About one-sixth of the total development credit granted by Government of India is made available to Sri Lanka. At present two lines of credit are operational. These are a US $ 100 million line for capital goods, consumer durables, consultancy services and food items and a US $ 31 million line of credit for supply of 300,000 tonnes of wheat. A US $ 150 million line of credit for purchase of petroleum products is operational since March 2005. Another one of US $ 100 million, earlier slated for rural infrastructure projects including a road between Anuradhapura and Trincomalee to be named the Rajiv Gandhi Amity Highway, is now being made available for post-tsunami rehabilitation of the coastal railway line. While the Free Trade Agreement has worked well; there is scope for significant improvement. Currently the Agreement covers only goods; there are a large number of items in the negative lists (429 items in case of India, 1180 items in case of Sri Lanka as well as quantitative caps on tea and textiles) and implementation of the Agreement has thrown up another set of issues. The two sides are jointly addressing these practical difficulties arising out of the implementation of the FTA. Work is simultaneously going on to move to the next step of economic integration by expediting the Comprehensive Economic Partnership Agreement (CEPA) between the two countries. Rounds of talks in New Delhi on February 2005 resulted in the setting up of a Trade Negotiating Committee and its sub-groups which have since met in New Delhi and Colombo to finalize the Agreement by end-2006.
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Free Trade between India and Sri Lanka

CURRENT SENARIO India is Sri Lanka's closest neighbor. The relationship between the two countries is more than 2,500 years old and both sides have built upon a legacy of intellectual, cultural, religious and linguistic intercourse. Relations between the two countries have also matured and diversified with the passage of time, encompassing all areas of contemporary relevance. The shared cultural and civilization heritage of the two countries and the extensive people to people interaction of their citizens provide the foundation to build a multi-faceted partnership. In recent years, the relationship has been marked by close contacts at the highest political level, growing trade and investment, cooperation in the fields of development, education, culture and defence, as well as a broad understanding on major issues of international interest. 2. The nearly three-decade long armed conflict between Sri Lankan forces and the LTTE came to an end in 25 May 2009. During the course of the conflict, India supported the right of the Government of Sri Lanka to act against terrorist forces. At the same time, it conveyed at the highest levels its deep concern at the plight of the mostly Tamil civilian population, emphasizing that their rights and welfare should not get enmeshed in hostilities against the LTTE. The conclusion of the armed conflict saw the emergence of a major humanitarian challenge, with nearly 300,000 Tamil civilians housed in camps for Internally Displaced Persons (Internally displaced person). The Government of India put in place a robust programmed of assistance to help these internally displaced person return to normal life as quickly as possible. In13 June 2009, Prime Minister Dr. Manmohan Singh announced a grant of Indian Rupees 5 billion for relief and rehabilitation in Sri Lanka. In the immediate aftermath of the end of armed conflict, India provided a total of 250,000 family relief packs for the internally displaced person. It also established an emergency medical unit in the IDP camps, which treated over 50,000 internally, displaced person and carried out over 3000 surgeries from 1 March to 30 September 2009. Medicines worth SLR 225 million were also supplied to Sri Lankan authorities. 3. India has also consistently advocated the need for internally displaced person to be resettled to their original habitations as early as possible. In order to help with this, India has provided shelter assistance by way of supplying more than 7,800 tones of galvanized iron (GI) sheets for constructing temporary housing for Internally displaced person. Another consignment of 2600 tones of GI sheets is in transit for further supply in Sri Lanka. In addition, 70,000 starter packs of agricultural
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Free Trade between India and Sri Lanka

implements have been supplied to help resettling families begin livelihood generating activities another 20,000 of these packs will be provided in the coming weeks and months. The Government of India also supplied 400,000 bags of cement to help Internally Displaced Persons rebuild their shelters. Since the requirement of de-mining is a major constraint on the speed of resettlement, the Government of India has fully financed seven Indian de-mining teams, which are now engaged in various sectors in northern Sri Lanka to help expedite resettlement. Sri Lanka's apparel industry; despite the economic downturn and hostile environment, is a generator of huge volumes of foreign exchange revenues. Good ethical standards in the country's apparel industries and their scrupulous loyalty to the rules and regulations have paved way for its success. Indian economy is been predicted by economic analysts to grow by 7% during 2009, standing to be one among the least affected countries by the global recession. Sri Lanka is currently a lucrative destination for Foreign Direct Investments (FDI). India is one of the top five countries investing in Sri Lanka's business and trade since 2007 constituting to 6.5% of the total FDI stock, other countries being US, UK, Hong Kong, and Singapore. FDEI inflows into Sri Lanka during 2001-07 accounted to 16% of the total investments. By managing economic bilateral relations with India, Sri Lanka can achieve quick and enormous economic development. India is enriched with the potential to manage its own growth momentum, amidst the global turmoil. By demonstrating a partnership with Sri Lanka, it will gain all the benefits of a productive partnership. India has enormous potential to produce vigorous growth and ameliorate its business structure. Tourism also forms an important link between India and Sri Lanka and India is the largest source market for Sri Lankan tourism. In tourism, India is the largest contributor with every fifth tourist being from India. In 2010, out of the total 654,976 tourists, 126,882 were from India constituting 19.37%. In the period from January to November 2011, the tourist inflow to Sri Lanka increased to 758,458 from 570,349 in the corresponding period of 2010 showing an increase of 32.98%. Out of this number of 758,458, 153,919 tourists were from India making to 20.29%. The number of India tourists during January-November 2011 (11 months) increased by 38.5% as against the increase of 32.98% of the global tourists. Sri Lankan tourists too are among the top ten sources for the Indian tourism market. In 2010, nearly 200,000 visas were issued by the High Commission in Colombo to facilitate travel between Indian and Sri Lanka.

