INDIA-SRI LANKA FREE TRADE AGREEMENT ANALYSIS October 02, 2010

BACKGROUND INDIA-SRI LANKA FREE TRADE

AGREEMENT

Introduction
The India-Sri Lanka Free Trade Agreement (ISLFTA) was signed in 1998
and became effective in March 2000. After almost ten years of
operation, made more urgent and relevant in view of the strong lobby
on both sides of the Palk Straits for its expansion and deepening into a
Comprehensive Economic Partnership Agreement (CEPA).

The World Trade Organization (WTO) that was established in 1995

introduced rules for international trade and all local measures affecting
such trade. These rules are valid for multilateral trade as well as
bilateral and regional trade conducted among the member countries.
The WTO, in fact, does not endorse regional or bilateral trade
agreements among countries unless they allow substantial levels of
trade liberalization over reasonable periods of times that go well
beyond the commitments of trade liberalization made by countries at
the WTO. The free trade approach requires countries to give up various
measures they use to safeguard interests of the local farmers and
industrialists, convert all such measures to an imposable duty and then
reduce that imposable duty to zero over a period of time. Therefore the
WTO allows bilateral and regional trade agreements only if these
agreements result in accelerating the process of duty elimination.

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INDIA-SRI LANKA FREE TRADE AGREEMENT ANALYSIS October 02, 2010

Trade In Service
Service activities are playing an increasingly important role in global
economic growth. The share of agriculture and miming tends to
decline and the share of manufacturing, and subsequently that of
services grow in important as economies develop to larger extend. Due
to high global competition amount the nations it is very important
manufacture goods very low cost with the very high quality. Otherwise
importing from other much more cost effective than manufacturing of
goods in own country. Importing goods from out side is wasting
resources in the country. Information technologies lead the major roll
any of the business entities and providing better impact to improve its
productivity as result it will reduce the unit cost of the products.
Improved productivity in business entities contributes the overall
improvement of productivity and efficiency in the economy of any
country.

The growth of the IT sector in India symbolizes the potential of Indian

industry to perform at world-class standards. Led by some visionaries
and supported by thousands of employees and entrepreneurs, the IT
sector embodies much of what can go right when the spirit of human
enterprise is given free rein.

India may be slow to enter into the global market due to political
behaviour but now prepared to take on the myriad social and economic
problems faced by us. India also backed by strong by strong ethical
beliefs. This transition will make India a more stable nation and will
also avoid the harmful side effects of an unexpected capital society.
Today India produces four hundred thousand engineers per year. India
has 5 hundred thousand telephone connections, 23 hundred thousand

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mobile phone connections and 6 hundred thousand internet users.

Information technology has thus seeped into the minds of millions of
Indians, as India takes of on a promising growth ride.

Information technology in India has brought about a radical change in

the society at one level. Since 1991 India may be earning a lot many
more dollars than what India were earning before. Though being a
beneficiary of the same boom do not really agree that the answer to
social and economic problems is within IT.

According to IMF and World Bank statistic Indian economy has

registered a growth of 8.8 per cent for the first quarter (April-June) of
2010-11 against 6 per cent a year ago. This is the highest growth in
any quarter in last 3 years. The growth in the GDP growth rate is
powered by a robust growth in manufacturing coupled with turnaround
in information and allied activities that became its competitive stand in
the world.

The Sri Lankan story is unique. A small country with a population of

around 22 plus million people witnessed devastating internal war for
over 26 years which came to an end in May 2009. Over the years
enormous young skill resources were spent on defence related
expenditure by the state to achieve a peaceful environment for the
people who had been facing hard financial conditions to do business
and maintain their livelihood during this period. Today after one year
from ending the war, the environment is slowly changing and better
opportunities are emerging to those who want to focus on business
and others seeking employment. Since country is practicing opened
economy in 1977 & capability of Sri Lankan recourses tendency of
coming foreign investors will increased to great extend due the
peaceful environment, geographical location this country is located &
skill level of the Sri Lanka resources.

