Economic relations between India and Sri Lanka, which date back to precolonial 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)

 

Larger negative list (SL agriculture sector fully protected) The immediate duty-free list (319 items) and 50% preferential duty list (889 items) were considerably smaller than those offered by India (1351 items and 2799 items respectively), while the Sri Lankan negative list (1180 items) was considerably lager than India s (196 items) Relaxed Rules of Origin (ROO) 35% (25% if Indian imports used) Longer tariff phase-out period (8 yrs for SL & 3 yrs for India) Negative list reduction based on SL s comfort level Revenue compensation excluded, but SL insisted that high revenue import items will not be subject to tariff preferences (M duties = 2% of GDP revenue)

   

In the period immediately preceding the Agreement (1995-2000), average annual exports from SL to India were US$ 39mn & annual average imports were US$ 509mn India was an important source of imports even prior to the Agreement by 2000, India was already the second largest source of imports to SL after Japan But India was not a major export market prior to the ILFTA it was the 14th rank in export destinations in 2000 SL s trade with India changed dramatically following the implementation of the FTA in 2000 India fully implemented the Agreement by March 2003, and SL did so by October 2008 longer time frame for the latter given economic asymmetries between the two countries

By 2005, Sri Lanka s exports to India reached a peak of US$ 566.4, a tenfold increase compared to 2000, and stood at US$ 418.3 million in 2010. India was the 5th largest destination for Sri Lanka s exports in 2010 Imports too have grown at a rapid rate following the implementation of the FTA. Imports from India which amounted to US$ 600.1 million in 2000 reached US$ 3443 billion in 2010, a growth by 5.7 fold An aggregate view of trade between India and Sri Lanka since the FTA came into being thus suggests a very positive picture with overall trade growing close to six fold and exports from Sri Lanka growing ten fold Furthermore, the increased diversity and greater value addition in exports from Sri Lanka is a positive development

TRQs on major exports tea, garments & textiles which make up 58% of SL s total exports have been placed under quotas in the FTA Rules of Origin besides stringent ROO within TRQs for garments, requiring a CTH at the 4-digit level has been burdensome for certain SL exports NTBs NTBs such as state taxes, quality requirements & administrative procedures have hindered the entering of SL exporters into the Indian market Unilateral imposition of quotas - in 2006 India unilaterally reduced the quota on vanaspathi exports to 100000 MT from 250000 MT. Similar problems have occurred in exports such as bakery shortenings, pepper & copper

Anecdotal evidence also suggests that delays at customs & bureaucratic red tapes continue to hinder export penetration from SL to India TRQs, ROOs & NTBs have thus diluted the special & differential treatment (SDT) offered by Indian to SL However, SL industrialists are also to be blamed put in an extra effort to study the Indian market they have not

SL has adhered to the spirit of the ILFTA & has not imposed any TRQs despite pressure from certain SMIs However many of these conflicts have been addressed in ensuing negotiations for the Indo-Lanka CEPA, such as restrictions on ports of entry & quotas on the export of certain products from SL to India Port restrictions on tea imports were removed in June 2007 and 3 Mn garments were allowed duty free without sourcing requirements As a result, garment exports from SL to India have increased from US$ 0.156 Mn in 2002 to US$ 4.194 Mn in 2007

Sri Lanka traditionally follows a nonaligned foreign policy Indo Sri Lanka Free Trade Agreement ISFTA . Was a founding member of the NonAligned Movement (NAM). A member of the Commonwealth, The South Asian Association for Regional Cooperation (SAARC),