Recent trade policy developments of India and implications for Sri Lanka

India has been Sri Lanka’s largest trading partner for a considerable period of time and is most likely to retain the status quo in the foreseeable future.

Approximately 14% of Sri Lanka’s international trade was conducted with India in 2010. India ranks number one among Sri Lanka’s source of imports, representing 20% of Sri Lanka’s total imports, valued at US$ 2,546 million in 2010.

India enjoys a predominant position in the Sri Lankan market in respect of commodities such as pharmaceutical, heavy vehicles, light vehicles, motorcycles, textiles and consumer products such as cosmetics, onion, potatoes and chillies.

India will continue to enjoy the position of market leader in respect of those commodities in the Sri Lankan market on account of competitive price, Sri Lanka’s liberal trade regime and geographical proximity.

China will have the capacity to be the closest competitor in the Sri Lankan market and time will tell us who will be the winner. Though India is a growing market with an increasing appetite for imported products, Sri Lanka is yet to explore its full potential to cater to the growing Indian market, despite the country having an advantage of market access through the Indo-Sri Lanka Free Trade Agreement (ISFTA).

Sri Lanka’s exports to India still remain at a low value of US$ 466 million, representing only 5% of our total exports. The balance of trade is excessively and consistently in favour of India at the rate of 1:5 in 2010 in terms of value of trade between the two trading partners.

Indian direct investment

 In respect of Indian direct investment in Sri Lanka, India has invested in strategically vital economic sectors such as retail distribution of petroleum products, expansion of the harbour in Kankesanthurai, construction of the Sampur coal power energy project, exploration of oil and gas in the northern coast (Mannar Basin) and telecommunication.

India is also becoming an important tourist originating destination for Sri Lanka. India is also involved in manufacturing sectors such as rubber tyres and cement. In the service sector, India has considerable investment in hotel, tourism and IT.

Sri Lanka serves as a transhipment hub for ever-growing Indian export cargo through the Port of Colombo. The Indian navigation sector is also served at the Colombo Dockyard facility. A large number of Sri Lankan students are enrolled in the Indian higher educational institutes.

It is well-known that not only commercial considerations but also Indian geopolitical interest in the region has largely overshadowed and has even fashioned Indian trade and economic relations with Sri Lanka.

In view of the above considerations, Indian trade and economic policy changes and its evolving dynamics have direct consequences for Sri Lanka’s trade and economic relations with India.

It is there for essential to examine the extent, level and the degree of current and future prospects and opportunities existing in India for her trading partners, particularly for Sri Lanka in terms of macroeconomic and trade policy parameters.

Fast growing

Undoubtedly, India is one of the fastest growing economies among the large economies of the world, ranking fourth largest after USA, China and Japan. According to the recent IMF Report, India recorded the highest growth rate of 10.4% in 2010.

The IMF estimated India’s growth rate at 8.2% in this year as against a projected global growth rate of 4.4%. The phenomenal growth of the services sector (58% of GDP) has been the engine of India’s economic growth, while agriculture (14% of GDP) and industry (28% of GDP) sectors have demonstrated mixed fortunes of varying degrees in the past.

India’s export grew at 37.5% in the year2010 recovering from the 2009 global economic downturn. India’s export baskets in terms of percentage shares comprised manufactured goods (63.6%) crude and petroleum product and coal (17.8%), Agriculture products (9.9%) and minerals (5.5%). In 2010, Indian imports grew at 21% mainly on account of increased value of import of Capital and intermediate goods. The Indian import baskets consisted of chemicals, iron and steel, non ferrous metals, electronic goods, precious and semi - precious stones, gold and silver accounted for 42%, Fuel 33%, Capital goods 15%, fertilisers 3% and printed materials 1%. The UAE has been India’s largest Trading Partner followed by China and USA. China is the largest source of imports to India (12%). The services export of India reached US $ 106 billion with a growth of 17.3% while imports of services accounted for US $ 60 billion with an annual increase rate of 15%. Indian inward foreign investment of both FDI and Foreign Institutional Investment (FII) amounted to US $ 56 billion in 2010. The Indian outward investment was US $ 18 Billion during 2010-2011. Mauritius received the largest share of outward Indian FDI followed by Singapore, USA, Netherlands and The UK.

