Trade Relationship between Sri Lanka & India

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					    Trade Relationship
between Sri Lanka & India

           Author: Darshana Jayawardena
                       TABLE OF CONTENT

                                                               Page No

CHAPTER 01: INTRODUCTION………………………………………………………...02



CHAPTER 04: RECOMMENDATIONS………………………………………….………12

CHAPTER 05: REFERENCES…………………………………………………….………14

                          CHAPTER 01: INTRODUCTION

There was a large demand for Indian goods due to the Indian immigrants engaged in the
plantation sector in Sri Lanka during the colonial time. The main items exported to India
were copra, coconut oil, nuts, unmanufactured tobacco, spices, etc and items imported from
India were dried fish, coal, dried chilies, textiles, fertilizers, onions, cement, etc during 1930s
and 1940s.
The first trade agreement was signed between Sri Lanka and India on 1961 in New Delhi to
maintain the high volume of trade between two countries. In 1968, the Indo-Sri Lanka joint
committee was set up to increasing the cooperation in trade, industry, agriculture and tourism.
Later, this committee was upgraded to Indo-Sri Lanka joint commission for economic, trade
and technical cooperation and both countries discussed the potential areas for new joint
ventures and bilateral arrangements.
In 1977 Sri Lanka embarked on a path of comprehensive economic policy reforms becoming
the first country in South Asia to adopt the export-driven growth strategies similar to those of
the newly industrialized economies of East Asia. In the 1980’s the Indian economy also went
in for partial liberalization and following its macroeconomic crisis in 1991 the economy
witnessed long term structural reforms in the industrial, trade and financial sector of the
economy. The trade policy reforms during this phase were mainly focused on- liberalization,
openness, transparency and globalization.
As a consequence of this gradual opening up of both the economies, trade between India and
Sri Lanka picked up significantly. India’s exports rose from US $ 277 million in 1992 to US
$ 502 in 1999 while total trade rose from US $ 291 million to US $ 546 million. Thus, the
total trade taking place between the two economies nearly doubled during this time.
Particularly, the export figures revealed that immediately in the post reform period when the
Indian economy opened up significantly the exports of goods from India to Sri Lanka
increased at a rate of 13% per annum during 1990s. By 1995 India became the largest source
of imports for Sri Lanka, accounting for 8%-9% of its total imports. Thus, Sri Lanka’s trade
with the SAARC region virtually amounted to trade with India. The FTA becoming
operational in March 2000, trade has grown rapidly between India and Sri Lanka.


Today India has become the largest supplier to Sri Lanka. But Sri Lanka has failed to
increase the export value to India. Therefore Sri Lanka has the largest trade imbalance with
India. This is because of the situation where the Indian market has vast number of businesses,
joint ventures and investments compared to Sri Lanka where the economy is small-scale and
businesses are few. This has given the opportunity for India to supply their goods to Sri
Lanka. Also the Indian economy is vast and has great potential for growth. So it has the
ability to supply goods to other countries due to the high manufacturing and production
facilities in the country and only the important items could be imported.

The example for this situation are Sri Lanka imported fabrics, copper, motor vehicle,
machinery and spare parts from India and it increasing greatly after the ISFTA to present.
Also some States in India has internal tariffs and taxes for importing of listed goods. So this
discourages the Indian investors to importing goods from Sri Lanka.

Also lack of resources, low venture capital and minimum levels of production has not helped
the export sector of Sri Lanka. Sri Lanka’s exports are at an all time small, while imports
keep increasing. The trade imbalance has been in existence since the early 1990s and has kept
gradually increasing throughout the years. Sri Lanka’s economy has kept decreasing due to
poor planning of resources and high amounts of costs. This does not encourage businessmen
and investors to freely engage in exporting their products.

The best live examples for these situations are Pepper and Coconut industry in Sri Lanka.
Last few years due to the poor planning of agricultural products like Pepper and Coconut
were imported from Kerala, India for Sri Lanka’s local consumption.

Another main reason for increasing trade imbalance between India & Sri Lanka is enormous
importing of Vanaspathi oil presently from India to Sri Lanka. A decade ago Sri Lanka
manufactured Vanaspathi oil and exported to India, but now Indian manufacturers are
manufactured in India not only for their consumption, but also the exporting purpose to Sri

Above mentioned points are the key reasons for increasing trade imbalance between India
and Sri Lanka.


 India-Sri Lanka Free Trade Agreement (ISFTA)

The year 1998 saw the biggest boost in economic relations when the two countries signed a
bilateral Indo-Sri Lanka Free Trade Agreement (ISFTA), which began implementation in
March 2000. The basic premise in signing the ISFTA 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
ISFTA 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. The ISFTA 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. The value of bilateral
trade increased fromUS$658 million in 2000 to US$ 4.1 billion in 2011.

