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Indo-Lanka FTA is 10 years old

The Island, Sri Lanka

Indo-Lanka FTA is 10 years old

By Devan Daniel

14 March 2010

The Free Trade Agreement between India and Sri Lanka is 10 years old and a top trade economist says trade between the two South Asian neighbours have improved and that Sri Lanka should consider upgrading the agreement into a comprehensive economic partnership.

"India is emerging as a leading economy in the world and whether or not one likes it Sri Lanka has to be close to India because it would stimulate Sri Lanka’s own economy," Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies, told the Island Financial Review.

"The Free Trade Agreement between the two countries was signed in March 2000 and since then, trade has improved, investments have grown along with professional services between the two countries, despite the fact that the FTA covers only trade in goods," he said.

In 2008, the two countries were on the verge of signing a historic comprehensive economic partnership agreement (CEPA) but by then the word ‘seepa’ (the pronunciation of the accronym CEPA) had become a bad word with some local businesses, professional bodies and political parties and the president was compelled to shelf the agreement.

Dr. Kelegama said the Indo-Lanka Comprehensive Economic Partnership Agreement (ILCEPA) was negotiated with proper checks and balances taking into account some of the difficulties encountered with the FTA.

"The ILCEPA was also going to open up trade in investments and services between the two countries with the proper checks and balances and although the current FTA does not cover these areas, they still have grown," he said.

Dr. Kelegam said that Indian investments in Sri Lanka had grown significantly since the FTA was signed in 2000,.

"Between 1978 and 1995, investments from India accounted to 1.2 percent of total foreign direct investments. In 1998, Indian investments in Sri Lanka amounted to US$ 1.4 million. But, by 2008, investments increased to US$ 125.9 million. This was 14 percent of total foreign direct investments. Today India is the second largest investor in Sri Lanka after Malaysia," he said.

"About 63 percent of these investments have been in the services sector, such as Bharti Airtel, Apollo Hospitals, Lanka Oil Company, Taj Hotels and Jet Airways. By 2007, Indian investments resulted in over 70 projects, employing 6,747 people in Sri Lanka."

About 70 percent of Colombo Port’s income is due to transshipments to and from India while 40 percent of Sri Lankan Airline’s revenue came from the Indian market.

Dr. Kelegama pointed out that several Sri Lankan IT companies had provided solutions to Indian companies. Interblocks sold Internet solutions to Indian banks while Microimage sold Tamil sms solutions to Airtel. Sri Lankan tourism companies Aitken Spence and Jetwing have also ventured into India.

Dr. Kelegama said, however, that most of the investments that came in where related to vanaspathi and copper, with many Indian and other countries investing in Sri Lanka with little job creation.

"There were problems in these areas. This was why the ILCEPA attempted to bring investments and services into the fold of an agreement," he said.

Trade in goods have increased under the FTA. The average annual exports to India between 1995 and 1999 amounted to US$ 39 million. Imports from India amounted to US$ 509 million. In 2008, eight years after the FTA was signed, exports to India reached US$ 418.3 million. Imports amounted to US$ 3,443 million.

Dr, Kelegama again pointed out that vanaspathi and copper made trade seem lopsided in favour of India.

"The FTA has its problems, but ILCEPA was meant to address those issues and deepen the economic ties between the two countries," he said.