In light of the above mentioned Trade and Macro- Economic Developments, in India, it is pertinent to evaluate Trade and Investment prospects and opportunities open for Sri Lanka. It is abundantly clear that the prospects for Sri Lanka’s major export products such as Apparel products, Tea, Rubber, Coconut and Spices have a little room at least in the short terms in the Indian Market. Firstly, India herself is not only a producer of these products but also competitive exporter. Secondly, most of these products are not in the realm of ISFTA. Thirdly, Sri Lanka does not have resources endowment to process the capital and intermediate goods which are in high demand in India. In this contest Sri Lanka will have to find a new export product profile which has a market in India. In this regards recent experiment of Sri Lanka in exporting furniture, electrical panel board, caned food products, value added food items and high valued ceramic products to India provide a lead model. Other alternative may be to attempt to explore niche market in India for Sri Lankan traditional export but definitely with high value addition with unique product development. One other option is to connect with the Indian Industry Sector to supply parts and component required for the various stages of the value change.

It is widely believed by some section of the trade policy formulating institutions and the academic circles in Sri Lanka that Trade in Services stand to gain more than Trade in goods with India. With the growing middle class segment that has a sizeable disposable income is a natural and promising market segment of India that auger well for the promotion of Sri Lanka Tourism and Hospitality Trade. India is also hub of Information Technology in the Region. With the relatively acceptable competence of computer literacy, English Language and sound infrastructure in the Telecommunication Sector, Sri Lanka has opportunities to synergise with the Indian ICT Industry.

As has already being demonstrated, it is cost effective for India to exports its products through the transshipment facilities offered by the Colombo port. It is also equally beneficial for India to import her ever growing capital and intermediate goods through the ports in Sri Lanka. In this context the ongoing massive developments taking place in the ports and navigation sector is a correct policy perspective for Sri Lanka. We believe that this policy prescription will enhance opportunities for the country in view of the economic development seen not only in India but also in China and the East Asian Region. The region in general, and India and China particularly are known as energy thirsty economies. The strategic location of Sri Lanka, poised for development of Sri Lanka as an energy hub. However, it is imperative that we enter in to such high profile enterprise by managing our external relations with tact and with utmost understanding of the sensitive nature of such enterprises. Our well defined Non-Align policy postures may throw some light in this direction.

Opening up

In the light of the economic rationale and trade logics stated above, one can reasonably assume that opening of Sri Lankan Market for Indian investors in selected service sectors such as hospitality industry, information technology, ports and navigations, would bring concrete economic benefit to Sri Lanka. Contrary to this suggestion, some may otherwise argue that the existing investment incentive regime, legal frame work and the business environment are liberal enough and sufficient for Indian investment to be attracted to the country. In the circumstance , it is essential to hold extensive consultations with all the stake holders in transparent manner before any policy decision is arrived at on this issue on account of sensitive nature of such exercise. We should particularly be sensitive in the opening of Movement of Natural Persons in respect of these Services Sectors. India is also emerging as a source of investment in the region. Indian outward investment has increased from US $ 19 billion in 2009 to US $ 19.7 billion in 2010. Mauritius received the largest share of Indian investment followed by Singapore, USA, The Netherlands and The UK. The manufacturing Sector accounted for largest share of outward FDI followed by the services sector (US $ 4.5 billion). In view of these developments, Sri Lanka should review objectively as to why Indian outward investment in commercial ventures are not attracted to Sri Lanka despite vast investment opportunities available and increasingly conducive business environment prevailing in the country. The private sector business chambers and trade association should also attempt to throw the search light in this direction.

Unique trend

One of the unique recent trends in the Indian demographic map is the ever growing young population profile as against the growing old population in the rest of the world. The Indian population in the working age group of 15-64 years is projected to increase from 63% in 2006 to 68% by 2026 leading to decline in the dependency ratio. These developments auger well for India in achieving an advantage over other trading partners in the global market. This trend also provides an opportunity for new market segment with high purchasing power. It is also estimated that the growing young population will add to the ever increasing middle income group in India. Sri Lanka being immediate neighbor of India should be alive to these developments and should strive towards sharing the benefits by catering to the needs of the growing middle income segment of the Indian Market.