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Sri Lanka being a neighbour to India with over 1.2 plus billion
populations is another significant geographical advantage that can be
explored to meet Sri Lanka’s needs. India is one of the countries who is
having world class infrastructure in terms of Information technology,
manufacturing etc. India is country they provide information
technology services across the global. Due availability & knowledge of
Indian resources most of the multinationals started expanding their
operation to India to great extend that helps India to largest service
providers in globe. Main driving force to achieve this sustainable
competitive advantage is their educational system.

In Sri Lanka the political stability and direction is needed to achieve

overall economic targets and to create a sustainable economic growth
in the country. The ongoing infrastructure development projects are on
the right direction. The ruling party obtained a significant voter base in
the presidential and parliamentary elections held in early 2010 and
commands a strong ruling coalition to improve the administrative
process and to devolve power to where necessary. The current outlook
for the country is very positive for investors in many sectors. Many
forms of direct investment opportunities are opening up in
infrastructure projects and industries whereas for portfolio investors
the stock market has opened more opportunities though the size of the
market remains small. Some of the advantages we were beneficiary
having free trade agreement with India is

• World's largest democracy

• Stable political environment and responsive administrative set
up
• Land of abundant natural resources and diverse climatic
conditions

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INDIA-SRI LANKA FREE TRADE AGREEMENT ANALYSIS October 02, 2010

• Second most attractive FDI location in the world

• Healthy macro-economic fundamentals
• Cost competitiveness; low labour costs
• Large pool of skilled manpower reforms; strong knowledge base
with significant English speaking population
• Young country with a median age of 30 years by 2025
• Huge untapped market potential
• Investor friendly policies and incentive based schemes
• Progressive simplification and rationalization of direct and
indirect tax structures
• Reduction in import tariffs
• Full current account convertibility
• Compliance with WTO norms
• Well established judiciary
• Robust banks and financial institutions
• Innovations of Information Technology.

Success of Indian information technologies and enable its industries is

well documented, The Indian information technologies business
process outsourcing (BPO) revenue aggregate is expected to grow
over 33% and reach to USD 64 Billion end of this year.
In 2007 there were more than 6000 software exporting companies in
the software technologies parks in India, spread over 21 cites. About
half of the fortune 500 companies are now client of Indian information
technology companies. Also now India becoming an important
knowledge process outsourcing destination. A majority of the fortune
500 and global around 2000 corporations are sourcing IT – TTES from
India. Indian companies HCL and Wipro carry out sourcing for
innovation through multinational corporations like Boeing. Also General
Electrical research centre in Bangalore is equal in size & facilities to
global research headquarters in New York.

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Even in India majority of Information technologies parks base in

southern part of the country. Some researches say information
technologies is knows as soft subject. Most of the south Indian’s was
identified as soft peoples. Sri Lankan also categorized as soft
community comparatively neighbouring nations & understanding new
technologies with is very high. With the past global recession most of
Multinational moved their back end server to open source solutions
instead of high cost propriety software. Sri Lankan engineers are doing
major contributions to open sources developments across globe. It was
highlighted some of international information technologies journals in
globe.

Sri Lanka and India have been related to each other for millennia and a
love-hate relationship had developed due to historical circumstance.
However, it is acknowledged that culturally linguistically,
philosophically, and ethnically that both share more similarities than
differences. Therefore, in the context of the evolving New International
Economic Order struggling to be born a relationship of mutual
interdependence must be forged and reinforced by every means
possible.

SOFTWARE INDUSTRY
India has in recent years established itself as a major player in
software development and exports. Software exports from India grew
from US $ 1760 million in 1997-98 to US $ 7175 million in 2002.
However, software exports to Sri Lanka were only US $ 2.5 million in
2002-03. Sri Lanka faces a serious shortage of trained software
professionals particularly in the areas of software design, project
management and network design and management. As a result, there

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is immense scope in the software sector. The Sri Lankan government

offers attractive incentives to software companies which include a tax
holiday, concessionary tax, and import duty exemptions on capital
goods.

Very few Indian companies have set up operations in Sri Lanka. While
the exact number is not known, the survey revealed that most of the
Indian companies are concentrated in a specific sector, namely,
telecom and have limited presence in other sectors. The opening up of
the telecom sector in Sri Lanka has provided vast opportunities to
Indian software applications in the telecom sector. Most of the
companies operating in Sri Lanka have expertise in network and
infrastructure management. Indian companies in Sri Lanka prefer to
have a local partner even if they have a wholly owned subsidiary; as
such partnerships facilitate access to information.

