Proposed CEPA with India:

CEPA offers more openings - ILCCI

In the past eleven years, since its implementation, the India-Sri Lanka Free Trade Agreement (ISLFTA) has helped the two countries’ bilateral trade to grow in five fold. The bilateral trade turnover has grown from approximately US$ 600 million in 2000 to over US$ 3 billion in 2010.

Exports from Sri Lanka to India have grown at double the pace than the rise in Indian exports to Sri Lanka. India, which ranked as the 16th largest buyer of Sri Lanka in year 2000, emerged as the 3rd largest buyer in 2003 and continues to be so and more than 70% in average of Sri Lanka’s exports have been exported to India under the ISLFTA for the last ten years. Sri Lanka now has opportunity to export more than 4000 product lines to the Indian market on duty free basis and Sri Lanka’s exports basket has been diversified tremendously under the Indo-Lanka FTA over the years.

On the other hand, India, which surpassed Japan as the largest supplier to Sri Lanka in 2001, continues to remain at the same position. However, more than 70% in average of India’s exports have been exported to Sri Lanka outside the ISLFTA for the last ten years. The FTA has also paved the way for a significant level of investment inflows into both countries and India has emerged as one of the prominent foreign direct investment source of Sri Lanka during the last ten years.

The ISLFTA was the first agreement of its type signed by India and Sri Lanka. Studies by independent observers have rated India-Sri Lanka Free Trade Agreement (ILSFTA) as one of the very few successful South-South free trade agreements. Whilst it is a fact that there are several problems in implementation of the agreement, it is also a fact that considerable economic progress has been achieved and benefits derived by Sri Lanka, as a result of the Agreement.

It was the ISLFTAs success that led the two governments to move towards a further expansion of the trade facilitating framework of ISLFTA to include trade in services, investments and mutual cooperation in the sphere of overall economic relations, whilst at the same time seeking to address some of ISLFTA’s problems. The CEPA was encouraged as a means of compiling a comprehensive document that would identify greater trade facilitation and also providing incentives for investments that could bring in much needed capital for industrialization thereby adding to export capacities. A need was also felt to bring the services sector into play, as economic relationship between India and Sri Lanka cannot flourish completely if the services sector in both countries, which constituted more than 55% of each country’s economy, were kept out of a new liberalized environment.

Under CEPA, Sri Lanka is reported to be open around 20 sub-sectors of the service industry, some of which are already open under the WTO and others which are likely to be opened under the WTO framework in due course. Even in this limited number of sub-sectors, Sri Lanka is said to be restrictive and subjected to several conditions and qualifications. It indeed would need greater monitoring by the relevant authorities to ensure compliance.

In contrast, India has agreed to larger and deeper openings than Sri Lanka and agreed to open over 80 sub-sectors. India has offered to allow any number of Sri Lankan professionals to work in India in most of the 80 sub-sectors it proposes to open under the CEPA. Proposed openings by Sri Lanka under CEPA for Indian professionals include only two sectors, Computer and related services and Ship repair and building. These openings too are reported to be allowed subject to a limited number and qualifying criteria. Under the CEPA, Sri Lankan professionals would get a lot of opportunities to work, within or outside Sri Lankan companies in India, as the Indian legislation on a minimum salary of US $ 25,000 per year, for foreign workers, will not apply to the Sri Lankans employed in India under the CEPA.

It is expected that the CEPA, would contain precise conditions to identify and eliminate non-tariff barriers. More importantly, going beyond the ISLFTA, it would outline clear-cut measures and procedures to achieve this objective through reducing the size of the negative lists in the current ISLFTA, applying more flexibility on rules of origin, signing of Mutual Recognition Agreements and harmonization of standards, thereby legally binding both parties to the relevant agreements.

Another issue that CEPA is expected to address is the long delays in testing and certification processes for products as required currently by India, even after the items had undergone these processes in Sri Lanka before shipment. CEPA has identified recognition and acceptance of certification conducted in Sri Lanka, through the signing of a Mutual Recognition Agreement (MRA) between the Testing Institutions in the two countries and adoption of common Sanitary and Phyto-sanitary standards that deal with technical barriers to trade. Therefore, delays due to laboratory testing and certification could be avoided entirely allowing Sri Lanka’s exports to enter India unhindered. Products that would benefit through these arrangements would mostly include agricultural sector products and processed food items.

One of the main drawbacks in the ISLFTA is expected to be covered under the CEPA, which to provide for a separate dispute resolution mechanism that stipulates in detail, the rules and procedures for arbitration in case of disputes. India has signed FTAs/CEPAs/CECAs with bigger economies and it is evident that these super powers consider they are immensely benefited with these economic liaisons with India.

The example of spectacular expansion of Sri Lankan Airlines into India with 100 flights a week indicates that Indian market affords Sri Lanka economies of scale and market access that if used well can actually bring it much greater benefits than India can hope to get through reciprocal penetration of markets in Sri Lanka. Even if Indian airline companies, much larger in size than Sri Lankan Airlines, were to so desire they cannot conceivably match Sri Lankan Airlines by operating 100 flights a week to Sri Lanka.

Therefore, it is the ILCCI’s belief that entering in to a CEPA certainly offers more openings for Sri Lanka than it is likely to obtain through other regional frameworks. In short, Sri Lanka clearly would benefit, particularly when it seeks to build a new momentum of economic growth and prosperity for the Country and its people with the end of three decades of armed conflict. However, it would be most important also to ensure that all stakeholder concerns are deliberated and changes if and as necessary are negotiated with India, in order to reap the best benefits of the agreement.