Free Trade Agreement a boon to both countries

THE INDIA-SRI LANKA free trade agreement (FTA), which has come into effect from March 1, is an opportunity for both countries to protect and improve their position in international trade, according to the Board of Investment (BOI), Sri Lanka.

It was with this perspective that the BOI sponsored a delegation of Sri Lankan businessmen from select sectors to India, including Chennai, in late April, to lose no time in creating ``win-win'' situations for both countries.

The agreement seeks to combine the strengths of India including its wide manufacturing and technological base and ``market clout'' and Sri Lanka's strengths such as strategic location on international sea-lanes, developed shipping, road and other infrastructure and high levels of literacy. ``South India in particular should look seriously at possibilities of taking advantage of the FTA in view of greater proximity'', said Mr. Edmond Jayasinghe, Senior Advisor, and Dr. Nihal Samarapulli, Director (Research), of the BOI.

They pointed out that not only India and Sri Lanka but other countries of the SAARC (South Asian Association for Regional Cooperation) as well face the prospect of being ``marginalised'' in international trade, with several developing countries elsewhere becoming or continuing to be members of one regional free trade agreement or another featuring large markets.

For instance, Kenyan tea will have concessional access to the Egyptian market under an African trade agreement. Garments from several developing countries have concessional access to big markets like the European Union and the U.S. through the Lome Convention or NAFTA (in the case of Mexico as a producer).

Implementation of the India-Sri Lanka agreement will help reduce the cost of production of several items for units located in either country and access to the large Indian market or third country markets on a competitive basis. Though the SAARC Free Trade Agreement (SAFTA) could not make much headway because of the negative attitude of Pakistan, ``as far as we (Sri Lanka) are concerned, India, being the biggest as also the closest market in the region, the India-Sri Lanka agreement is as good as SAFTA'', the BOI executives said.

Explaining the features of the agreement, they pointed out that it provided for zero duty on a range of items by both countries, and duty concession of 50 per cent (namely, half of the existing duty rates) on others, with provision for tapering of the duties to zero per cent within three years in the case of India and eight years in the case of Sri Lanka. India's zero duty list contained about 1,360 items and Sri Lanka's corresponding list 319 products.

Sri Lanka, which had opted for economic liberalisation much earlier than India, has in general lower levels of duty, while its domestic levies include a GST of 12.5 per cent and a defence levy of 5.5 per cent.

According to the agreement, whose scope covers only value addition in the form of merchandise and not pure trade or services, the duty concessions will apply only in the case of goods where the value addition in the country of location (India/Sri Lanka) of the unit is at least 35 per cent of the f.o.b. value of their export, irrespective of the structure of ownership of the production unit - Indian, Sri Lankan, joint ventures and multinational corporations.

The agreement also stipulates two `negative lists' (for purposes of this agreement and not in the normal sense). Out of the more than 5,100 tradeable items identified in the six-digit international harmonised system of classification, according to Mr. Samarapulli, in 1998, India exported to Sri Lanka 2,819 items and Sri Lanka exported to India 346 items. India's negative lists in the bilateral FTA contains 429 items and Sri Lanka's negative list 1,110 items. The items in the `negative lists' will not be eligible to the FTA terms but will be eligible to normal treatment in bilateral trade. Concessional duties on raw materials were covered by the agreement.

Why is it that Sri Lanka, whose domestic manufacturing base is much narrower than India's and which hence has fewer industries to protect, has insisted on a much longer negative list for the FTA? According to Mr. Jayasinghe and Mr. Samarapulli, the island nation has put in the list those items where it sees the potential for building a base for value addition on the strength of its resource endowments.

They said agricultural commodities were for the most part in the negative lists. In the case of tea, which had become controversial in India, the agreement provided for a ``realistic'' level of 15 million kg of Sri Lankan tea for coverage under the agreement. ``Sri Lanka aims at the upmarket of the tea sector'', they said. They pointed out that this represented 5.5 per cent of total Sri Lankan exports of tea and 2.5 per cent of India's consumption. In 1998, India imported 0.7 million kg of tea from Sri Lanka and 8.8 million kg from all countries.

India had put coconut in the negative list but allowed a 50 per cent duty concession on coconut powder.

In the case of garments, specific benefits to India had been provided by the agreement. Sri Lanka could export eight million pieces to India under the agreement, out of which six million pieces would have to use Indian fabric.

In the bilateral context, India has a huge trade surplus with Sri Lanka. Out of the bilateral trade of 34.4 billion Sri Lankan rupees (65 Sri Lankan rupees make a U.S. dollar), 32 billion rupees comprised Indian exports and 2.2 billion rupees Sri Lankan exports. Will the FTA help narrow this extraordinary gap? ``The objective of the agreement is not promotion of trade, but of ''new investment, economic expansion and employment``, the BOI executives said.

The wide range of fiscal reliefs granted by Sri Lanka for various investments in several categories of projects - thrust industries, export-oriented industries, designated industrial zones and export processing zones - under the umbrella of the Board of Investment and the liberal exchange control regime are expected to be used by investors from India and Sri Lanka as also third countries to realise the potential offered by the FTA.

Not incidentally, India will feature as the Partner Country at the fourth INTRAD Millennium Exhibition and Investor Forum being organised by the Sri Lanka National Chamber of Commerce in cooperation with various government departments and agencies and to be held at the Bandaranaike Memorial International Conference Hall, Colombo, from May 26 to 28.

R. Gopalakrishnan

in Chennai

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Potential areas

What are the industries that Sri Lanka looks forward to as having the potential for development as a result of the free trade agreement? The composition of the first post-FTA Sri Lankan business delegation to India, many of whose members were looking for ''strategic alliances``, as also the perspectives offered by executives of the BOI, Sri Lanka, show that the industries include:

Tea, rubber-based products including rubber mats/flooring/components, garments, ceramic components, electronic components, footwear, food processing, organic chemicals, automotive components and iron and steel, trailers and tankers, besides computer software/hardware and IT.

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