Professional Documents
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Outline of Presentation
Introduction Recent Trends in Indo-Lanka Economic Relations:
Investment Services
Role Played by the ILFTA in Crisis Situations CEPA: Looking Beyond the FTA Opportunities through CEPA Conclusion
Introduction
Economic relations between India and Sri Lanka, which date back to pre-colonial times, began to pickup in the 1990s with the liberalization of the Indian economy The year 1998 saw the biggest boost in economic relations when the two countries signed a bilateral Indo-Lanka Free Trade Agreement (ILFTA), which began implementation in March 2000 Among other factors, contemporary political forces led to the signing of the Agreement The ILFTA was formulated based on the negative list approach; each country extending concessions/preferences to all commodities except those indicated in its negative list The two countries agreed for preferential treatment on 5112 tariff lines & an 8-year time table was devised for phasing out tariffs NTBs (Indian state taxes) were also to be removed gradually Asymmetry between the two countries was accommodated by special & differential treatment (SDT)
Introduction Cont.
No of products from 505 SL Type of exports Many primary products: pepper, areca nuts, waste & scrap, dried fruit, cloves Rank of export 14 destination Ind investment in Less than 2% SL (% of total FDI)
3 16%
5 14%
Negative Outcomes Cont. If vanaspathi & copper were excluded from the trade figures, SL s exports to India would have increased from US$ 58 Mn in 2000 to just US$ 278 Mn in 2006 a five-fold increase compared to the tenfold increase with vanaspathi & copper Vanaspathi & copper are a problem since these exports arose not due to any distinct comparative advantage that SL held, but due to short-term tariff arbitration by Indian manufacturers investing in SL The viability of the industry was only as long as there was a discrepancy between Indian & SL tariffs on palm oil imports In response to the increase in global commodity prices in 2007/08, India cut import taxes on food imports including palm oil, making vanaspathi exports from SL unviable Accordingly, vanaspathi exports in 2008 were US$ 31.96 Mn, a fall of 78% from exports in 2007 which amounted to US$ 145.32 Mn Vanaspathi exports are expected to be non-existent in 2009
Negative Outcomes Cont. Copper exports from SL were also subject to much scrutiny from India, based on their low domestic value addition, arguing that they were under-invoiced India insisted that pricing should be done based on the London Metal Exchange Prices, and since then a large proportion of copper exports were deemed ineligible Copper exports were severely affected, with exports falling from US$ 145 Mn in 2005 to US$ 13 million in 2008 Both copper & vanaspathi exports were not seen very favourably in SL as well, since both entailed a high import content, limited employment creation & environmental concerns The collapse of vanaspathi & copper exports in 2008 led to the substantial decline in total SL exports to India in 2008 to US$ 418 Mn a 26% fall in export value since the peak in 2005
Value (US$ Mn) 2007 38.105 35.440 145.320 8.357 9.352 14.732 5.574 19.229 26.919 8.450 2008 40.694 33.647 31.961 29.116 18.118 17.899 16.782 16.578 12.817 9.574 33.145 19.020 79.692 11.780 9.019 11.494 1.226 11.981 93.253 6.426
vanaspathi
Negative Outcomes Cont. Anecdotal evidence also suggests that delays at customs & bureaucratic red tapes continue to hinder export penetration from SL to India TRQs, ROOs & NTBs have thus diluted the special & differential treatment (SDT) offered by Indian to SL However, SL industrialists are also to be blamed in an extra effort to study the Indian market they have not put
SL has adhered to the spirit of the ILFTA & has not imposed any TRQs despite pressure from certain SMIs However many of these conflicts have been addressed in ensuing negotiations for the Indo-Lanka CEPA, such as restrictions on ports of entry & quotas on the export of certain products from SL to India Port restrictions on tea imports were removed in June 2007 and 3 Mn garments were allowed duty free without sourcing requirements As a result, garment exports from SL to India have increased from US$ 0.156 Mn in 2002 to US$ 4.194 Mn in 2007
19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08
Year
Trade Deficit Cont. It is possible that non-petroleum imports from India would also grow at a faster rate in the coming years with full liberalization of trade with India (other than items in the negative list) in October 2008 However, the bulk of Indian imports into SL are not influenced by the FTA over 65% of SL s import value from India is from products either in the negative list or exempt from MFN duty According to the DOC, Sri Lanka s imports under the FTA were only about 14% of the country s total imports from India in 2007
US$ Mn
Investment
Indian investment into SL has also increased significantly since the FTA came into operation Between 1978 & 1995, Indian investment accounted for 1.2% of total FDI Cumulative Indian investment which was a mere US$ 1.437 Mn in 1998 increased to US$ 125.925 Mn by 2008, contributing to 14% of total FDI flows to SL India is now the second biggest investor in SL, exceeded only by Malaysia The bulk of Indian investment (63%) in SL in recent years has been in the services sector telecommunications (Bharti Airtel), health (Apollo Hospitals), retail services (Lanka Oil Company), energy, hospitality (Taj Hotels) and air transport services (Jet Airways) As of the end of 2007, Indian investment resulted in over 70 projects, employing 6747 individuals
Investment Cont. However much of the investment that came into SL was associated with products such as vanaspathi & copper, as foreign investors from India & third parties saw an opportunity to break into India s market through SL Employment creation was also limited according to the BOI, though 5900 jobs were created as a result of Indian investment, this includes 1500 employees in the Indian Oil Company retail outlets This entailed re-hiring staff from the Ceylon Petroleum Cooperationowned outlets, rather than creation of new jobs The dominance of services suggests that the impact of the FTA (which only deals with trade in goods) on the investment decision is limited Yet, the surge of investment between 2000 & 2008 has been influenced by increased economic ties between the two countries & increased investor confidence as a result of the FTA
