Integrating industry into Indian supply chains - 'vital for growth'

Integrating the Sri Lankan industry into the Indian supply chains is the best option for fast growth, said Dr. Sirimal Abeyratne.

Based on a study he conducted for the Pathfinder Foundation, Dr. Abeyratne said that Sri Lanka has little integration into production processes in India and exports of manufactured 'parts and components' to India is insignificant because India does not have globalised supply chains.

Dr Sirimal Abeyratne

According to Dr. Abeyratne, an integration of countries into a supply chain of a commodity at its different stages of production is a fast-growing modern phenomenon. International trade is no longer dominated by 'old-style' trade patterns because of the fragmentation of production across countries and the formation of global supply chains.

The production and supply of parts and components by countries and then assembling the final product in another country, is a phenomenon that has been growing rapidly in the East and the South East Asian region since the 1980s and thereafter spreading across the world.

This new facet of globalisation has been made possible by liberal policy reforms, technological changes in production processes, and the decline in transport and communication costs, that has allowed countries to find best locations for production of parts and components leading to globalised supply chains and to enhance mutual benefits of integration.

At a glance, anyone would think that if the Sri Lankan industry is entering into global supply chains, the most attractive market, for many reasons, would be in India. All factors underlying economic relations between Sri Lanka and India remain strong in favour of deeper integration. The biggest and fast-growing market within close proximity, bilateral free-trade established through Indo-Lanka Free Trade Agreement (FTA), the biggest trading partner of the country, the biggest source market for travel and tourism, port and airport services, and in some years even for direct investment and historical links beyond economic spheres.

The studies, however, show quite paradoxically that Sri Lanka's trade with its neighbouring countries in the South Asian region continued to remain marginal. With over a decade of experience under the bilateral Indo-Lanka Free Trade Agreement (FTA), one would anticipate well-established and fast-growing economic integration between the two countries.

Despite the greater scope for deeper integration in merchandise trade, investment and trade in services between the two countries, the studies portray a slow and lopsided pace of transformation.

After the implementation of the Indo-Lanka FTA in 2000, trade expansion during the first half of the decade (2000-2005) was remarkable.

On average annual exports grew by over 300 percent and imports by nearly 200 percent. During the second half of the decade (2005-2010), exports contracted by 2.7 percent, while imports grew only by 12.8 percent, presumably due to both internal policy changes and external shocks.

In spite of all the good things, surprisingly the study finds that the Sri Lankan integration into the manufacturing processes in India is rather weak. The findings were based on a classification of trade data into different categories: finished goods, raw materials, parts and components and capital goods.

The most important commodity category entering the supply chains is the export of parts and components which accounts for only seven percent of Sri Lanka's total exports to India, while it is also overwhelmingly concentrated in two categories, rubber tyres and some machinery items.

While Sri Lanka also exports a smaller share of capital goods (machinery), over 20 percent of Sri Lanka's exports to India still exhibit 'old-style' raw material supply. In fact, the Indian manufacturing processes seems to have made little changes in terms of expanding into a globalised production processes unlike the case of labour-abundant China and other countries in East and South East Asia.

This is confirmed by India's total import mix from the world in which raw materials account for 45 percent and parts and components only six percent.

The nature and the degree of Sri Lanka's integration into the Indian supply chains is a result of supply-side factors in Sri Lanka and the demand-side factors in India. These factors that need to be analysed at both ends encompassing the level of economic progress, trade and development policies, the nature and the degree of trade facilitation, and the cross-country differences in comparative advantages.

This means that as Dr. Abeyratne concludes the mere 'tariff-free' trade regime established under the Indo-Lanka FTA would not be sufficient, while even the FTAs implemented in the context of rising protectionism could be detrimental.

GW