India
and
Sri Lanka
signed a Free Trade Agreement (FTA) in December 1998. The rationale for the FTA, its provisions, merits and demerits, and its implications for
India
,
Sri Lanka
and the SAFTA process is analysed below.
For
Sri Lanka
, firstly, the FTA, will provide a huge market of 1.2 billion people. This could reduce its adverse balance of trade with
India
. Secondly, free access to the huge Indian market would attract trade driven investments, desperately required by the war torn Sri Lankan economy. Thirdly, the free trade area in
South Asia
will also provide
Sri Lanka
access to the rapidly expanding international market. Fourthly, the FTA will enable
Sri Lanka
to earn foreign exchange through exports of traditional goods like ores, metal scrap, natural rubber and spices, which would enable
Sri Lanka
to import of capital goods like machinery and transport equipment, drugs, textiles and garments.
For India, the agreement would support its economic reform process by providing an export market in Sri Lanka for joint ventures involving foreign investment and serving the Indo-Sri Lankan market and the outside world.
India
is also expected to gain from the export of capital goods to
Sri Lanka
Provisions of the FTA: In this agreement
India
has committed itself to grant duty-free access to all Sri Lankan exports, with the exception of a limited number of goods in the negative list (around 400 items). Around 1000 items enjoy duty free access. For other items, a 50 per cent margin of preference on duties would be granted, except textiles and garments, which will enjoy only 25 per cent margin. The items, which enjoy 50 per cent margin, would be raised to 100 per cent in two stages within three years from the date of coming in to force of this agreement (March 1, 1999). On its part,
Sri Lanka
will give free access to around 900 Indian items; nearly 600 items will get 50 per cent margin, which will be raised to hundred per cent in three stages. For the remaining items, the cut will be around 35 per cent within three years, 70 per cent in six years and duty free in eight years. The number of items placed on the negative list is, however, minimal .
Problems and Prospects: At the technical level, there seems to have been some urgency in concluding the agreement, with little homework having been done by both sides. The agreement also seems to be hedged with too many ‘unknowns’. The list of commodities enjoying duty -free and preferential treatment is yet to be finalised. For India, though there is a provision regarding “rules of origin “, it will face a new challenge due to entry of manufactured goods from Japan, China and South Korea. There is a also danger of items such as pepper, ginger, and cardamom from Guatemala and Zanzibar finding their way into India via Sri Lanka.Before finalising the negative list, India has to consider the domestic compulsions. It would be better if the items such as tea, coconut, coffee and spices are included in the negative list. Moreover, an efficient mechanism has to be installed to strictly monitor the “rules of origin”. Secondly, at political level, the main opposition party in Sri Lanka UNP, which had supported this agreement earlier, have been highly critical of it as eroding
Sri Lanka
’s sovereignty and independence.
In reality,
Sri Lanka
will gain the most in terms of number of items and time period to reach the duty free level. Specific industry groups like natural rubber, wood panels, metal works, ceramics and consumer durables will attract investments to enter the international market. The balance of trade being heavily in
India
’s favour, it is expected that the agreement will progressively correct this skewed situation. In sum, the free trade agreement will enhance the political and economic stability of
Sri Lanka
.
Though the agreement signed in December 1998 can only be called a ‘FTA in the process’, since the free flow of goods would only be achieved over a period of time, the FTA could not be viewed as a ‘zero sum’ game, but as a ‘positive sum’ one, where both countries would stand to gain.
The agreement, no doubt, is a giant leap towards formalising South Asian Free Trade Area (SAFTA).
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