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INTRODUCTION
Economic links between India and Sri Lanka have a long history with recorded commercial links going back many centuries. These links strengthened to the point where legal barriers to movement of goods and labor practically disappeared during the period when both countries fell under British rule. But in the early years of the post-independence period, both countries implemented inward-looking economic policies resulting in the weakening of the economic ties. However, these ties once again started to strengthen when Sri Lanka embarked on a liberalization policy in 1977, which was followed by India but to a fairly limited extent, but it coincided with a second wave of policy reforms in Sri Lanka.

The most popular bilateral free trade agreement to emerge in the region was the India-Sri Lanka Free Trade Agreement signed in December 1998. This was a result of the renewed political confidence between the two countries as well as the labored progress made through the South Asian regional initiatives. There were mixed feelings among the business community regarding the free trade agreement with India. The India-Sri Lanka Free Trade Agreement aims at promoting economic linkages between India and Sri Lanka through enhancement of bilateral trade and investment. The Agreement covers only trade in goods and requires the two countries to offer market access for each others exports on duty free basis and concessionary tariffs. However, the India-Sri Lanka Free Trade Agreement does not provide for elimination of non-tariff barriers.

There were concerns that while some Sri Lankan exports (such as rubber products, ceramic products and leather goods) catering to particular niche markets in India may benefit, some small and medium industrial enterprises, and producers of livestock and subsidized agricultural products not protected under the negative list will face stiffer import competition from Indian exporters, who arguably enjoy the advantages of a relatively sophisticated industrial and agricultural base, and also the economies of scale provided by the larger domestic market.

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On the other hand, it was also considered that in some products where current exports are non-existent or minimal, there may be scope for expansion of Sri Lankan exports to the Indian market. While it was obvious that the largest gains from trade would likely to come from opening up precisely those sectors where domestic industries will come under strong import competition, they were naturally also the sectors where domestic producers felt most vulnerable, where adjustment costs were likely to be considerable, and where political resistance the strongest. Sri Lankas exports to India increased from US$ 164.51 million during the first seven months of 2009 to US$ 239.2 million during the corresponding period of 2010 registering a 45.4% growth. This increase was mainly due to a significant increase in exports such as spices (cloves, nutmeg, mace, pepper etc.), electrical machinery and parts, copper products, sheet rubber, pulp, confectionery & bakery products, tyres & tubes, glass products, wooden products, garments, apparel & clothing accessories, furniture, processed fruits & fruit juices, jewellery items etc. in the first seven months of 2010, when compared to the corresponding period of 2009. However, exports of certain products such as tea, ceramic products, cinnamon, gems, boilers & machinery parts, processed food, mineral sand, activated carbon etc. have recorded a decrease during January to July in 2010 compared to 2009. These percentages are exaggerated due to the sharp decline in the figures recorded for the year 2009 compared to the year 2008.

While there has been a reduction in major exports such as vegetable oil, primary copper, margarine, marbles and pepper, a variety of other products have gained market access to India. They include insulated wires and cables, poultry feeds, pneumatic tyres, ceramics, apparel, furniture, air conditioners & coolers, measuring and checking instruments, glass bottles, processed meat products, Medium density Fiber (MDF) Boards, rubber gloves, thermal papers, tiles, stones and marbles, boilers & machinery parts, iron & steel articles, panel boards & enclosures, sacks and bags etc. thereby brining about product diversification.

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TRADE BETWEEN INDIA AND SRI LANKA

The ISFTA was formulated based on the negative list approach; each country extending concessions/preferences to all commodities except those indicated in its negative list. The two countries agreed for preferential treatment on 5112 tariff lines & an 8-year time table was devised for phasing out tariffs. The value of bilateral trade increased fromUS$658 million in 2000 to US$ 4.1 billion in 2011.

Table: 1

Year

Exports

Imports

Total Trade

Balance of Trade

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Jan- April)

55.65 70.12 168.86 241.14 385.50 559.26 494.06 516.40 418.08 324.87 466.60 521.65 207.00

600.12 601.50 834.70 1,076.17 1,358.01 1,440.41 1,822.07 2,785.04 3,006.93 1,709.93 2,546.23 4,338.04 1,346.00

655.77 671.62 1,003.56 1,317.31 1,743.51 1,999.67 2,316.13 3,301.44 3,425.01 2,034.8 3,012.83 4,859.69 1553.00

-544.47 -531.38 -665.84 -835.03 -972.51 -881.15 -1,328.01 -2,268.64 -2,588.85 -1,385.06 -2,079.63 -3816.39 -1139.00

