By Harsha Senanayake 22 April 2020
The trade between the two respective nations started before the colonial period. Both countries marked their close relationships in trade and cultural sector with each other nations. The notion of sovereignty was able to transfer the relationships between two nations into formal connexions. Thought the leaders of the two countries had to address several antagonisms in the political field, the functional integrations developed gradually. Mainly mutuality on trade and education sector between India and Sri Lanka advance with the support of many critical junctures.
India and Sri Lanka signed the first Free Trade Agreement (FTA) between two nations in 1998. The idea of free trade amid two nations started in 1994; Sri Lankan President Chandrika Bandaranaike and the Indian government had a series of negotiations regarding the free trade agreement.
“…rapid development of economy, trade and people to people ties between Sri Lanka and India, and seeing an opportunity for itself- in growing India economy…Sri Lanka became the first country to sign a free trade agreement with India.” (Sikri, 2009, p79)
The free trade agreement was a necessary element to the development of the economic process of both countries, although it was attached some negative factors which powerful enough to influence the local economies. The massive trade surface of the Indian economy can influence the Sri Lankan market and meanwhile, the Indian leaders realized that the FTA opened up the Indian market to commercial exports of Sri Lanka. For instance, through the FTA, Indian market exposed to the tea exporters of Sri Lanka and it was directly influenced by the local tea industry of India.
To avoid vulnerabilities and gain the maximum advantages Indian government agreed to reduce the tax line to zero per cent for 1000 production within three years. After that, they expanded the zero tax policy to another 1000 productions and Sri Lankan government contracted to remove tax policies to 900 import items within 8 years. (n.a, 1999)
These policy implementations were avoided the trade dumpings and mainly it created sustainable trade relations between two nations. The agreement also provided many safeguards. Both countries had the legal rights to protect their national economies from foreign trades. The preferential treatments of the imported into any countries cause or threaten to cause serious damage to the local market or the economy the importing country can take unilateral actions to deter the situation.
“… threaten to cause serious injury to the industries in the importing country, that country may suspend the preferential treatment with a prior consultation which too may be dispensed within critical circumstances.” (n.a, 1999, p5)
These articles maintain the balance of payment gap and as well as both countries could restrict or the control of unfair trade or trade methods like subsidies and dumping. The FTA initiated the CEO’s forums to address the equal trade partnerships and reduced the fear of the Sri Lankan government to trade with larger economies. The CEO’s forum engaged with the private sectors to deepen the bi-lateral trades and economic cooperations. The collaborations of the private sector expanded the export limits of the Sri Lankan government and mainly reputed private companies entered into the Indian service sector. In 1997 the “Bussiness Promotion and Investment Agreement signed by two nations.” (Dahiya & Behuria, 2012, p196) The agreement encouraged Sri Lankan investors to open their businesses in India.
For Instance, Companies like Brandix, one of the largest textile entered to Indian market establish their units in India. Similarly, leading companies in Sri Lanka, like Ceylon Biscuit, Damro, Carsons Cumberbatch (Carlsberg), MAS holdings, John Keels, Heyleys, Aitken Spence Hotel networks, Jetwing entered to the Indian trade and service surface.
The Private sector involvement assists to the Sri Lankan government to maintain the trade balance between two nations. Mainly India released several credit lines to the development process in Sri Lanka under these agreements. The Indo – Sri Lanka Free Trade Agreement and South Asian Preferential Trade Agreement (SAPTA) in December 1995 has inspired exports capabilities of two countries.
Before the FTA balance of ratio of the trade between two nations was favoured to India and After the memorandum the favouritism down 15 to 5. This strengthened the Sri Lankan economy. In 1998, the balance of ratio was 16: 1. In 2005 it was indicated as 2.4: 1 in favour of Sri Lanka; additionally Sri Lankan exports surface to India increased by 717 per cent and Indian exports to Sri Lanka increased by 139 per cent between 2001- 2005. (Ray, 2011)
The draft agreement and negotiations process of the Comprehensive Economic Partnership Agreement (CEPA) apprehended from 2005 to 2008. The agreement largely liberated the air services between two nations and it strengthened the trade and services flow between two neighbours. CEPA was the idyllic solution to expand the trade and services between two stakeholders. The partnership on petroleum highlighted under the trade agreements.
