Indo-Lanka FTA should promote a win-win situation - Dr. Kelegama

By Lalin Fernandopulle

Sri Lanka's exports to India have increased under the Free Trade Agreement (FTA) and it is the third largest destination after EU and US for Sri Lankan exports, said Institute of Policy Studies (IPS), Executive Director Dr. Saman Kelegama at the launch of ‘Handbook on the India-Sri Lanka FTA' in Colombo last week. The book is a publication of the IPS.

Saman Kelegama

He said that the import-export ratio which was in favour of India before the FTA commenced in 1999, dropped from 10.3:1 to 6.4:1, last year and in 2011 around 81 percent of Sri Lankan exports went to India under the FTA compared to 13 percent of Indian exports to Sri Lanka.

On average, 70 percent of Sri Lankan exports go to India through the FTA and 30 percent Indian imports come to Sri Lanka through the FTA. Only one percent of Sri Lankan exports went to India before the FTA, now six percent of overall exports from Sri Lanka go to India.

Dr. Kelegama said that there are many misconceptions and a limited understanding of the agreement. The first myth is that when there is an FTA between a large country and a small country it is always the large country that gains the most. This is not correct.

If this is true, China and Pakistan will not have an FTA and on the same grounds Australia and New Zealand would not have embarked on a free trade agreement.

Much research has been done on how to design an FTA between a small and large country to bring more gains to the smaller country or to work out a ‘win-win’ situation and this is done by taking the asymmetry between the two countries by building Special and Differential Treatment (SDT) for the smaller country in the FTA and the large country adhering to non-reciprocity.

He said that the second myth is that in spite of the trade deficit with India reducing in favour of Sri Lanka, it has still not reached a balancing level or zero deficit, and the FTA has not been effective in achieving this.

One thing should be clear in this context. In the globalised world, no country can have surpluses or zero deficits with all trading nations. Sri Lanka has trade surpluses with its main export destinations in the West, such as US and EU and trade deficits with its main import sources mainly in the East, such as China, India and the Middle East.

He said had the FTA not been there, given the fact that on average 70% Sri Lankan exports go to India through the FTA compared to 30% Indian imports coming through the FTA to Sri Lanka, the trade deficit would have been larger.

The key fact to take note of when talking about the trade deficit is that it gets compensated to some extent by the large capital flows from India in the form of FDI and aid.

So using this trade deficit argument does not make much sense in the context of an FTA.

The objective of the FTA is to bring the best deal to the Sri Lankan consumers and exporters, while giving reasonable protection to Sri Lankan Industrialists, and not the bringing of the existing trade deficit to near zero.

The publication highlights the misconceptions and clarifies the correct position and it fills the gap of not having one document that contains all the relevant information on the FTA. The India-Sri Lanka FTA was signed in 1998 to promote trade, economic relations and FDI between the two countries. It came into force in 2000.