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Outline of Presentation
Introduction Recent Trends in Indo-Lanka Economic Relations:
Trade
Positive
Outcomes Outcomes
Negative
Investment Services
Role Played by the ILFTA in Crisis Situations CEPA: Looking Beyond the FTA Opportunities through CEPA Conclusion
Introduction
Economic relations between India and Sri Lanka, which date back to pre-colonial times, began to pickup in the 1990s with the liberalization of the Indian economy The year 1998 saw the biggest boost in economic relations when the two countries signed a bilateral Indo-Lanka Free Trade Agreement (ILFTA), which began implementation in March 2000 Among other factors, contemporary political forces led to the signing of the Agreement The ILFTA 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 NTBs (Indian state taxes) were also to be removed gradually Asymmetry between the two countries was accommodated by special & differential treatment (SDT)
Introduction Cont.
Many primary Dominated by VA products: insulated products: vanaspathi & wires & cables, pepper, areca copper refined copper nuts, waste & products, rubber scrap, dried gloves, apparel fruit, cloves 14 Less than 2% 3 16% 5 14%
1995-1999 average 2000 2001 2002 2003 2004 2005 2006 2007 2008
Value (US$ Mn) 2007 38.105 35.440 145.320 8.357 9.352 14.732 5.574 19.229 26.919 8.450 2008 40.694 33.647 31.961 29.116 18.118 17.899 16.782 16.578 12.817 9.574 33.145 19.020 79.692 11.780 9.019 11.494 1.226 11.981 93.253 6.426
Exports Imports
Year
Trade Deficit Cont. It is possible that non-petroleum imports from India would also grow at a faster rate in the coming years with full liberalization of trade with India (other than items in the negative list) in October 2008 However, the bulk of Indian imports into SL are not influenced by the FTA over 65% of SLs import value from India is from products either in the negative list or exempt from MFN duty According to the DOC, Sri Lankas imports under the FTA were only about 14% of the countrys total imports from India in 2007
US$ Mn
Investment
Indian investment into SL has also increased significantly since the FTA came into operation Between 1978 & 1995, Indian investment accounted for 1.2% of total FDI Cumulative Indian investment which was a mere US$ 1.437 Mn in 1998 increased to US$ 125.925 Mn by 2008, contributing to 14% of total FDI flows to SL India is now the second biggest investor in SL, exceeded only by Malaysia The bulk of Indian investment (63%) in SL in recent years has been in the services sector telecommunications (Bharti Airtel), health (Apollo Hospitals), retail services (Lanka Oil Company), energy, hospitality (Taj Hotels) and air transport services (Jet Airways) As of the end of 2007, Indian investment resulted in over 70 projects, employing 6747 individuals
Investment Cont.
However much of the investment that came into SL was associated with products such as vanaspathi & copper, as foreign investors from India & third parties saw an opportunity to break into Indias market through SL Employment creation was also limited according to the BOI, though 5900 jobs were created as a result of Indian investment, this includes 1500 employees in the Indian Oil Company retail outlets This entailed re-hiring staff from the Ceylon Petroleum Cooperationowned outlets, rather than creation of new jobs The dominance of services suggests that the impact of the FTA (which only deals with trade in goods) on the investment decision is limited Yet, the surge of investment between 2000 & 2008 has been influenced by increased economic ties between the two countries & increased investor confidence as a result of the FTA
Services
The extent of commercial services exchange between the two countries has increased in the post-FTA period as demonstrated by the following examples: Many SL students & patients travel to India to purchase education & health services each year Approximately 70% of Colombo ports income is from transshipment earnings from India Approximately 40% of SL airlines revenue is from the Indian market (SL Airlines) SL IT firms have provided technical solutions to Indian companies (interblocks sold internet banking solution to Indian banks, Microimage sold Tamil SMS adaptation to Bharti Airtel) SL tourist sector firms such as Aitken Spence & Jetwing have ventured into the Indian market India has become the largest source of tourists to SL Tourist arrivals from India grew rapidly at 20.9% per annum during 2000-2007 & accounted for 19.4% of the market share in 2008
CEPA Cont.
But critics failed to take into account the fact that like the FTA, the CEPA also made room for economic asymmetry between the two countries & accorded SDT to SL The 2nd concern, that the shortcomings in the FTA should be addressed before CEPA, is counterproductive the CEPA was negotiated with the very objective of addressing the shortcomings in the FTA (removal of port restrictions & ROO requirements in garments) Also, increasing exports to India requires a general change in perceptions & preferences of SL exporters a process that will take time With the CEPA negotiations being stopped, the only forum for addressing the shortcomings of the FTA has closed Given the fact of geographic proximity and socio-political and historical relations between the two countries, economic exchange is inevitable
Several SL firms such as Damro have successfully entered the Indian market It is important to realize that India is becoming increasingly open to foreign economic integration in 2007 FDI into SL amounted to almost US$ 25 Bn & imports were over US$ 180 Bn Given that the rest of the world is able to get a foothold in India, SL firms need to be more positive & look to do the same Whilst there will undoubtedly be cases of failure, this has to be expected given the fact that Indian is not an easy market to enter CEPA could be used as an opportunity to deal with such problems It is not too late for SL to engage with the Indian market through CEPA the agreement is an opportunity not to be wasted
Conclusion
It is important to rectify the shortcomings of the FTA & build on its achievements The key opportunity is to tap into the large and dynamic Indian market, by moving beyond the ILFTA towards broader economic integration The CEPA, implemented with proper regulatory mechanisms in order to accommodate the disparity between the countries, provides an opportunity for SL to integrate more closely with the Indian economy Deep economic integration with a fast-moving economy like India could contribute to stimulating growth rates in SL Today, as an economic crisis grips Sri Lankas traditional export markets and a food price crisis engulfs the global economy, SL should view India as an opportunity and not a threat, and strive towards more meaningful cooperation in facilitating inclusive and equitable development policies