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India, Sri Lanka aim to broaden free-trade agreement

Bloomberg | 25 September 2007

India, Sri Lanka Aim to Broaden Free-Trade Agreement

By Anusha Ondaatjie

Sept. 25 (Bloomberg) — India and Sri Lanka plan to sign an agreement to advance a 2000 free-trade accord by April, after disagreements over access to agriculture products and service industries held up negotiations.

Discussions on a Comprehensive Economic Partnership Agreement have been inconclusive for about three years as India seeks to restrict the export of pepper and hydrogenated vegetable oil from Sri Lanka, which is concerned about jobs being lost to Indians.

``We definitely would finish the process by this financial year,’’ Rajeev Kher, joint secretary at India’s Ministry of Commerce and Industry, said in an interview in New Delhi yesterday. ``We’re trying to see how best to integrate and complement each other’s economies.’’

Trade between the two countries more than quadrupled after the free-trade agreement was signed and exceeded $2.6 billion in 2006. Widening the agreement would facilitate investment and trade in service industries and give Sri Lanka greater access to the world’s second-fastest-growing major economy.

``At present, the balance of trade is very much in favor of India, but they are being very cooperative to make our exports bigger into the region,’’ Sarath Amunugama, Sri Lanka’s investment promotion minister, said in a phone interview from the capital Colombo. ``With the expectation of inflows from India and China, Sri Lanka can draw annual foreign investment of $1 billion.’’

Chinese Assistance

The Chinese government is helping Sri Lanka build its first coal-fired power plant at Norocholai, north of the capital Colombo. State oil companies in China and India have been promised two of five offshore exploration blocks in Sri Lanka’s northwestern Mannar basin.

Sri Lanka, with the highest borrowing costs in Asia, is seeking to attract more overseas investment and improve trade ties to drive the $26 billion economy to 8 percent growth. The island attracted $600 million of overseas investment last year, mostly from telecommunications companies and garment makers.

The free-trade accord would help Sri Lanka bolster ties with India, which accounts for about 21 percent of the island-nation’s total imports and is its third-largest export destination, according to central bank data.

Among India’s biggest investments in Sri Lanka is Lanka IOC Ltd., the country’s only international gasoline retailer. NTPC Ltd., India’s largest power company, in December signed an agreement to build a 500 megawatt coal-fired power plant in Sri Lanka’s northeastern port town of Trincomalee.

Poll Pledge

The government has pledged to hold elections and attract investors and tourists to the Eastern Province, which has a 462- kilometer (287-mile) coastline, since winning control of the region from Tamil Tiger rebels after 14 years of fighting.

The Liberation Tigers of Tamil Eelam’s estimated 12,000 fighters still hold areas in northern Sri Lanka as part of their struggle for a separate homeland. The LTTE said in July that its units were still operating in the Batticaloa area in the east.

The conflict between the government and the LTTE escalated a year ago as two attempts at peace talks in Geneva failed to make progress toward ending the two-decade insurgency.

Indian companies, including Mahindra Realty & Infrastructure Developers Ltd., may be interested in setting up special economic zones as the CEPA brings opportunities to boost investments in construction and infrastructure, energy, tourism, information technology and outsourcing, Kher said.

``Indian investors are poised to look at neighboring countries but ultimately what will matter is how much Sri Lanka is able to hold that interest,’’ Kher said. ``A certain amount of political stability and investment incentives is needed.’’

 source: Bloomberg