Obligations of ISFTA

                                                          Sri Lanka’s           India’s
                                                         Commitments        Commitments
  Tariff lines to become Zero Duty in March 2000               319               1351
  Tariff lines to become Zero Duty in March 2003               889               2799
  Garment Quota – 8 million pieces                             Nil                233
  25% MOP – Textile Items                                      Nil                528
  50% MOP – Tea 15 million Kgs                                 Nil                 5
  Tariffs lines to become 35% in March 2003 and
                                                              2724                Nil
  decreased progressively to Zero by March 2008
  Negative List                                               1180                429

As a result of ISFTA, 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 15 million tonnes of Tea (5 tariff lines) with 50% margin of preference
with no port entry restrictions since June 2007; Textiles, where there is a 25% tariff reduction
for 528 Textile items; and 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. India has recently decided to do away with the condition of ’Indian made fabrics’ and
a formal notification is expected soon.

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.

Structure of ISFTA

In order to receive ISFTA benefits, the merchandise exported between India and Sri Lanka
should comply with the following Rules of Origin criteria.

 Wholly Obtained Products - All wholly obtained products such as tea, fish, spices etc. will
   be able to enjoy duty free benefits at each other's markets without difficulty, provided they
   are eligible for duty concessions.
 Products not Wholly Produced or Obtained - These include the products manufactured
   using imported raw materials. In order to enjoy ISFTA benefits, the products should
   comply with the following criteria.

   a)   The Domestic Value Addition (DVA) in the exporting country should not be less than
        35% of the FOB value of the finished product and
   b)   HS Codes of the imported raw materials and the finished products should be different
        at 4-digit level. (Change of Tariff Heading criteria)

 Cumulative Rules of Origin - The Cumulative Rules of Origin encourage the contracting
   states (India and Sri Lanka) to source raw materials needed for their exports from each
   other. Accordingly, an exporter has to show only a minimum DVA of 25% of the FOB
   value of the finished product, provided the raw materials imported from the other
   contracting state accounts for not less that 10% of the FOB value of the particular product.

 Operational Certification Procedures (OCP) - Both ISFTA and SAFTA specify
   Operational Certification Procedure for obtaining Certificates of Origin (COO) to make
   products eligible for concessions in the country of export under the relevant agreements.
   These must be carefully consulted and followed to avoid disappointment. The validity of
   the COO under SAFTA is 12 months and can be issued within 3 working days of the
   shipment of the product. The ISFTA is silent in this regard and it is advisable to obtain
   COO before the consignment is shipped to avail benefits under the ISFTA.

Negative Lists - Comparison

        Sri Lanka             Agriculture                       India
                              /livestock Items
                              Rubber Products                                    Garments
                              Paper Products
     31%                                                  23%                    Plastic
                              Iron and Steel                                     Products
                                                       7%                        Rubber
                              Machinery                              54%
                                                         16%                     Products
 3%                           Electrical Items
        4%                    Others
 4%           5%

Sri Lanka’s exports growth has largely been under the ISFTA, whereas India’s exports have
remained mostly outside the ISFTA. In average, over 70% of Sri Lanka’s exports to India
continue to be under the ISFTA, while India’s exports to Sri Lanka under the ISFTA remains
only around 25%. Sri Lanka could export more than 4000 product lines to the Indian market
on duty free basis.

The noteworthy aspect of the growth of exports under the agreement is the broad product
diversification, which took place following the FTA. Major exports from Sri Lanka under the
ISFTA includes; apparel, furniture, MDF boards, glass bottles, processed meat products,
poultry feed, insulated wires & cables, bottle coolers, pneumatic tires, tiles & ceramics
products, rubber gloves, electrical panel boards & enclosures, machinery parts, food
preparations and spices etc.

Trade Trends of Indo-Sri Lanka Trade Relationship

 Bilateral Trade Figures (US$ Million)

                     Imports            Exports To       Sri Lanka’s           Imports/
                    From India            India        Trade Imbalance       Exports Ratio
        2007           2784                516               2268                5.4:1
        2008              3007             418               2589                 7.2:1
        2009              1710             325               1385                 5.3:1
        2010              2546             474               2073                 5.4:1
        2011              4397             522               3875                 8.4:1
                                                                    Source: Sri Lanka Customs

 4500                                                       Imports /Exports Ratio
 4000                                                9.0                                   8.4

 3500                                                8.0            7.2
 3000                                                7.0
 2500                                                6.0    5.4            5.3    5.4

