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Bridging the Straits: Prospects of the India-Sri Lanka CEPA

India and Sri Lanka can send a powerful economic message by announcing a firm deadline to implement the Comprehensive Economic Partnership Agreement (CEPA) at the Colombo SAARC meeting, which seeks to deepen existing economic agreements, widen economic cooperation and provide a big leap forward in bilateral relations.

India signed a CEPA with Singapore in 2005 and is negotiating CEPAs with the EU, Japan, and South Korea. Sri Lanka is also negotiating CEPAs with Pakistan and deepening economic cooperation with China. Seeing the initial success of the 1998 Indo-Sri Lanka Free Trade Agreement (ISLFTA), the Joint Study Group (JSG) set up after the 2002 Summit meeting, recommended that CEPA negotiations covering services and investment be completed by 2004. India and Sri Lanka have inked a Bilateral Investment Protection Agreement (BIPA) and a Double Taxation Avoidance Agreement (DTAA). They are part of the Asia Pacific Trading Agreement (APTA), the South Asian Free Trade Agreement (SAFTA) and the proposed Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Agreement, relating to trade in goods.

Since the entry into force of the FTA in 2000, bilateral trade has witnessed a more than four fold jump and reached US$2.72 billion in 2006-07. India is the biggest source of Sri Lankan imports and the third largest destination for Sri Lankan exports. The CEPA has the potential to bolster bilateral trade to US$5 billion by 2010. However, the twelve rounds of CEPA negotiations have not been a smooth sailing. Difficulties associated with implementation of the ISLFTA, the negative list there under and apprehensions in Sri Lanka about opening the services sector are the three major challenges that need to be addressed before the CEPA can enter into force.

First, ISLFTA has faced intermittent operational difficulties creating skepticism about the CEPA. The Sri Lankan trade has opposed non-tariff barriers, port restrictions and imposition of Tariff Rate Quotas (TRQs) on products like pepper and vegetable oils. To overcome this, India can put in place proper trade facilitation measures to ensure hassle-free movement of goods through additional ports and iron out the delays arising out of non-tariff barriers.

The second major challenge is the deepening of trade coverage under CEPA by pruning the existing negative lists. Both countries need to drastically cut down their negative lists, except for tariff lines which would have an adverse impact on the agricultural sector. India has 429 items and Sri Lanka 1180 items in their respective negative lists. India could offer significant concessions to the plastics and chemical sectors and additional market access for Sri Lankan textiles to minimize the skewed balance of trade. Since nearly 40 per cent of Indian exports to Sri Lanka are in the negative list, Sri Lanka could provide India additional market access in the automobiles and capital goods sector.

The third major challenge is related to resistance from the trade and political parties in Sri Lanka to opening the services sector. Similar fears that cheaper Indian goods would be dumped in Sri Lanka were expressed prior to commencement of the ISLFTA. On the contrary, Sri Lankan exports to India have witnessed a five-fold increase over the last five years. The Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) has expressed optimism that the proposed CEPA would result in greater gains for Sri Lanka.

India needs to allay Sri Lankan fears and project the CEPA as a win-win situation for both countries. For Sri Lanka the gains would accrue from services sector market access in areas like tourism, cargo handling and other maritime related activities. The Sri Lankan professionals should feel that CEPA will result in increased business opportunities for them in the growing Indian economy. Further, Indian investments in telecommunications, IT and construction sectors, transfer of technology and contribution of our medical and nursing, hospitality and management professionals will augment the GDP of both the economies.

Finally, a successful CEPA would call for a degree of socio-economic and political stability, particularly across the straits. Early implementation of the CEPA will help Sri Lanka raise its GDP growth to 8-9 per cent. An open and inclusive regional economic architecture will lead to increased welfare effects, alleviate conflict, and reduce bilateral tensions due to people to people contacts.

India has consciously decided not to interfere in the civilian strife in Sri Lanka due to its own domestic compulsions. Some regional and extra-regional countries are seeking to take advantage of this situation. India's political influence in Sri Lanka can be ensured by implementing the CEPA. Efforts should be made to reap benefits and use it to promote seamless trade, services and investment related cooperation across South Asia.

Note: The views expressed ate those of the author and do not represent those of the Indian Government.