Mainly, Indian National Oil Cooperation invested more than US$ 100 million to increased the operation level of Sri Lankan Oil Cooperations and IOC credited 100 petroleum outlets owned by the Sri Lankan government.
Trade between Sri Lanka and India (2000-2013)
In the 21st century, India remains as the largest trade partner of Sri Lanka in a global context and for Indians Sri Lanka is the second largest trade partner in SAARC region. More than 20 per cent Sri Lankan imports coming from Inda and it was the 3rd largest export destination of Sri Lankan exports items. Annually it carries 6 per cent export margin to India. In 2000, the bilateral trade noticeable the annual trade limit as 658 million and in 2013 it was passed the 3.6 billion milestones. (Kelegama, 2014)
Under the Indo – Sri Lanka Free Trade Agreement, Sri Lanka is enjoying over 70 per cent exports to India and 25 per cent export margins maintaining by the Indian government. Especially, Sri Lanka was able to disseminate 4000 product lines to the Indian market on a duty-free basis.
Source: Sri Lanka Custom cited by Latha, Maturi Sri., 2016, ‘India & Sri Lanka Political Relations’, International Journal of Multidisciplinary Advanced Research and Trends 111- 1(3), 103-104.
With the end of the Civil War, in 2010 Sri Lankan economy started to flourish and mainly country recorded its highest quarterly GDP growth since 2002. The three major sections of the economy: agriculture, service and tea registered its significant growth in the second quarter of 2010. (Dahiya & Behuria, 2012)
The changing gear of the Sri Lankan economy reinforced the Indo – Sri Lanka trade relations. Mainly India opened lines of credit over 1 billion USD to develop programs of Sri Lankan railway system. These credits line invented in the development process of Madu-Talaimanner, Medawachchiya- Madu railway line and reconstructing the Omanthai- Pallai and Pallai- KKS rail line. (Latha, 2016) “India has pledged a credit line of US$ 800 million for the development projects in Sri Lanka and signed a credit agreement for US$ 416.39 million for the Northern railway constructing projects.” (Dahiya & Behuria, 2012, p191)
The FTA, CEPA and other agreements which enforced between two nations mobilized the trade relations between two nations in the recent past as well. Mainly, in the first eight months of 2015, the bilateral trade reached US$ 3.23 billion milestones. Sri Lankan imports from India amounted US$ 2777.65 million and exports to India counted as US$ 454.42 million. In 2014 the bilateral trade was much broader than 2015 and in 2015 it marked the turn over due to political changes which taken placed in Sri Lanka. In 2014, the bilateral trade value was 4.6 billion and Sri Lanka imported US$ 3977.18 million items. Comparing to imports they were able to export US$ 624.67 million trade line only. (Latha, 2016)
But this situation is 24.83% increment rather than in 2013. Under the trade agreements, Sri Lanka was able to maintain the balance of trade for some degree and mainly it helps to Sri Lanka to maintain the foreign investment rate.
Bilateral Trends in Tourism and Functional Integration in IT Sector between India & Sri Lanka
India and Sri Lanka have enjoyed close economic ties in the fields of tourism and IT in the last decade or so. The primary stimulator of this increased cooperation between the two neighbouring countries is the India-Sri Lanka Free Trade Agreement (ISLFTA) signed in March 2000. Since then, there have been numerous strides in bilateral engagements to boost tourism and ICT services (Information and Communications Technology). Going by current trends and future growth estimates, it is safe to assume that the potential for these two sectors is immensely high and the opportunities are open to being tapped given the willingness of the political establishments in both countries.
India has been a source of investment in the island nation with its rapidly growing hospitality and services sector. The increases in disposable income and the quality of technical education have contributed to the remarkable prosperity enjoyed by Sri Lankans. The steady flow of Indian private companies into Sri Lanka is an indication of the progress made following the implementation of the ISLFTA.
The political commitment of Narendra Modi and Ranil Wickremesinghe to negotiate long-term agreements has come at a ripe time for both the emerging economies. The efforts to enhance regional cooperation is a step in the right direction with both countries agreeing to maintain a more balanced growth in trade and greater inflow of Indian FDI and tourists into Sri Lanka.