 2000                                                5.0
 1500                                                4.0
 1000                                                3.0
  500                                                2.0
    0                                                1.0
         2007    2008     2009   2010   2011         0.0
                Exports     Imports                        2007   2008    2009   2010     2011

 Percentage of Total Sri Lanka’s Trade with India

           Year                 Exports (%)                  Imports (%)
           2007                     6.82                        24.44
           2008                     5.10                        21.99
           2009                     4.56                        18.13
           2010                     5.77                        21.03
           2011                     5.07                        22.42

 Sri Lanka's Major Exports to India (US$ Million)

                 ITEM                      2007     2008       2009        2010    2011
  Rubber and articles thereof              35.44    35.66      39.40       56.70   44.51
  Residues and waste from the food         12.57    26.93      37.41       56.56   46.03
  Machinery & mechanical appliances        9.35     19.20      28.01       19.00   21.86
  Ships, boats and floating structure        -       0.02      18.34       19.07   19.15
  Copper & articles thereof                0.58      4.54       7.03       24.92   19.12
  Cocoa & cocoa preparations                 -       0.57       5.88       18.56   21.79
  Apparel & Clothing - not knitted or      4.19      5.18       6.81       11.00   20.03
  Pulp of wood or of other fibrous         4.72       -          -         11.90   26.99
  cellulosic material
  Other                                  449.55     325.98     181.99    256.29    302.11
  Total Exports                         516.40     418.08     324.87    474.00     521.59
                                                               Source: Sri Lanka Customs

 Composition of Sri Lanka’s Exports to India (US$ Million)

                                                               Pulp of wood or of other
                                                               fibrous cellulosic material
                                                               Apparel & Clothing - not
                                                               knitted or crocheted
 400                                                           Cocoa & cocoa preparations

 300                                                           Copper & articles thereof

                                                               Ships, boats and floating
 200                                                           structure
                                                               Machinery & mechanical
                                                               Residues and waste from the
                                                               food industries
    0                                                          Rubber and articles thereof
         2007      2008       2009     2010         2011

 Sri Lanka's Major Imports from India (US$ Million)

            ITEM                      2007       2008         2009       2010        2011
Mineral Fuels, Mineral Oils          1163.44    1136.67      337.83     428.57      904.67
Vehicles other than Railway or       279.63         257.68   171.40     531.31      894.21
Tramway Rolling-Stock
Cotton & related products            112.02         140.56   140.59     171.83      217.40
Pharmaceutical products               69.90          78.40    89.79     107.49      162.24
Iron and steel                       125.78         153.60   104.41      93.77      115.29
Machinery and mechanical              78.78          85.08    64.13     105.49      165.45
Electrical Machinery &                40.42         56.96     42.46      94.03      132.89
Equipment & parts
Other                                 915.07    1097.98       700.91   1039.02      1758.12
Total Imports                        2785.04    3006.93      1709.93   2571.51      4350.27
                                                                 Source: Sri Lanka Customs

 Composition of Sri Lanka’s Imports from India (US$ Million)


  4000.00                                                          Electrical Machinery &
                                                                   Equipment & parts
                                                                   Machinery and mechanical
  3000.00                                                          appliances
                                                                   Iron and steel

  2000.00                                                          Pharmaceutical products

                                                                   Cotton & related products
                                                                   Vehicles other than Railway
                                                                   or Tramway Rolling-Stock
     0.00                                                          Mineral Fuels, Mineral Oils
              2007     2008      2009      2010      2011

 South Asian Free Trade Area (SAFTA)

The Agreement on South Asian Free Trade Area (SAFTA) came into force from 1st January,
2006. India, Pakistan and Sri Lanka are categorized as Non-Least Developed Contracting
States (NLDCS) and Bangladesh, Bhutan, Maldives, Afghanistan and Nepal are categorized
as Least Developed Contracting States (LDCS). With SAFTA in force the concessions under
SAPTA signed in 1995 ceased in respect of Sri Lanka and India as they are classified as

Article 7 of the SAFTA Agreement provides for a phased tariff liberalization programme
(TLP) under which, in two years, NLDC would bring down tariffs to 20%, while LDCS will
bring them down to 30%. Non-LDCS will then bring down tariffs from 20% to 0-5% in 5
years (Sri Lanka 6 years), while LDCS will do so in 8 years. NLDCs will reduce their tariffs
for L.D.C. products to 0-5% in 3 years. This TLP would cover all tariff lines except those
kept in the sensitive list (negative list) by the member states. The salient features of the four
Annexes of SAFTA Agreement are as under:

 Rules of Origin - For giving preferential access to the member countries under SAFTA,
   the goods shall have undergone substantial manufacturing process in the exporting
   countries. The substantial manufacturing process is defined in terms of twin criteria of

    Change of Tariff Heading (CTH) at four-digit Harmonized Coding System (HS) and value
    content of 40% (30% for LDCSs).
 Apart from the general rules, SAFTA provides for Products-Specific Rules (PSR) for 191
    tariff lines to accommodate the interest of LDCSs given their limited base for natural
    resources and undiversified industrial structure. The Products Specific Rules have been
    provided clearly on technical grounds, where both inputs and outputs are at the same four-
    digit HS level.

