Can more services trade with India benefit SL?

The potential for Sri Lanka becoming a services hub to India is large

At present, trade in services accounts for more than 25% of global trade. As WTO negotiations have come to a standstill, most countries attempt to engage in more services trade via regional and bilateral free trade agreements. 

Sri Lanka is already a signatory to a regional trade agreement SATIS (South Asia Trade in Services) that came into operation in 2010. However, as the negotiations in SATIS have got protracted, like in the WTO, Sri Lanka is planning to incorporate services liberalisation in the existing India-Sri Lanka and Pakistan-Sri Lanka FTAs, as well as the proposed agreements with China and Singapore. In this context, Sri Lanka will engage in services liberalisation with India under the proposed ETCA (Economic and Technology Cooperation Agreement).

Has Sri Lanka benefitted?

First, let us examine whether Sri Lanka has benefitted from whatever unilateral liberalisation efforts it has made when trading with India in services. As is well known, Sri Lanka benefits from its unique geographical location in the Indian Ocean. It is centred in the shipping lines crisscrossing the Indian Ocean. 

Colombo Port has benefitted from many ships that arrive for transhipment, bunkering, etc. Transhipment in the Colombo Port has increased by leaps and bounds in recent years and it is estimated that 70 to 80% of the TEUs handled by Colombo Port is transhipment to India. This is a major source of earning to the Port in particular, and the country in general.

Another shipping service that India uses heavily from Sri Lanka is ship repair and building. This task is performed by the Colombo Dockyard and as one of our previous columns highlighted, Colombo Dockyard has significantly benefited by servicing Indian vessels and meeting the requirements for boats/vessels in the Indian market.

Air connectivity

Sri Lanka has relatively liberal policies with regard to aviation. India has opened eight destinations to Sri Lankan Airlines (Delhi, Mumbai, Chennai, Bangalore, Trivandrum, Madurai, Trichy, and Kochi) and three destinations for Mihin Air (Kolkata, Varanasi, and Gaya). No other international airline has access to so many destinations in India. There are 120 flights a week to India and close to 40% of the revenue for Sri Lankan Airlines comes from the Indian market. Clearly, like shipping, the aviation sector has benefitted from serving the Indian market.

Tourism is another sector that has benefitted with such air connectivity. India accounts for 20% of the tourist arrivals in Sri Lanka and ranks on the top of the country-wise tourist arrivals. Unlike many Western mass tourists, Indians are high spending and contribute more foreign exchange (per individual tourist) to the local economy. The Indian tourist flows received a boost when Sri Lanka unilaterally liberalised immigration laws in 2002 to issue Visa at arrival for Indian visitors. In 2015, India reciprocated this gesture.

Good air connectivity with India has also stimulated Sri Lankan tourists to India, in particular pilgrims visiting religious destinations like Buddha Gaya (and other Buddhist cities such as Saranath, Rajagir, Sravasti, Kusinagar, etc.), Goa, Tirupathi, Putapathi, and so on. India is also the main source of MICE (Meetings, Incentives, Conference, and Exhibitions) tourists to Sri Lanka. Major promotional programmes are already underway in India to attract more MICE tourists to Sri Lanka (https://srilankawonderofasia.wordpress.com/tag/mice-tourism-in-sri-lanka/). 

According to Indian statistics, Sri Lanka ranks No. 4 in Indian tourist arrivals (behind US, UK, and Bangladesh) with 301, 601 tourist arrivals in 2014, which accounted for 4% of Indian overall tourist arrivals. Services liberalisation has, therefore, facilitated tourism flows and improved people-to-people contacts between the two countries.

Services also feature in much of the Indian investment that has come to Sri Lanka: ITC Hotel, Taj Hotels, ICICI Bank, Axis Bank, Bharati Airtel, Indo-Ocean Development, etc. Likewise, services have featured in some Sri Lankan investment in India – Aitken Spence has Turiya Chennai Hotel, Bank of Ceylon and Hatton National Bank have branches, etc. 

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.

Services hub potential

The potential for Sri Lanka becoming a services hub to India is large. There is a growing automobile industry in Southern India, so much so Chennai is now called the ‘Detroit of India’ (http://topyaps.com/why-chennai-is-called-the-detroit-of-india). The city accounts for 60% of the automobile exports of India and Indian companies like Mahendra, Ashok Leyland, and MRF and foreign companies such as Hyundai, BMW, Nissan, and Ford have automobile manufacturing plants in the city. 

Sri Lanka can not only strategically work out some vertical integration to this industry by being a supplier of rubber products and other automotive components but also be a service supplier in the medium term. 

Clearly, Sri Lanka is in a position to develop services on these foundations and prospects. During the previous Government, five potential hubs were identified as sea port, aviation port, energy, knowledge, and retail. The more realistic out of these five hubs are shipping and aviation, the former can be developed using its existing strength and the latter using Sri Lanka’s location between Dubai and Singapore as well as its good relations with all countries in the South Asian region. 

However, development of port hubs cannot be done by developing infrastructure in ports or passing hub related legislation alone; but should be accompanied by liberalisation or opening up the relevant services for foreign entry. As services liberalisation has to be accompanied by a suitable regulatory framework, it is prudent to open it first to a few countries with bilateral FTAs. Once the regulatory framework gets consolidated over time more liberalisation of services could be considered as per Sri Lanka’s comfort level.

A good starting point

Needless to say, India will be a good starting point in this exercise given the track record of mutual benefits both countries have enjoyed with whatever unilateral liberalisation in services that has already taken place in both countries. The proposed ETCA with India will provide a ruled-based framework to engage in this exercise and it will be designed to provide the maximum gains to Sri Lanka. Small countries can benefit most when trading with large countries under a ruled-based framework and that is precisely what ETCA is proposing to do in the near future.

It is important to recognise that export expansion is essential to meet the country’s growth and employment targets and service external debt. This article seeks to demonstrate that there is considerable potential for growth in earnings from services exports to India in areas such as, shipping, aviation, tourism and ICT enabled services. As a result, Sri Lanka has considerable offensive interests in the Indian market in each of these sectors. There is, therefore, a strong case for the inclusion of services in the proposed ETCA.