India Sri Lanka Economic Relations and proposed ETCA

To facilitate the trade relations between the two countries, the India-Sri Lanka FTA was signed in 1998. This FTA is in operation since 2000 and is only in goods. As per this agreement, while India provides duty free access to 4227 Sri Lankan Products; Sri Lanka provides duty free access to 2802 Indian products. The FTA was significant because it alone multiplied the trade by 8 times by 2011. However, there are certain issues with this FTA.

Firstly, in comparison to India, Sri Lanka received more benefits. While 70% of Sri Lanka’s exports are covered under FTA, only 30% of India’s exports to Sri Lanka were covered under the preferential route of the FTA. Secondly, there have been complaints from Sri Lankan side that the existence of non-Tariff barriers (NTBs) for market access has prevented Sri Lanka to export more to India. Though some barriers have been removed few others remain. Experts from Indian side have different answer for this problem. They cite the case of China. China was able to increase its exports from a mere US$1.5 billion in 2000 to over US$50 billion by 2011 despite the existence of the same NTBs that Sri Lanka is complaining about. In addition, China did not have the benefit of an FTA. So they argue that NTBs alone are not the reason for Sri Lankan products not capturing a bigger share in the Indian market.

The proposed ETCA

Till recently, the two countries were also holding negotiations to finalize Comprehensive Economic Partnership Agreement (CEPA). With negotiations dragging for years on account of opposition from Sri Lanka’s business communities, CEPA could not be finalized. CEPA aimed to liberalize trade in services and investment. Both the countries are now negotiating to conclude a new trade pact called the Economic and Technological Cooperation Agreement (ETCA). The pro-liberalization regime of Prime Minister Ranil Wickremesinghe has been actively involved in shaping the proposed trade pact.

The Economic and Technical Cooperation Agreement (ETCA) is negotiated as an extension over the existing FTA and it is expected to be signed by this year end. It will encompass India’s five fastest growing southern states which have a population of 250 million and a combined GDP of $400 billion and Sri Lanka’s 22 million population with an US $80 billion economy. This would make the GDP of the sub region to be $500 billion. This would be roughly equal to Sweden’s economy ETCA aims to attract investment in this $500 billion economy. The ETCA would facilitate trade in services, investments and technology cooperation. The agreement will boost cooperation in technical areas, standards of goods and services, scientific expertise and enhance opportunities for manpower training and human resource development.

Apart from these engagements, India and Sri Lanka are also signatories of South Asia Free Trade Agreement (SAFTA).

Hurdles in ETCA

Conclusion of ETCA with India is opposed by some interest groups and political parties in Sri Lanka. They include supporters of the Rajapaksa regime and left opposition parties like Janatha Vimukthi Perumana. The protest against ETCA is based in huge trade deficit. As per official Sri Lankan figures, Indian exports to Sri Lanka was US$ 4,268 million while Sri Lankan exports to India was just US$ 643 million in 2015. This huge trade deficit is not liked by the business community in Sri Lanka. They claim that ETCA is to be largely advantageous to India and oppose conclusion of any trade pacts with India. However, Indian officials and pro-liberalisation advocates in Sri Lanka have offered different explanations on the gains of FTA. According to them, high Indian exports were mostly independent of FTA and argue that Sri Lanka got more benefits out of FTA than India.

Secondly, Sri Lanka is at present facing a major balance of payments (BOP) crisis. At this juncture, it would be difficult for the Sri Lankan government to push for the economic pact and convince the opposition parties who believe that economic pacts with India are disadvantageous to them. However, India has helped the Sri Lankan government to tackle the BOP problem by boosting the foreign exchange reserves of Sri Lanka by US $1.1 billion with a Reserve bank of India credit swap for six months followed by another emergency credit swap in March. Credit Swaps are temporary arrangements to increase Sri Lanka’s foreign exchange reserves until the loans from IMF took effect in June.

Proposed India-Sri Lanka – Singapore Tripartite arrangement

In July 2016, speaking at South Asian Diaspora Convention in Singapore, Sri Lankan Prime Minister Ranil Wickremesinghe has proposed for an economic collaboration between Sri Lanka, Singapore and the five southern states of India. This proposal is an improvement over his 2003 idea of making South India-Sri Lanka region into a single market.

This idea is based on Sri Lanka’s proximity to five southern states of India. For India, Sri Lanka’s unique geo-strategic location at the crossroads of major shipping routes is important. For Singapore, the proposed arrangement will help in expanding its importance and capacity for business networking in the region. In sum, with the proposed arrangement, Sri Lanka aims to become a “geo-economic centre of South Asia, dynamically and synergically engaged with the rest of region”

However, it would be tough for the Sri Lankan government to convince the xenophobic forces in its territory to support tri-nation economic pact. Indian government should be careful in accommodating the interests of the island nation, otherwise the great opportunity for rebuilding of Indo-Lanka relations that has emerged as a result of regime change in Sri Lanka would be lost.

Present status of economic cooperation between India and Singapore

The Comprehensive Economic Cooperation Agreement (CECA) between India and Singapore was signed on 29th June, 2005 and became operational from August 2005.  The CECA became India’s first comprehensive trade agreement signed with any trade partner. Similarly, it was also the Singapore’s first comprehensive economic pact signed with a South Asian country. India and Singapore are presently negotiating a Free Trade Agreement (FTA).