 Sensitive List or Negative List

The summary of the Sensitive Lists are as under:

      Participating      No.    of   Tariff No.     of    Tariff Consolidated
      countries          Lines for LDCS      Lines for NLDCS      List
1     Bangladesh         1249                1254                 --
2     Bhutan             --                  --                   137
3     India              744                 865                  --
4     Maldives           --                  --                   671
5     Nepal              --                  --                   1335
6     Pakistan           --                  --                   1183
7     Sri Lanka          --                  --                   1065

As can be seen above, the Negative List for Sri Lanka with regard to India is 865 (much
larger than under the ISFTA where is it 429 tariff lines only). The Negative List for India
with regard to Sri Lanka is 1065 tariff lines which is somewhat smaller than 1180 tariff lines
under the ISFTA.

However, in real terms the value of SAFTA benefits as incremental to ISFTA is marginal for
both countries. There are a total of 139 items in Sri Lanka’s Negative List under the ISFTA
that are absent from the Sri Lanka’s list under SAFTA. Zero duty benefits under these are,
therefore, available to Indian exporters.

                     CHAPTER 04: RECOMMENDATIONS

 Reorient the role and mandate of the Department of Commerce

The Department of Commerce is the focal point within the Government of Sri Lanka for all
trade negotiations and is therefore mandated to collect data and information, generate
statistics and conduct analysis of all trade mechanisms. Their prime responsibility and
obligation is to evaluate all trade agreements including the ISLFTA against its own objectives
in its mission statement, which is to what extent these agreements contribute to raising the
standard of living and achieving a higher quality for life for Sri Lankans as measured by
increase in total domestic production, rise in income levels, and increase in total employment.
Sri Lanka should view India as an opportunity and not a threat, and strive towards more
meaningful cooperation in facilitating inclusive and equitable development policies and
redesign the taxation policy in ISFTA.

 Maximize more opportunities for Sri Lanka’s export industry

Maximum utilization of natural resources in Sri Lanka to develop more in existing industries
and startup new business can increase the net export value in future. In that Sri Lanka can
export items that will gain comparative advantage to Sri Lanka. So that Sri Lanka can
minimize the trade imbalance with India.

 Attract more Indian investors to Sri Lanka

If Sri Lanka has more Indian investors to invest in various massive projects & industries
mainly in North and Eastern province in Sri Lanka will encourage & develop the Sri Lanka’s
infrastructure and export industry. When Sri Lanka manufacture and export the products
included in negative list of ISFTA to India can also enjoy duty free basis or various duty
reductions to Sri Lanka.

 Investigate the impact of the entire trade liberalization process

The protection provided by the negative list of importing items is minimal mainly as a result
of several reasons. Firstly, the maximum imposable duties were drastically reduced as a part
of tariff reforms in several stages during the last three decades. By the time the ISLFTA was
implemented, some of the agricultural and industrial products were already wiped out in the
face of cheap imports. Those tariff reforms, hence, limit the protection provided by the
negative list of the ISLFTA. Also Sri Lanka has committed to further tariff reductions under
multilateral trade mechanisms, in particular under the Agreement on Agriculture (AoA) and
Non-Agricultural Market Access (NAMA) of the World Trade Organization. This further
restricts the maximum imposable tariff, making the protection offered by ISLFTA extreme
marginal. It would be more meaningful therefore when investigating the impacts on
communities of producers and consumers involved with agriculture and industries to look at
the entire trade liberalization process including the multilateral commitments, rather than to
study the ISLFTA in isolation.

 Establish domestic companies in India for industrial sectors

If Sri Lanka investors can establish more subsidiary companies, branches, and showrooms in
India will also increasing the export capacity to India from Sri Lanka and can benefit
economies of scale of production in India as well as Sri Lanka can benefit more strategic
advantages like can use raw material (fabrics, spices, vanaspathi oil, etc) from India and
manufacture in India mainly for their consumption. It can reduce unnecessary volumes of
imports from India to Sri Lanka.

                          CHAPTER 05: REFERENCES

Central Bank of Sri Lanka Annual Report – 2011


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