7/30/2019 How Can ISFTA Use as an Investment Promotional Tool in Sri Lanka

1/2

How can ISFTA use as an investment promotional tool in Sri

Lanka?

1. The overall trade turnover has grown eight times since the entry into force of the FTAin the year 2000 and reached USD 4.9 billion in 2011.

2. India has emerged as the largest trade partner of Sri Lanka. Sri Lanka has alsoemerged as Indias largest trade partner in South Asia, displacing Bangladesh fromthat position a few years ago.

3. India is also Sri Lankas most balanced trade partner. It is the only country among thetop ten Sri Lankan trade partners where both exports and imports are substantial.Thus, India ranks first as exporter to Sri Lanka and third as importer from Sri Lanka.All other leading partners of Sri Lanka, viz., USA, UK, China, Singapore etc areeither predominantly exporters to or importers from Sri Lanka.

4. India was the second largest exporter to Sri Lanka before the FTA and is now thelargest exporter to Sri Lanka. But, more important, India became the third largestexport destination for Sri Lankan products (rising from 16th rank) as a result of FTA.

5. Overall Sri Lankan exports to India have grown 10 times since 2000 while Indianexports, mostly on the non-FTA route, has grown 5 times.

6. Sri Lankan exports to India have largely been of new products where Sri Lanka didnot traditionally have capacities. Therefore, FTA has created new export capacities inSri Lanka that hitherto did not exist. It has brought precious foreign exchange to the

country by helping create this potential.

7. While the trade gap has expanded, the FTA has helped by creating exportopportunities for Sri Lanka at a much faster rate helping in bringing down the export-import ratio from 10.4:1 in 1999 to 8.4:1 in 2011.

8. A better way to look at benefits of the FTA is to compare the trade between India andSri Lanka using the FTA concessions, as this is trade generated by FTA for eithercountry and conversely at non-FTA trade where trade is carried out without anyconcessions. Trade under FTA between India and Sri Lanka shows that Sri Lankanexports are at about USD 450-500 million and Indian exports at USD 600-700million, which is fairly balanced.

9. Non-FTA exports from Sri Lanka to India are negligible at about US$ 50 million, thesame as it was in 2000, when FTA came into force. Non-FTA exports from India toSri Lanka are substantial standing at about US$ 2 billion, up from about US$ 500million in 2000.

10.FTA has benefited Sri Lanka by creating 90% of its current export potential. Incontrast, FTA accounts for only 30% of Indias export to Sri Lanka. The import-export ratio which has come down from 10:1 in 2000 to 8:1 in 2011 would have been

40:1 if the FTA was not there.

7/30/2019 How Can ISFTA Use as an Investment Promotional Tool in Sri Lanka

2/2

How can ISFTA use as an investment promotional tool in Sri

Lanka?

Indian Investments

The increase of Indian investments to Sri Lanka has been a more visible indirect benefit ofthe ISFTA. India is now the countrys second largest investor; investing US$ 126 million in2008, second only to Malaysia (which invested US$ 150 million in 2008). This is acontribution of 14% of total FDI inflows to Sri Lanka, and is a marked increase from theprevious investment levels during 1978-1995 which amounted to just 1.2% of totalinvestments. The number of projects too increased from 18 in 1999 to 83 in 2006, with amajority of recent Indian investment being in telecommunications, retail services, energy,hospitality trade and air transport services. An example of a recent Indian investment successstory has been the entry of Piramal Glass (acquisition of Ceylon Glass Company), which isnow not only catering to the Sri Lankan market but has also begun exporting nearly 70% of

their output to the Indian market.

Sri Lankan investments in India too have increased, and include areas such asgarments, confectionaries, hotels and furniture, with some of Sri Lankas top blue chipcompanies opening up ventures there (e.g., Brandix, MAS, Aitken Spence, John Keells).

Taking it to the next levelthe CEPA

Given the positive outcomes of the ISFTA and emerging services/investment linksencouraged both India and Sri Lanka to broaden economic cooperation by including servicesand investment under a proposed Comprehensive Economic Partnership Agreement (CEPA).Potential areas of cooperation for the CEPA identified by the Joint Study Group included

trade in services, investment, and economic cooperation. Although the FrameworkAgreement was scheduled to be signed on the sidelines of the 15th SAARC Summit inColombo in 2008, reservations and pressure from some Sri Lankan stakeholders haltedthe signing of the agreement. The CEPA is expected to provide Sri Lanka access to a fastexpanding Indian economy with a rapidly growing middle class, encourage Indian FDI inservices, provide greater access to technology, and a more regulated mechanism for themovement of workers. Although many cite the downside risks like higher competition fordomestic service providers and the flooding of Indian professionals in to Sri Lanka, the

CEPA makes provisions to address many of these concerns which are often misplaced.CEPA negotiations have been on a positive list approach where only specified sectors areliberalized and Indias offers to Sri Lanka has been much more extensive than that ofSriLankas offers.

With India pursuing stronger economic relations with the wider Asian region, closereconomic integration with India would no doubt open doors of new opportunities for SriLanka. India has already signed Comprehensive Economic Cooperation Agreements(CECAs) with Singapore and South Korea, and a Trade in Goods Agreement with ASEAN(soon to be expanded to an FTA in services). India has also begun negotiations on an FTAwith the Gulf Cooperation Council (GCC) and EU (European Union).