Source: Central Bank of Sri Lanka Trade between India and Sri Lanka: 2000 January to April 2012 (Values in US $ Millions)

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Figure: 1

Trade between India and Sri Lanka

6000 5000 4000 3000 2000 1000 0 2000 -1000 -2000 -3000 -4000 -5000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Exports Imports Total Trade Balance of Trade

Figure: 2
5000 4000 3000 2000 1000 0 2000 -1000 -2000 -3000 -4000 -5000 Exports Imports Balance of Trade 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Table -2:

Product
Spices Natural Rubber & Rubber products Poultry Feed Accessories for electrical machinery Copper & Copper based products Refrigerators, freezers and other refrigerating equipment & Machinery Paper & Paper products Ships, Boats and floating structures Cocoa butter Fiber board of wood Furniture, bedding, mattress etc Apparel

Value in US$ Mn
67.93 44.51 44.13 44.81 19.12 24.81 39.66 19.15 20.98 17.72 9.28 12.92

Source: Sri Lanka Customs Major Exports to India in 2011 Figure: 3

Furniture, bedding, mattress etc 3%

Major Exports to India in 2011

Fiber board of wood 5% Cocoa butter 6% Apparel 3%

Spices 19%

Ships, Boats and floating structures 5% Paper & Paper products 11% Natural Rubber & Rubber products 12%

Refrigerators, freezers and other refrigerating equipment & Copper & Copper Machinery based products 7% 5%

Accessories for electrical machinery 12%

Poultry Feed 12%

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Table: 3

Product
Motor Vehicles Mineral fuels & oils Cotton Pharmaceutical products Refrigerators, freezers and other refrigerating equipment & machinery Electric/power generating sets Iron & Steel Articles of paper & paper board Cement Source: Sri Lanka Customs Major imports from India in 2011

Value in US$ Mn
894.21 904.67 217.40 162.33 28.18

39.45 115.29 100.24 137.29

Figure: 4

Major Imports from India in 2011

Articles of paper Iron & Steel & paper board Refrigerator 5% 4% s, freezers Cement and other Electric/power gene rating sets 5% refrigerating 2% equipment & machinery 1% Pharmaceutical products 6%

Motor Vehicles 34%

Cotton 8%

Mineral fuels & oils 35%

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After the agreement, Sri Lankas exports have increased rapidly. By 2005, it reached a peak of US$ 566.4 million; a tenfold increase as compared to 2000.India was the 5th largest destination for Sri Lankas exports in 2008. The agreement has facilitated increased diversity and greater value addition in exports from Sri Lanka. While exports from Sri Lanka peaked in 2005, most of these exports were largely concentrated in two products-Vanaspati and Copper. This poses a problem because these exports arose not due to any distinct comparative advantage that SL held, but due to shortterm tariff arbitration by Indian manufacturers investing in Sri Lanka. Both copper & vanaspathi exports were not seen very favorably in SL as well, since entailed high import content, limited employment creation & environmental concerns. The collapse of vanaspathi & copper exports in 2008 led to the substantial decline in total SL exports to India in 2008 to US$ 418 million a 26% fall in export value since the peak in 2005.At the same time, imports from India have increased considerably in recent years. In 2008, imports from India reached a peak of US$ 3443 billion, a growth of 37% compared to 2007. Exports are decreased by 24% compared to 2007 as a result of decreasing product composition export to India under ISFTA. Spices exports have decreased by 9% compared to 2007. Paper Products and Natural Rubber Products also decreased up to 12% and 11% throughout the 5 year period. However, the major cause for the increase in imports was the increased cost of petroleum products in global markets. The import of petroleum products from India is not influenced by the FTA as petroleum imports are in Sri Lankas negative list. In fact, the bulk of Indian imports into Sri Lanka (petroleum, vehicles, sugar, cotton, iron and steel, pharmaceutical products) are not subject to reduced tariff through the FTA as over 65% of Sri Lankas import value from India is from products that are either in the negative list or are exempt from MFN duty. According to the Department of Commerce, Sri Lankas imports under the FTA were only about 14% of the countrys total imports from India in 2007. When compared to 2007, the total imports increased from 2,785.04Mn to 4,338.04 Mn and that result in increase of bilateral trade deficit by 1548.75 Mn. This is a result of increase in amounts of Automobile, Mineral Fuel & Oil etc. These are increased by 28% & 14% respectively.

