Federation of Chambers of
Commerce and Industry of Sri Lanka

RECENT TRADE POLICY DEVELOPMENTS OF INDIA AND ITS IMPLICATIONS ON SRI LANKA

India is Sri Lanka’s largest trading partner for a considerable period of time and most likely to retain the status quo in the foreseeable future. Approximately 14% ofSri Lanka’s international trade was conducted withIndiain 2010.Indiaranks number one ofSri Lanka’s source of imports representing a 20% ofSri Lanka’s total import valued at US $ 2,546 Million in 2010.Indiaenjoys a Pre- dominant position in the Sri Lankan Market in respect of commodities such as pharmaceutical, heavy vehicles,
Light vehicles, Motor Cycles, Textiles and consumer products such as cosmetics, onion, potatoes and chilies.Indiawill continue to enjoy the position of market leader in respect of those commodities in the Sri Lankan Market on account of competitive price, liberal Trade Regime of Sri Lanka and the geographical proximity.Chinawill have the capacity to be the closest competitor in the Sri Lankan Market and the time will tell us who will be the winner. ThoughIndiais a growing market with increasing appetite for imported products,Sri Lankais yet to explore its full potentials to cater to the growing Indian market despite the country having an advantage of Market Access through Indo –Sri Lanka Free Trade Agreement (ISFTA).Sri Lanka’s exports toIndiastill remained at a low value of US $ 466 Million representing only 5% of our total exports. The balance of trade is excessively and consistently in favor forIndiaat the rate of 1;5 in 2010 in terms of value of trade between the two trading partners.

In respect of Indian direct investment inSri Lanka,Indiahas invested in strategically vital economic sectors such as retail distribution of petroleum products, expansion of harbor in Kankasanthurei, construction of Sampur coal power energy project, exploration of oil and gas in the Northern Cost (MannarBasin) and telecommunication.Indiais also becoming and important Tourists Originating destination forSri Lanka.Indiais also involved in manufacturing Sectors such as rubber tires and cement. In the service SectorIndiahas considerable investment in Hotel and Tourism and Information Technology.Sri Lankaserves as a transshipment hub for ever growing Indian export cargo through thePortofColombo. The Indian Navigation Sector is also served at theColombodockyard facility. A large number of Sri Lankan students are enrolled in the Indian higher educational institutes. It is well known that not only the commercial considerations but also the Indian Geo- Political interest in the Region is largely over shadow and even fashion the Indian Trade and Economic Relations withSri Lanka.

In view of the above considerations, the Indian Trade and Economic Policy changes and its evolving dynamic have direct consequences forSri Lanka’s Trade and Economic Relations withIndia. It is there for essential to examine the extent, level and the degree of current and future prospects and opportunities existing inIndiafor her Trading Partners, particularly forSri Lankain terms of macro -economic and Trade Policy Para meters.

UndoubtedlyIndiais one of the fastest growing economies among the large economies of the world, ranking fourth largest afterUSA,ChinaandJapan. According to the recent IMF Report,Indiarecorded the highest growth rate of 10.4% in 2010. The IMF estimatedIndia’s growth rate at 8.2% in this year as against a projected global growth rate of 4.4%. The phenomenal growth of services Sector (58% of GDP) has been the engine ofIndia’s economic growth while Agriculture (14% of GDP) and Industry (28% of GDP) sectors have demonstrated mixed fortune of variance degrees in the past.India’s export grew at 37.5% in the year2010 recovering from the 2009 global economic downturn. India’s export baskets in terms of percentage shares comprised manufactured goods (63.6%) crude and petroleum product and coal (17.8%), Agriculture products (9.9%) and minerals (5.5%). In 2010, Indian imports grew at 21% mainly on account of increased value of import of Capital and intermediate goods. The Indian import baskets consisted of chemicals, iron and steel, non ferrous metals, electronic goods, precious and semi – precious stones, gold and silver accounted for 42%, Fuel 33%, Capital goods 15%, fertilizers 3% and printed materials 1%. The UAE has beenIndia’s largest Trading Partner followed byChinaandUSA.Chinais the largest source of imports toIndia(12%). The services export ofIndiareached US $ 106 billion with a growth of 17.3% while imports of services accounted for US $ 60 billion with an annual increase rate of 15%. Indian inward foreign investment of both FDI and Foreign Institutional Investment (FII) amounted to US $ 56 billion in 2010. The Indian outward investment was US $ 18 Billion during 2010-2011.Mauritiusreceived the largest share of outward Indian FDI followed bySingapore,USA,Netherlandsand The UK.

