India-Sri Lanka Bilateral Free Trade Agreement
Outline of Presentation
Introduction Recent Trends in Indo-Lanka Economic Relations:
Trade
Positive
Outcomes Outcomes
Negative
Role Played by the ILFTA in Crisis Situations
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 Asymmetry between the two countries was accommodated by special & differential treatment (SDT)
Recent Trends in Indo-Lanka Economic Relations
Trade
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 SLs 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
Outcome of 9 Years: 1999-2008
1999 SL exports to India SL imports from India Import/Export ratio 1% 8.5% 10.5:1 2005 9% 17% 2.6:1 1062 Dominated by vanaspathi & copper 2008 5% 25% 8.2:1 869 VA products: insulated wires & cables, refined copper products, rubber gloves, apparel 5 14%
No of products from 505 SL Type of exports Many primary products: pepper, areca nuts, waste & scrap, dried fruit, cloves Rank of export 14 destination Ind investment in Less than 2% SL (% of total FDI)
3 16%
Positive Outcomes: Rapid Growth in Overall Trade
By 2005, Sri Lankas exports to India reached a peak of US$ 566.4, a tenfold increase compared to 2000, and stood at US$ 418.3 million in 2008. India was the 5th largest destination for Sri Lankas exports in 2008 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 2008, 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
Negative Outcomes: Lopsided Trade
While an aggregate view of trade between India & SL since the FTA came into being suggests a very positive picture, a more disaggregated analysis reveals a not so positive story
While exports from SL to India peaked at US$ 566.4 Mn in 2005, these exports were largely concentrated in two products copper & vanaspathi (49.66%)
SL's Main Exports to India: 2005
Copper & copper products Vanaspathi Aluminium products Electrical machinery & parts Antibiotics Cloves Iron & steel products Pepper
Negative Outcomes Cont. If vanaspathi & copper were excluded from the trade figures, SLs exports to India would have increased from US$ 58 Mn in 2000 to just US$ 278 Mn in 2006 a five-fold increase compared to the tenfold increase with vanaspathi & copper Vanaspathi & copper are a problem since these exports arose not due to any distinct comparative advantage that SL held, but due to short-term tariff arbitration by Indian manufacturers investing in SL
The viability of the industry was only as long as there was a discrepancy between Indian & SL tariffs on palm oil imports
In response to the increase in global commodity prices in 2007/08, India cut import taxes on food imports including palm oil, making vanaspathi exports from SL unviable Accordingly, vanaspathi exports in 2008 were US$ 31.96 Mn, a fall of 78% from exports in 2007 which amounted to US$ 145.32 Mn Vanaspathi exports are expected to be non-existent in 2009
Negative Outcomes: Inherent Weaknesses in the FTA
Given that the results of the ILFTA have not been entirely positive from a Sri Lankan perspective, a key question is: why hasnt there been a greater positive impact on the SL economy as a result of the ILFTA? Critics of the ILFTA have argued that there are inherent weaknesses in the Agreement that make it very challenging for SL exporters to compete in the Indian market, such as: TRQs on major exports tea, garments & textiles which make up 58% of SLs 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
Role Played by the ILFTA in Crisis Situations
After the global financial & food crises & in the context of the ongoing economic slowdown, it is important to examine whether the ILFTA has played any role in attenuating the crisis and recovery effects in the SL economy The main role played by the FTA in the face of the crisis has been in providing cheap Indian imports to SL consumers, such as oil, vehicles, watches & pharmaceutical products, when prices are on the rise in other countries The fact that the Indian economy has remained relatively unaffected by the economic downturn has been an additional advantage Geographical proximity has enabled savings on transport-related costs However, such advantages are prevalent with or without crises it appears that the ILFTA has not played any particularly significant role in mitigating the impacts of the financial & food crises It is thus important to look beyond the FTA in order to promote more cooperation which will enable the two countries to follow more inclusive & sustainable development policies & provide necessary safeguards against future crises
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
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