The companies have opined that there are no major barriers to entry
into the Sri Lankan market the chief reason being that Indian software
standards are recognized globally. The proposed FTA could play a
significant role in identifying sectors where Indian software companies
could enter, as such information is lacking. This would enable the
Indian companies to expand their presence in Sri Lanka. Also, the FTA
can facilitate co- operation in software training between the two
countries.

In the current Round of negotiations India has requested Sri Lanka to

undertake more liberal commitments in all the sub-sectors under
computer and related services which includes consultancy services for
installation of computer hardware, software implementation services,
data processing services, database services and other services. India
has requested Sri Lanka to undertake full commitments in Modes 1, 2,

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3, and 4 under market access and national treatment. In addition, India

has requested Sri Lanka to undertake additional commitments to
recognize the educational qualifications, training, and experience of
Indian professionals related to computer related services. This
indicates India’s interest in penetrating into all the segments of
computer related services in Sri Lanka. Sri Lanka has not scheduled
computer and related services in its initial offer. Sri Lanka has not
made any request to India in computer and related services. India has
in its initial offer made more liberal commitments.

ADVANTAGE TO SRI LANKA

• This agreement mitigates the risks of a small economy of Sri

Lanka, opening up its economy to a large economy. India, the
ISFTA was negotiated on the lines of asymmetric treatment. This
took into consideration it’s an advantage to Sri Lanka’s less
diversified industrial base and its small economy status.
• With the implementation of the ISFTA, trade between the two
countries underwent substantial changes. Overall trade/ IT
services between the countries grew by six fold since it came in
to effect.
• The increase of Indian investments to Sri Lanka has been a more
visible indirect benefit of the ISFTA. India is now the country’s
second largest investor; investing US$ 126 million in 2008,
second only to Malaysia. Example : Air Tel
• This is given the positive outcomes of the ISFTA and emerging IT
services/investment links encouraged Sri Lanka to broaden
economic cooperation by including services and investment
under a proposed Comprehensive Economic Partnership
Agreement (CEPA).

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INDIA-SRI LANKA FREE TRADE AGREEMENT ANALYSIS October 02, 2010

• Sri Lanka’s export market (Software) penetration to India is far

from adequate, and has a long way to progress. But of
companies already providing solution to their financial sector.
• Sri Lankan exporters to India ought to undertake more
diversification of product baskets to fully make use of the FTA.
• The movement of IT professionals is much more limited in the Sri
Lankan schedule of commitments. India will allow Sri Lankan
professionals in almost all sectors it is opening under CEPA to
work in India.

ADVANTAGES TO INDIA

• Can get better ROI inverting Sri Lanka

• Comparatively small markets but there is very good
opportunities for Information systems solutions.
• Compare to India cost of IT resources is lower in Sri Lanka.
• Can positions IT educations centers.
• Since Sri Lanka practicing open economy over period of time Sri
Lankan resources having good exposure international business
practicing that India can capitalized invest to open BPO’s here.

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DISADVANTAGES TO SRI LANKA

• With regard to the SAPTA agreement Exports have relatively
decrease compared with the Imports from India. Therefore there
is cash out flow from the country with consideration to the cash
inflows to the country.

Source: Chamber of Commerce SL, 2010

• With regard to the reduction of traffics in the SAFTA agreement

both Sri Lanka and India has a win -win situation. But with the
rules and restrictions the Indian government has imposed Sri
Lanka is unable to get it fullest advantage. Eg: Indian Customs
rules and regulations in imports of goods or services.
• If the CEPA agreement is being signed there would be a threat to
the Sri Lankans who reside in Sri Lanka on Job opportunities. The
reason for this is due to that India being a large country and Sri
Lanka being 1/10 of it, Indians would enter Sri Lanka’s service
industry and a job scare would be created for the Sri Lankans in
the Sri Lankan Market. The other reason is that, since the Indian

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Rupee is strengthen than the Sri Lankan Rupee Indians has the
potential of working for a lower salary than the Sri Lankans and
this action would be drastically effected the Sri Lankan
professionals in the Service industry.