In light of the above mentioned Trade and Macro- Economic Developments, inIndia, it is pertinent to evaluate Trade and Investment prospects and opportunities open forSri Lanka. It is abundantly clear that the prospects forSri Lanka’s major export products such as Apparel products, Tea, Rubber, Coconut and Spices have a little room at least in the short terms in the Indian Market. Firstly,Indiaherself is not only a producer of these products but also competitive exporter. Secondly, most of these products are not in the realm of ISFTA. Thirdly,Sri Lankadoes not have resources endowment to process the capital and intermediate goods which are in high demand inIndia. In this contestSri Lankawill have to find a new export product profile which has a market inIndia. In this regards recent experiment ofSri Lankain exporting furniture, electrical panel board, caned food products, value added food items and high valued ceramic products toIndiaprovide a lead model. Other alternative may be to attempt to explore niche market inIndiafor Sri Lankan traditional export but definitely with high value addition with unique product development. One other option is to connect with the Indian Industry Sector to supply parts and component required for the various stages of the value change.

It is widely believe by some section of the trade policy formulating institutions and the academic circles in Sri Lanka that Trade in Services stand to gain more than Trade in goods with India. With the growing middle class segment that has a sizeable disposable income is a natural and promising market segment ofIndiathat auger well for the promotion of Sri Lanka Tourism and Hospitality Trade.Indiais also hub of Information Technology in the Region. With the relatively acceptable competence of computer literacy, English Language and sound infrastructure in the Telecommunication Sector,Sri Lankahas opportunities to synergize with the Indian ICT Industry.

As has already being demonstrated, it is cost effective forIndiato exports its products through the transshipment facilities offered by theColomboport. It is also equally beneficial forIndiato import her ever growing capital and intermediate goods through the ports inSri Lanka. In this context the ongoing massive developments taking place in the ports and navigation sector is a correct policy perspective forSri Lanka. We believe that this policy prescription will enhance opportunities for the country in view of the economic development seen not only inIndiabut also inChinaand the East Asian Region. The region in general, andIndiaandChinaparticularly are known as energy thirsty economies. The strategic location ofSri Lanka, poised for development ofSri Lankaas an energy hub. However, it is imperative that we enter in to such high profile enterprise by managing our external relations with tact and with utmost understanding of the sensitive nature of such enterprises. Our well defined Non-Align policy postures may throw some light in this direction.

In the light of the economic rationale and trade logics stated above, one can reasonably assume that opening of Sri Lankan Market for Indian investors in selected service sectors such as hospitality industry, information technology, ports and navigations, would bring concrete economic benefit toSri Lanka. Contrariety to this suggestion, some may otherwise argue that the existing investment incentive regime, legal frame work and the business environment are liberal enough and sufficient for Indian investment to be attracted to the country. In the circumstance , it is essential to hold extensive consultations with all the stake holders in transparent manner before any policy decision is arrived at on this issue on account of sensitive nature of such exercise. We should particularly be sensitive in the opening of Movement of Natural Persons in respect of these Services Sectors.Indiais also emerging as a source of investment in the region. Indian outward investment has increased from US $ 19 billion in 2009 to US $ 19.7 billion in 2010.Mauritiusreceived the largest share of Indian investment followed bySingapore,USA, The Netherlands and The UK. The manufacturing Sector accounted for largest share of outward FDI followed by the services sector (US $ 4.5 billion). In view of these developments, Sri Lanka should review objectively as to why Indian outward investment in commercial ventures are not attracted to Sri Lanka despite vast investment opportunities available and increasingly conducive business environment prevailing in the country. The private sector business chambers and trade association should also attempt to throw the search light in this direction.

One of the unique recent trends in the Indian demographic map is the ever growing young population profile as against the growing old population in the rest of the world. The Indian population in the working age group of 15-64 years is projected to increase from 63% in 2006 to 68% by 2026 leading to decline in the dependency ratio. These developments auger well forIndiain achieving an advantage over other trading partners in the global market. This trend also provides an opportunity for new market segment with high purchasing power. It is also estimated that the growing young population will add to the ever increasing middle income group inIndia.Sri Lankabeing immediate neighbor ofIndiashould be alive to these developments and should strive towards sharing the benefits by catering to the needs of the growing middle income segment of the Indian Market.

As a part of Indian Trade Policy Regime,Indiahas embarked on a number of policy reforms with a view to liberalizing international trade by removing quantitative restrictions and progressively and autonomously lowering import duties. The industrial tariff has been brought down to an average of 10% in 2008. The simple average MFN tariff rate declined to 12% in 2011. Although the declining tariff favor for accessing the Indian market, it may entail negative effect by eroding the preferential margin enjoyed by countries likeSri Lankaunder the ISFTA. In other wards, the competitive suppliers will earn additional market access opportunities due to reduction of MFN tariff across the board negating margin of preference enjoyed by the trading partners with whom India has bilateral trade arrangements.Sri Lankashould take in to account of this aspect in trading withIndia.

