India-Srilanka Free Trade Agreement(FTA): The Success and Road Ahead

The Free Trade Agreement between India and Srilanka came into full existence from 1st March 2000.This FTA basically deals with the modalities of the Duty Free Import of the Goods manufactured in Srilanka. Which exempt specified goods imported under Indo-Srilanka Free Trade Agreement from the Import Duty up to 100%. There is a clear business opportunity for manufacturers from India to set up unit in Srilanka so that the goods produced in Srilanka can be brought to India duty free availing the exemption provided in the Free Trade Agreement. Since there is no Excise Duty in Srilanka or Import Duty the goods produced there would be cheaper.

Establishment of free trade arrangements between India and Sri Lanka has accelerated the development of national economies, promoting mutually beneficial bilateral trade and strengthening intra-regional economic cooperation. Both sides have recognized that the expansion of their domestic markets through economic integration is a vital pre-requisite for accelerating their processes of economic development and have further recognized that comprehensive reductions and elimination of obstacles to bilateral trade through a bilateral free trade agreement would also contribute to the expansion of world trade.

Under the agreement Zero duty on around 1000 items has been provided by India with. 50% margin of preference on all items, except for those in the Negative List. Tariffs has been brought down to zero over a period of three years. Concessions on textile items has been restricted to 25%. Four chapters under the textiles sector have been retained in the Negative List. India has retained less than 400 items in its Negative List. These mainly include garments, petro-chemicals, alcoholic spirits and coconuts and coconut oil. Sri Lanka has around 1200 items in its Negative List. Items in the Negative List do not enjoy tariff concessions.

Domestic value-addition requirements have been kept at 35%. If the raw-material/inputs are sourced from each other’s country, this is reduced to 25% within the overall limit of 35%. The criterion of ‘substantial transformation’ has been provided in the Rules.

Since the coming of the FTA in March 2000, trade has grown rapidly. Bilateral trade exceeded US $ 1.7 billion in 2004 and rose to US $ 2.025 billion in 2005. Exports from India to Sri Lanka in 2004 amounted to US$ 1350 million, while exports from Sri Lanka to India in the same year amounted to US$ 382 million. It rose to further US $ 1.437 billion and US $ 588 million respectively in 2005. The FTA prompted a 257 % increase in bilateral trade between 2001 and 2004. At 15% of the total, India is the biggest source of Sri Lankan imports. It is also the 3rd largest destination for Sri Lankan exports. With FDI approvals of US $ 450 million, India is the 4th largest investor in Sri Lanka. Indian Oil Corporation, Taj Hotels, Apollo Hospitals, L & T, Ambujas, Tatas and Ashok Leyland are among the prominent Indian companies operating in Sri Lanka. Connectivity between the two countries is at an all time high with approximately 100 flights per week, including Indian private airlines, to and from 10 destinations in India.

India is a keen partner in developmental activities in Sri Lanka. About one-sixth of the total development credit granted by Government of India is made available to Sri Lanka. At present two lines of credit are operational. These are a US $ 100 million line for capital goods, consumer durables, consultancy services and food items and a US $ 31 million line of credit for supply of 300,000 tonnes of wheat. A US $ 150 million line of credit for purchase of petroleum products is operational since March 2005. Another one of US $ 100 million, earlier slated for rural infrastructure projects including a road between Anuradhapura and Trincomalee to be named the Rajiv Gandhi Amity Highway, is now being made available for post-tsunami rehabilitation of the coastal railway line

While the Free Trade Agreement has worked well; there is scope for significant improvement. Currently the Agreement covers only goods; there are a large number of items in the negative lists (429 items in case of India, 1180 items in case of Sri Lanka as well as quantitative caps on tea and textiles) and implementation of the Agreement has thrown up another set of issues. The two sides are jointly addressing these practical difficulties arising out of the implementation of the FTA. Work is simultaneously going on to move to the next step of economic integration by expediting the Comprehensive Economic Partnership Agreement (CEPA) between the two countries. Rounds of talks in New Delhi on February 2005 resulted in the setting up of a Trade Negotiating Committee and its sub-groups which have since met in New Delhi and Colombo to finalize the Agreement by end-2006.

With a small beginning the Free Trade Agreement between the two countries is another feather in its excellent bilateral relationship It is a huge leap forward but a lot more needs to be done in future to make it a real success story.