The tourism industry has been well served by the regular flow of tourists into both countries. For example, India is the largest tourist supplier to Sri Lanka while Sri Lanka is the fourth largest tourist supplier to India. While India remains among the four largest overall investors in Sri Lanka with cumulative investments of over US$ 800 million, Lankan investments have been a trickle. The priority therefore for India is to strategise well with long-term interests in mind and focus on investments. We can already see some potential collaborations resulting in a win-win scenario both ways. Business ties have to be also about people-to-people connect which can be fostered through tourism. Both India and Sri Lanka have rich prospects with their richly diversified flora and fauna, scenic and historical spots. The hospitality sector, especially midsized hotels in Sri Lanka and set up of training institutes for manpower required in this sector holds great promise for Indian companies. (Suri, 2017)
To build on these remarkable growth opportunities, the two prime ministers had called for the signing of the Economic and Technology Cooperation Agreement (ETCA) in September 2015. However, negotiations have hit a roadblock with India claiming that Sri Lanka is attempting to score domestic gains over economic cooperation. The Sri Lankan government is wary of a domestic backlash against the ETCA, which is rumoured to be a rank giveaway to India and wants the latter to make explicit concessions to salvage the political consequences of the pact. Although there have been some contentious issues contributing to the delay in its finalization, the ETCA provides an opportunity to explore greater cooperation in tourism and IT services.
This has been promulgated in one of the chapters dedicated to economic cooperation, which will seek to increase the benefits of the ETCA in tourism. This is pertinent in light of the rules-based framework that will be adopted in any joint agreement, thereby making the ETCA based on the principles of non – reciprocity and special and differential treatment to take account of the substantial asymmetry between the two countries. Such an agreement would usher in increased transparency in relations and advance the national interests of Sri Lanka vis-à-vis ties with a larger neighbour like India. (Modsit.gov.lk, 2017)
In the sphere of tourism, India is the single largest contributor to Sri Lankan tourist arrivals with 350,000 arrivals in 2016. Sri Lankan Airlines benefits from operating in eight destinations (Delhi, Mumbai, Chennai, Bangalore, Trivandrum, Madurai, Trichy and Kochi) and three destinations for Mihin Air (Kolkata, Varanasi and Gaya). There are 120 flights a week to India and close to 40 per cent of the revenue for SriLankan Airlines comes from the Indian market.
Efforts are being made to engage the diaspora communities in both countries. Presence of People of Indian Origin (PIOs) including Sindhis, Gujaratis, Malayalis, Parsis, Telugu-speaking people provides ample opportunities for the exhibition of their cultural traditions, which can be a useful way to promote greater tolerance among communities, which will also add to the benefit of the tourism sector in Sri Lanka. To this end, a Cultural Cooperation Agreement has been signed between both countries. Another area for tourism development is through the active encouragement of Indian culture by the Indian Cultural Centre in Colombo by offering classes in Indian music, dance, Hindi and yoga. Every year, cultural troops from both countries exchange visits, making it a cultural extravaganza and revenue source for the tourism sector.