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These observations suggest that the growth of the trade deficit between India and Sri Lanka is not largely a result of the FTA between the two countries, since most of the major traded items are not subject to the FTA. Normal trade patterns between the two countries are likely to have resulted in an even wider trade deficit since the FTA has provided some scope for Sri Lankan exports to India.

FUTURE OF THIS AGREEMENT

During the Comprehensive Economic Partnership Agreement (CEPA) held in Colombo from July 9 to July 12, India offered to reduce the number of items on the negative list by about 8o items. Sri Lanka, on the other hand, agreed to remove around 50 items from its list. India had suggested a list of 139 items which it wanted to remove from Sri Lankas negative list while Sri Lanka had suggested a list of 118 items. But a consensus was not reached and the lists were unchanged. Both the countries need to understand each others demand and supply conditions and work together to create a synergistic situation. Another issue which the countries need to look at is the trading in services. Since beginning, Sri Lanka has been apprehensive about opening up its services sector to Indian competition as most of its professional services sectors are unorganized and hence are at risk by Indian services. The major unresolved issue, however, is that of allowing the Indian financial services sector to enter Sri Lanka.

SOUTH ASIAN PREFERENCIAL TRADE AGREEMENT (SAPTA)

As a part of the SAAARC process the South Asian Preferential Trade Agreement (SAPTA) was implemented in 1995, and in 1996 it was agreed in principle to convert it to South Asian Free Trade Area (SAFTA) and the focus appeared to implement measures to improve intra South Asian economic links The SAPTA process offered only very limited liberalization although this was a period of general policy liberalization and also regional and bilateral initiatives to foster economic partnerships. With the heightening of political tensions between India and Pakistan in the late 1990s the transition to SAFTA stalled. However, as an important result of the limited achievements of the SAPTA process was that the member countries became interested in moving into liberalized bilateral arrangements. It was
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envisaged to permit countries willing to proceed at a faster pace to do so within the SAPTA/SAFTA framework. However, from the latter half of 1998 official activities of SAARC came to a virtual standstill, giving way to bilateral foreign trade agreements between the member countries, which were totally outside the SAARC process. In fact, there is little evidence of similar trends in other regional groups. The vast majority of regional blocs began from an agreed base on the degree of cooperation and has progressed from there, taking collective decisions with regard to either the speed of integration or admission of new entrants.

CONCLUSION
It is important to remember that free trade agreements have become essential especially for the smaller countries like Sri Lanka which have opened up their economies which may not be that successful in facing up to the high competition in the global market. We should not forget that all parties to an agreement would aim to get the best for their own country and it is up to us to negotiate what is best for Sri Lanka. The key opportunity for Sri Lanka is to tap into the large and dynamic Indian market, by moving beyond the ILFTA towards broader economic integration. The bilateral trade agreement that Sri Lanka has implemented with India, providing analysis on the structure of the respective agreement and its trade impact. It was found that although the agreement has provided significant market access to Sri Lanka, full advantage has not been taken of this market access for a combination of reasons. Certain impediments to trade remain despite the existence of the FTAs.

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RECOMMONDATIONS

Reduce unnecessary volumes of imports from India to Sri Lanka.

Under ISFTA Sri Lanka is importing unnecessary automobile, food items, cement etc. There are so many domestic industries in Sri Lanka which can produce enough products and services for local consumption. This can be used to reduce imports of automobile from 34% to at least 20%.

Redesign taxation policy in India - Lanka free trade agreement.

The products which can manufacture domestically are most of the time imported from India under FTA because of the tax exemptions. It is favorable for Sri Lanka if we could increase taxes for those goods and services and decrease the taxes for local exports. This way we can reduce the trade deficit by a considerable margin.

Attracting more foreign investments to Sri Lanka.

Investments in Sri Lanka are pretty less compared to India and other regional countries. Under ISFTA we can attract more Indian investors using appropriate promotional tools to Sri Lanka. This could result in increasing exports and reducing the imports. Trade imbalance will be eventually narrowed down to an acceptable level.

Utilizing natural resources of Sri Lanka to startup new business in different industry.
This is the most preferable way to increase countrys exports in the future. Trade deficit generated through ISFTA in theses years can be reduced by utilizing natural resources to its optimal level. This can be carried out through the support of Sri Lanka government by creating an investor friendly environment. The interest rates, inflation and government policies need to be controlled in order to get the full impact of starting up new businesses.

Increasing more opportunities for export industry in Sri Lanka.

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