As a part of Indian Trade Policy Regime, India has embarked on a number of policy reforms with a view to liberalising international trade by removing quantitative restrictions and progressively and autonomously lowering import duties. The industrial tariff has been brought down to an average of 10% in 2008. The simple average MFN tariff rate declined to 12% in 2011. Although the declining tariff favor for accessing the Indian market, it may entail negative effect by eroding the preferential margin enjoyed by countries like Sri Lanka under the ISFTA. In other wards, the competitive suppliers will earn additional market access opportunities due to reduction of MFN tariff across the board negating margin of preference enjoyed by the trading partners with whom India has bilateral trade arrangements. Sri Lanka should take in to account of this aspect in trading with India. India has recently offered Duty- Free Quota- Free Market Access (DFQF) to all least developed countries (LDCs) the scheme covers on 94% of India’s tariff lines. 27 LDCs including Bangladesh, Nepal, and Bhutan from our region are availing these facilities. India has offered these facilities even for selected apparel products originating from Bangladesh opening the India market for apparel products from Bangladesh. Though Sri Lanka has FTA with India, our exporters do not enjoy such level of market access. In this context Sri Lanka exporters and trade policy practitioners should be alive to these developments and attempt to response and design trade policy appropriately.

FTAs

India has so far concluded ten free trade agreements and five limited scope preferential trade agreements. India is in the process of negotiating 17 more agreements. India is currently negotiating a Broad Based Trade and Investment Agreement (BTIA) with the European Union. (27member states) The negotiations cover goods, services, investment, SPS, TBT, Trade Facilitation and custom cooperation. A research conducted by the Sussex University on behalf of the commonwealth institute in London draw attention to the negative trade affect likely to encounter by the South Asian Countries particularly Sri Lanka and Pakistan in the European market if the India –EU FTA Agreement is concluded.  If the FTA is concluded, the competitiveness of our export products to the EU will be eroded as against Indian export. If India receives zero duty by any chance for its apparel products to the EU-Market, under the proposed arrangements, Sri Lankan products will be certainly adversely affected in the EU-Market. India is even now a competitive supplier of those products to the EU-Market. One of the major objectives of the EU for entering into FTA negotiating with     India is to seek liberal access for EU-Investment in India to explore the huge domestic Indian Market In this context Trade Policy Formulators in Sri Lanka yet to embark a comprehensive study on proposed India –EU Free Trade Agreement and its implications on Sri Lanka. Needless to emphasise the urgency of such study as 40% of our total exports are absorbed by the EU.  India’s Foreign Direct Investment (FDI) policy has been gradually liberalised by bringing more industries under the automatic approval system, enlarging areas opened for FDI, reducing the negative list, establishing single window approval facility and implementing moderate and stable tax regime. With these policy reforms which are more conducive for FDI, countries like Sri Lanka are expected to provide more conducive business environment and competitive investment incentive package to the foreign investors. The positive aspect is that if Sri Lanka can establishes links with those new FDI flowing in to India, through supply chain links, one could envisage a win -win situation.

Impediment

One of the impediments cited by many critics in accessing the Indian market is the problem encountered by the exporters on clearance of their consignment at the point of custom. As a part of reform of the Indian Trade Policy, India recently took some measures for trade facilitation to reduce transaction time and cost. Among the measures being implemented are introduction of electronic data interchange system and risk management system. It is expected that these measures will remove some of the difficulties faced by the Sri Lanka exporters at the Indian customs and the ports. Despite application of these measures, India’s import regime continue to remain complex particularly it’s licensing, permit system, administration of FTA covered imports, tariff quota system and complex tariff structure. This essay, as one would observe, is an attempt to analyse the evolving dynamics of the Indian Trade Policy with a view to maximising trade and investment benefit for Sri Lanka. This exercise, it is hope, will result in further studies on the subjects with a view to recalibrating of our trade policy in respect of trade relations with India. Since this attempt is not a complete and comprehensive exercise, the responsibilities of trade policy practitioners assumed high priority to undertake such exercise, particularly since Sri Lanka is now negotiating an Economic Cooperation Agreement with India to built and expand current FTA.

It is also an essential that trade policy formulators should undertake a study on the consequences of EU- India free trade agreement to Sri Lanka, even though EU –India Agreement is under negotiations. Similarly, private sector economic actors should also look for innovative avenues to enhance trade and economic relations with our closest neighbor. India with its emerging economic power, political clout and regional leadership may certainly aware of its responsibilities towards its small neighbors located around her vicinity. Economically prospers, stable and peaceful neighborhood is sin -qua-non for in realising legitimate aspiration of India and for her neighbors as well.

(This paper has been complied by the Research and Policy Advocacy Unit of the Federation of Chambers Of Commerce and Industry of Sri Lanka (FCCISL) more research papers of this nature can be accessed by visiting Trade Watch Blog. www.blog.fccisl.lk Comments are welcome via email to [email protected])