Free Trade between India and Sri Lanka

INDIA-SRI LANKA FREE TRADE AGREEMENT (ISLFTA) The main framework for bilateral trade has been provided by the India-Sri Lanka Free Trade Agreement (ISLFTA) that was signed in 1998 and entered into force in March 2000. The basic premise in signing the ISLFTA was asymmetries between the two economies, local socio-economic sensitivities, safeguard measures to protect domestic interests, and revenue implications so as not to impact high revenue generating tariff lines in the short term. In a nutshell, India sought to do more without insisting on strict reciprocity from Sri Lanka. This is reflected in the respective obligations of the two countries under the ISLFTA where India agreed to open more tariff lines upfront and within a shorter time span of three years as against smaller and more staggered openings by Sri Lanka which was provided a longer time of eight years. As a result of ISLFTA, currently 4150 Indian tariff lines have been made zero duty for Sri Lankan exports to India. Similarly, 3932 tariff lines have been made zero duty for Indian exports to Sri Lanka. In addition to these steps, India has offered quotas to Sri Lanka on certain tariff lines (a) 15 million tonnes of Tea (5 tariff lines) with 50% margin of preference with no port entry restrictions since June 2007; (b) Textiles, where there is a 25% tariff reduction for 528 Textile items; and (c) Garments where the 50% margin of preference on 8 million pieces over 233 tariff lines. The Garments quota terms have been further liberalized through a MoU on October 5, 2007 by which the Government of India has issued a Custom Notification No. 52/2008 dated 22 April 2008 giving immediate effect to the MoU. As a result, India has reduced duty to zero and removed restrictions on entry ports and sourcing of fabrics from India for 3 million pieces of apparel products from Sri Lanka. India has also removed port restrictions on the balance 5 million pieces of apparel products. These 5 million pieces of garments will be allowed to enter India at zero duty or Margin of Preference of 75% depending on the product category provided that they are manufactured using Indian made fabrics.

Free Trade between India and Sri Lanka

As of now, 1180 tariff lines remain in the Sri Lankan negative list that includes Agriculture/livestock items, rubber products, paper products, Iron and Steel, machinery, and electrical items. On the Indian side, there are 429 items in the negative list, which include garments, plastic products and rubber products etc.

Free Trade between India and Sri Lanka

BILATERAL TRADE Bilateral Trade Figures (US$ Million) Year Imports India from Exports India to Total Trade Trade Deficit EXIM Ratio for Sri Lanka SL Imports: SL Exports

All figures in US $ million, (FTA implemented in March 2000) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (Jan-Nov) 512 600 602 835 1076 1358 1399 1805 2750 2838 1707 2571 3973 49 58 72 171 241 385 559 489 516 418 328 471 482 561 658 674 1006 1317 1743 1958 2294 3266 3256 2035 3042 4455 -463 -542 -530 -664 -835 -973 -840 -1316 -2234 -2420 -1379 2100 -3970 10.4:1 10.3:1 8.4:1 4.9:1 4.4:1 3.5:1 2.5:1 3.6:1 5.3:1 6.8:1 5.2:1 5.4:1 8.2:1

Source: Sri Lanka Customs Percentage of Total Sri Lanka Trade with India Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (Jan-Nov) Exports (%) 3.57 4.79 6.84 8.95 7.17 6.63 5.10 4.56 5.57 5.12 Imports (%) 13.81 16.49 17.25 17.32 18.47 24.43 20.80 17.96 20.63 22.19

Source: Sri Lanka Customs

Free Trade between India and Sri Lanka

SRI LANKAN EXPORTS TO INDIA Sri Lanka Exports 2010 SRI LANKAN IMPORTS FROM INDIA Top ten Articles exported to Sri Lanka from India -2009: Description 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Mineral fuels, mineral oils and products Vehicles other than railway or tramway Cotton Pharmaceutical products Iron and steel Edible vegetables and certain roots and tubers Machinery and mechanical appliances; & parts Coffee, tea, mate and spices Knitted or crocheted fabrics Paper and paperboard Others Total % Share 20.12 10.79 8.30 5.62 3.97 3.82 3.78 3.53 3.22 2.69 34.15 100.00 US$M. 343.50 184.29 141.75 95.92 67.81 65.28 64.60 60.30 54.96 45.85 582.94 1707.21

CONCLUSION India and Sri-Lanka signed the Free Trade Agreement on 28th December 1998 and further discussions were held between India and Sri Lanka on 2nd February 2000 in New Delhi. The Agreement provides duty free market access to both the countries on a preferential basis in a phased manner. India has also agreed to permit limited quantities of imports of tea and garments from Sri Lanka. Tea quota will be 15 million kilogram per annum and garments 8 million pieces. The Free Trade Agreement is expected to boost the bilateral trade between India and Sri Lanka and also consolidate the close economic, commercial and political relations between the two countries through increased trade and investments. As of now, India is one of the largest exporters to Sri Lanka and the trade balance is heavily in favors of India.

Free Trade between India and Sri Lanka

References: 1. Dr. Abhijeet Singh,(2010), Title- Sri Lankan Trade Scenario Favors Indian Investors, FMS Delhi School of economics. 2. Duty concessions for Sri Lanka Exports to India, (2010) 3. INDO-SRI LANKA trade in services: FTA II and Beyond, Indian council for Research on International Economic Relation, New Delhi. Department of Commerce, Govt. of India Ministry of Commerce & Industry,(2010) 4. India-Srilanka economic and trade engagement,(2011), High commission of India Colombo