Services
The extent of commercial services exchange between the two countries has increased in the post-FTA period as demonstrated by the following examples: Many SL students & patients travel to India to purchase education & health services each year Approximately 70% of Colombo port s income is from transshipment earnings from India Approximately 40% of SL airlines revenue is from the Indian market (SL Airlines) SL IT firms have provided technical solutions to Indian companies (interblocks sold internet banking solution to Indian banks, Microimage sold Tamil SMS adaptation to Bharti Airtel) SL tourist sector firms such as Aitken Spence & Jetwing have ventured into the Indian market India has become the largest source of tourists to SL Tourist arrivals from India grew rapidly at 20.9% per annum during 2000-2007 & accounted for 19.4% of the market share in 2008
CEPA Cont. But critics failed to take into account the fact that like the FTA, the CEPA also made room for economic asymmetry between the two countries & accorded SDT to SL The 2nd concern, that the shortcomings in the FTA should be addressed before CEPA, is counterproductive the CEPA was negotiated with the very objective of addressing the shortcomings in the FTA (removal of port restrictions & ROO requirements in garments) Also, increasing exports to India requires a general change in perceptions & preferences of SL exporters a process that will take time With the CEPA negotiations being stopped, the only forum for addressing the shortcomings of the FTA has closed Given the fact of geographic proximity and socio-political and historical relations between the two countries, economic exchange is inevitable
Opportunities through CEPA Cont. The ILFTA has somewhat helped in shifting Sri Lanka s trade towards alternative emerging markets by encouraging exporters to move beyond their traditional buyers Given Sri Lanka s proximity and long-standing relationship with India, the country is in an ideal position to take advantage in the shift in global economic powers towards the East The CEPA should be seen as an attempt to manage Sri Lanka s trading relationship with India. The Agreement provides a legal framework which defines the rules and regulations under which trade occurs between the two countries While countries continue to move ahead with negotiations at various levels, the multiple and overlapping agreements of such negotiations can involve considerable transactions costs For example, SL has entered into bilateral and regional negotiations in the South Asian region such as the ILFTA, SAFTA, and APTA, each involving different rules of origins, tariff preferences, etc
Opportunities through CEPA Cont. In the absence of progress in regional frameworks such as SAFTA, the best option available to Sri Lanka is a bilateral framework within a rule-based disciplinary framework Given the fact that India is currently negotiating and implementing a number of bilateral trade agreements with much larger economies such as Japan and the EU, it would be unwise to delay or reopen the already negotiated CEPA Also, given the slow progress of the WTO services negotiations, SL stands to benefit from early access to the large and growing Indian services sector by engaging in the CEPA It is also possible that access to the Indian market may attract investment from third parties into Sri Lanka, looking to export services to Indians through joint ventures with Sri Lankan firms Given Sri Lanka s limited domestic market, the required economies of scale can never be achieved without sufficient international integration. In the present climate, there is no better opportunity than the Indian market
Several SL firms such as Damro have successfully entered the Indian market It is important to realize that India is becoming increasingly open to foreign economic integration in 2007 FDI into SL amounted to almost US$ 25 Bn & imports were over US$ 180 Bn Given that the rest of the world is able to get a foothold in India, SL firms need to be more positive & look to do the same Whilst there will undoubtedly be cases of failure, this has to be expected given the fact that Indian is not an easy market to enter CEPA could be used as an opportunity to deal with such problems It is not too late for SL to engage with the Indian market through CEPA the agreement is an opportunity not to be wasted
Opportunities through CEPA Cont. The experience of the current crisis has stressed the need for more inclusive and equitable trade and growth policies The CEPA is important in this context, as increased importing of services such as health and education from India at a reasonably low cost is beneficial to the lower and middle-income Sri Lankans who face domestic supply constraints While wealthy Sri Lankans can obtain these services from Singapore, Europe and the US, India is the only option for the poorer population The most effective trade policy response to high food prices over the long-term is greater (agricultural) trade liberalization that would allow new supplies to emerge, particularly in developing countries Increased access to new technology and investment is also important in modernizing and improving productivity in the agricultural sector By providing deeper integration of the two economies, the CEPA will facilitate more investment and technology flows from India to Sri Lanka, thereby providing scope for development of the agricultural sector in responding to the food crisis
Conclusion
It is important to rectify the shortcomings of the FTA & build on its achievements The key opportunity is to tap into the large and dynamic Indian market, by moving beyond the ILFTA towards broader economic integration The CEPA, implemented with proper regulatory mechanisms in order to accommodate the disparity between the countries, provides an opportunity for SL to integrate more closely with the Indian economy Deep economic integration with a fast-moving economy like India could contribute to stimulating growth rates in SL Today, as an economic crisis grips Sri Lanka s traditional export markets and a food price crisis engulfs the global economy, SL should view India as an opportunity and not a threat, and strive towards more meaningful cooperation in facilitating inclusive and equitable development policies