Indiahas recently offered Duty- Free Quota- Free Market Access (DFQF) to all least developed countries (LDCs) the scheme covers on 94% ofIndia’s tariff lines. 27 LDCs includingBangladesh,Nepal, andBhutanfrom our region are availing these facilities.Indiahas offered these facilities even for selected apparel products originating fromBangladeshopening theIndiamarket for apparel products fromBangladesh. ThoughSri Lankahas FTA withIndia, our exporters do not enjoy such level of market access. In this contextSri Lankaexporters and trade policy practitioners should be alive to these developments and attempt to response and design trade policy appropriately.

Indiahas so far concluded ten free trade agreements and five limited scope preferential trade agreements.Indiais in the process of negotiating 17 more agreements.Indiais currently negotiating a Broad Based Trade and Investment Agreement (BTIA) with the European Union. (27member states) The negotiations cover goods, services, investment, SPS, TBT, Trade Facilitation and custom cooperation. A research conducted by the Sussex University on behalf of the commonwealth institute in London draw attention to the negative trade affect likely to encounter by the South Asian Countries particularly Sri Lanka and Pakistan in the European market if the India –EU FTA Agreement is concluded. If the FTA is concluded, the competitiveness of our export products to the EU will be eroded as against Indian export. IfIndiareceives zero duty by any chance for its apparel products to the EU-Market, under the proposed arrangements, Sri Lankan products will be certainly adversely affected in the EU-Market.Indiais even now a competitive supplier of those products to the EU-Market. One of the major objectives of the EU for entering into FTA negotiating with Indiais to seek liberal access for EU-Investment inIndiato explore the huge domestic Indian Market In this context Trade Policy Formulators inSri Lankayet to embark a comprehensive study on proposedIndia–EU Free Trade Agreement and its implications onSri Lanka. Needless to emphasize the urgency of such study as 40% of our total exports are absorbed by the EU.

India’s Foreign Direct Investment (FDI) policy has been gradually liberalized by bringing more industries under the automatic approval system, enlarging areas opened for FDI, reducing the negative list, establishing single window approval facility and implementing moderate and stable tax regime. With these policy reforms which are more conducive for FDI, countries likeSri Lankaare expected to provide more conducive business environment and competitive investment incentive package to the foreign investors. The positive aspect is that if Sri Lanka can establishes links with those new FDI flowing in to India, through supply chain links, one could envisage a win -win situation.

One of the impediments cited by many critics in accessing the Indian market is the problem encountered by the exporters on clearance of their consignment at the point of custom. As a part of reform of the Indian TradePolicy,Indiarecently took some measures for trade facilitation to reduce transaction time and cost. Among the measures being implemented are introduction of electronic data interchange system and risk management system. It is expected that these measures will remove some of the difficulties faced by theSri Lankaexporters at the Indian customs and the ports. Despite application of these measures, India’s import regime continue to remain complex particularly it’s licensing, permit system, administration of FTA covered imports, tariff quota system and complex tariff structure.

This essay, as one would observe, is an attempt to analyze the evolving dynamics of the Indian Trade Policy with a view to maximizing trade and investment benefit forSri Lanka. This exercise, it is hope, will result in further studies on the subjects with a view to recalibrating of our trade policy in respect of trade relations withIndia. Since this attempt is not a complete and comprehensive exercise, the responsibilities of trade policy practitioners assumed high priority to undertake such exercise, particularly sinceSri Lankais now negotiating an Economic Cooperation Agreement withIndiato built and expand current FTA. It is also an essential that trade policy formulators should undertake a study on the consequences of EU- India free trade agreement to Sri Lanka, even though EU –India Agreement is under negotiations. Similarly, private sector economic actors should also look for innovative avenues to enhance trade and economic relations with our closest neighbor.Indiawith its emerging economic power, political clout and regional leadership may certainly aware of its responsibilities towards its small neighbors located around her vicinity. Economically prospers, stable and peaceful neighborhood is sin -qua-non for in realizing legitimate aspiration ofIndiaand for her neighbors as well.

(This paper has been complied by the Research and Policy Advocacy Unit of the Federation of Chambers Of Commerce and Industry of Sri Lanka (FCCISL) more research papers of this nature can be accessed by visiting Trade Watch Blog. www.blog.fccisl.lk Comments are welcome via email to [email protected] )