The collaborative efforts by the Indian and Sri Lankan governments to promote travel and tourism are best exemplified in the Ramayana Trail and the Buddhist circuit initiatives. The Ramayana Trail, as the name suggests, is a string of tourist attractions with mythical significance in Sri Lanka that provides people with the opportunity to relive the experiences and explore destinations narrated in the Hindu epic, Ramayana. This is poised to be one of the most sought-after tourist attractions for Hindu pilgrims coming from India. Tied to this project is the ambitious plan by the Ministry of Tourism in India to announce the Buddhist circuit as India’s first trans-national tourist circuit. The effort will promote tourism in Nepal and Sri Lanka alongside that in India. (Bhandary, 2017)
There is a growing sense that India, along with the active participation of countries like Nepal and Sri Lanka where Buddhist influence exists, needs to boost their infrastructure and awareness about Buddhist culture similar to efforts carried out by Indonesia and Thailand. This has sparked interest even among India’s other neighbouring countries like Pakistan and Afghanistan in promoting their Buddhist sites. The ministry has already taken the Buddhist circuit under its Swadesh Darshan scheme, and released funds of Rs 100 crore. Meanwhile, talks are on with private players to come up with hotels around the sites and the World Bank to invest in infrastructure, the official said. A mega convention centre to accommodate 2,500 people has been approved in Bodh Gaya so that corporate groups can hold conventions while touring the Buddhist circuit. (Divya. A, 2016)
At Nagarjunasagar, a Buddhist heritage theme park is being built and the 274 acres has been divided into eight segments like Buddha Charitavanam, Jataka Park, Dhyanavanam, Krishna Valley Park, Acharya Nagarjuna International Higher Buddhist Learning Centre, Buddhism in the Telugu States, etc. The Dhayanavam already has a huge 27-foot tall Buddha statue donated by the Sri Lankan Government. The Government has spent close to Rs.35 crore and another Rs.25 crore was required to complete it in all respects when it would be the first in the country to have many thematic segments depicting significant events in the life of Buddha and other stories. This can generate tourist inflow from Sri Lanka, hoping to generate similar footfall like with the Ramayana Trail. (The Hindu, 2016)
Concerning the opportunities in the services sector, the Comprehensive Economic Partnership Agreement (CEPA) continues to be a sticky point for the Sri Lankan government while negotiating the ETCA with India. There has been a heated debate in Sri Lanka about the need to “liberalize” services trade with India. The reason for the CEPA deal to fall through the cracks last year was primarily because the government refused to include “services” in the trade agreement fearing a backlash from certain quarters. The CEPA, a sequel to the India-Sri Lanka Free Trade Agreement (ISLFTA) of 2000, was being negotiated between both sides for many years. Both the countries, however, plan to ink the ETCA agreement by the end of this year.
The feeling among many IT professionals in Sri Lanka is that the pact, which allows free movement of IT professionals, would increase competition with their Indian counterparts, thereby affecting job opportunities for the locals. The apex body of professionals in Sri Lanka, the Organization of Professional Associations (OPA) has expressed its deep concern over the proposed ETCA arguing that ‘the island nation already has sufficient professional resources’. A group called the Sri Lanka Solidarity Movement has also voiced its opposition to the ETCA saying that it would create a situation where Sri Lanka will be flooded with labourers and professionals from India.”(Daily News, 2016)
Tourism has also been aided by the liberalization measures. The Indian tourist flows received a boost when Sri Lanka unilaterally liberalized immigration laws in 2002 to issue a visa at arrival for Indian visitors. In 2015, India reciprocated this gesture. The potential boost for the proposed Buddhist circuit has stimulated Sri Lankan tourists to India, in particular pilgrims visiting religious destinations like Buddha Gaya and other Buddhist cities such as Saranath, Rajgir, Sravasti, Kushinagar, Tirupathi, Putapathi etc.
India is also the main source of meetings, incentives, conference and exhibitions (MICE) tourists to Sri Lanka. Major promotional programmes are already underway in India to attract more MICE tourists to Sri Lanka. Sri Lanka ranks number four in Indian tourist arrivals (behind the US, UK and Bangladesh) with 301,601 tourist arrivals in 2014, which accounted for 4 per cent of Indian overall tourist arrivals. Services liberalization has, therefore, facilitated tourism flows and improved people-to-people contacts between the two countries. (Development Strategies and International Trade Ministry, 2016)
Sri Lanka’s growing IT services has provided various services to India, for example, the Tamil SMS text for Bharati Airtel was done by a Sri Lankan software company. Already, business process outsourcing and knowledge process outsourcing to Sri Lanka is taking place from the growing IT sector in India. Therefore, there is considerable potential for growth in earnings from services exports to India in specific areas such as aviation, tourism, ICT-enabled services. Therefore, there is a strong case for the inclusion of services in the proposed ETCA. (Development Strategies and International Trade Ministry, 2016)
About the author
Harsha Senanayake is a researcher at Social Scientists’ Association- Sri Lanka and a visiting lecturer at the University of Colombo, Sri Lanka. He has acquired a master’s degree in International Relations from the Department of International Relations, South Asian University, New Delhi, India. sharshacpbr@gmail.com