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CONCLUSION

Bilateral trade between India and Sri Lanka has been growing rapidly since the 1990s
largely as a result of unilateral liberalisation efforts undertaken by two countries. Trade
flows have further accelerated since early 2000 with the implementation of a bilateral
FTA. Although efforts to foster economic linkages through the SAARC process got
underway from the late 1990s with the implementation of SAPTA, the implementation
process remained less effective and slow moving due to the lack of commitment among
the member countries. With the poor performance of regional efforts in economic
integration, India and Sri Lanka, therefore, embarked on an alternative course to
strengthen bilateral economic ties, facilitated by a significant improvement in political
relations between the two countries from the late 1990s. The key factor behind India’s
pursuit of an FTA with Sri Lanka was to further expand its import penetration in to the
country.

Sri Lanka on the other hand, viewed an FTA with India as a means of broadening its
industrial base by taking advantage of the ‘first mover’ access to the large and growing
Indian market. Given the existing economies of scale disparities between the two
countries, the ISFTA offered Sri Lanka asymmetric treatment, particularly in terms of the
size of the negative list it was permitted to maintain and in terms of the period of 38
implementation. As such, despite some objections from domestic interest groups in both
countries, the ISFTA was signed in 1998 and came into effect in 2000 with the primary
objectives of broadening domestic markets and enhancing bilateral trade by employing
important instruments such as significant tariff reductions and more moderate RoO as
compared to SAPTA.

The operationalization of the ISFTA in 2000 was an important step taken by the two
countries to harness the economic complementarities between them. As expected, post
ISFTA bilateral trade performance between India and Sri Lanka indicates that exports
and imports have grown considerably, accompanied by significant product
diversification. Despite the fact that the ISFTA was confined to trade in goods, increases

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in trade links between India and Sri Lanka have been further triggered by large
investment flows as well as services integration between two countries over time.

Nevertheless, investment flows have been mostly one sided as would be expected –
flowing from India to Sri Lanka – where the bulk of Indian investment in manufacturing
in the post ISFTA phase has come from Indian investors keen to take advantage of
preferential duty access to the Indian markets. Nevertheless, the potential for greater
linkages in investment and services has been fairly obvious based on recent performance,
and in part has encouraged both countries to further deepen integration in these areas
under the CEPA framework. It is evident from detailed analysis of post ISFTA trade
flows that Sri Lanka’s exports to India have expanded significantly. However, it is also
clear that the overwhelming share of the increase has originated in a few commodities,
raising concerns about the sustainability of the growth momentum in the long term.
Furthermore, Sri Lanka is yet to experience the full impact of opening up of its economy
to the large and dynamic Indian market. It is expected that India will significantly
improve its export presence in Sri Lanka after the full implementation of ISFTA in 2008.
Though the ISFTA has resulted in a substantial increase in trade between India and Sri
Lanka, the agreements remains fairly restrictive given the size of the negative lists being
maintained, particularly by Sri Lanka.

However, the ISFTA has been more constructive and progressive relative to the regional
SAFTA agreement. The SAFTA agreement is found to be significant more restrictive in
39 terms of the negative lists being maintained. For Sri Lanka in particular, SAFTA
offers much less favourable access to the Indian market, both in terms of the depth of
liberalisation and the period of implementation. Looking at the respective negative lists, it
is evident that the ISFTA offered both countries relatively more liberal market access at
the time of negotiation than that agreed under SAFTA.

Both India and Sri Lanka have benefited from the ISFTA to take an early mover
advantage and strengthen trade and economic linkages between the two countries. A
similar process is underway between Pakistan and Sri Lanka under the respective

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bilateral FTA currently in force (in addition to preferential access granted by India to
Nepal and Bhutan bilaterally). Given these developments, SAFTA also has the potential
to build on existing economic integration links in the region. However, in order to ensure
that SAFTA remains relevant and a potential force to generate such integration, it has to
be strengthened significantly in key areas. These include implementation of the terms
negotiated and agreed upon as a start, thereafter focusing attention on reducing the size of
negative lists maintained by member countries and addressing concerns with regard to
NTBs that act to constrain trade flows. Finally, the time frame for implementation of
SAFTA can be brought forward to ensure that it complements, and perhaps over time
supersedes the bilateral trade agreements currently operating in the South Asian region.

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