Indo-Lanka economic relations:

Potential for a transformative leap

Indo-Lanka economic relations are on the cusp of a transformative leap forward. Modi's bilateral visit to Sri Lanka, the first by an Indian Prime Minister in 28 years, highlighted the role India can play in boosting Sri Lanka's development prospects, said a media release of the Pathfinder Foundation and the Vivekananda International Foundation, India.

Excerpts from the release:

It is important that India is seen as an opportunity rather than a threat for the full potential of this historical visit to be realised. There have been a number of changes in the overall landscape which have created more conducive conditions for strengthening Indo-Lanka economic reforms.

• India has reset its relations with its neighbours. It has concluded that peace and prosperity in the region not only benefits its own development but it is also necessary for pursuing its global ambitions.

There are tangible signs of Bangladesh, Bhutan and Nepal capitalising on this in power generation and grid connectivity and improved road and rail transport which would boost trade.

• India has become the fastest growing large economy in the world. The combination of a reform-oriented government and demographic dynamics mean that it is likely to be sustained in the future. Modi called on Sri Lanka to participate in India's accelerated process. Greater dynamism in the Indian economy will create opportunities for countries in the sub-region, including Sri Lanka.

• The 'make-in-India' strategy will create better conditions for replicating the experience of East and South East Asia where the rise of, first, Japan and then China boosted prosperity in the countries of that region through the growth of manufacturing supply chains.

• Improved infrastructure in Sri Lanka and India is strengthening the enabling conditions for taking advantage of proximity. In the past, poor infrastructure increased transaction costs and created distance between the two economies. Today, better roads, ports and railways are creating more conducive conditions for supply chain-driven growth in trade and investment between the two countries.

Modi's visit also yielded some practical outcomes which will benefit the Sri Lankan economy.

• The SWAP arrangement (400 million) between the CBSL (Central Bank of Sri Lanka) and RBI (Reserve Bank of India) has already served to strengthen Sri Lanka's foreign exchange position by supplementing its external reserves.

• The $320 million made available for railway development will facilitate the movement of goods within the country and across borders by improving connectivity between the hinterland and major cities on the one hand and ports and airports on the other.

• The Sampur coal-based electricity generation facility will improve energy security and the development of the Trincomalee tank farms will entail better use of an under-performing asset of considerable value.

Arguably the potential 'jewel in the crown' in the bilateral relationship is the Comprehensive Economic Partnership Agreement (CEPA). It has been the subject of considerable suspicion and controversy. Much of the unease has been based on a lack of appreciation of India's increasing willingness to accept the principles of non-reciprocity and special and differential treatment.

Safeguards

This means that concerns regarding asymmetry between the two economies can be handled through negative and positive lists, safeguards against import surge and differences in the speed of liberalisation undertaken by the two countries. In practice, India will be opening up far more than Sri Lanka.

Support for CEPA within Sri Lanka can be boosted significantly if some of the non-tariff barriers which have impacted adversely on the existing Indo-Lanka FTA are addressed expeditiously. Modi undertook to address these. Early follow up would serve to change sentiment within a large swathe of the Sri Lankan business community.

The Indo-Lanka FTA, despite some difficulties, has resulted in India being Sri Lanka's biggest trading partner and largest source of FDI in recent years. The trade and investment nexus can be strengthened by transforming the FTA in goods into a CEPA which includes investment. India can be an important source not only of capital but also of technology and training and be a large and rapidly growing market.

There is also a strong case for extending the FTA to include services as this is the most competitive component of the Sri Lankan economy.

India has demonstrated a willingness to accept the principle of non-reciprocity. India will be opening up much more than Sri Lanka. In practice, Sri Lanka will liberalise very few items beyond what is available under existing laws, such as the Board of Investment Act.

India accounts for the highest number of tourists to Sri Lanka. However, considerable scope exists not only to increase numbers but also the daily spend per head as Sri Lanka improves the quantity and quality of its hotel inventory and customised products, such as the Ramayana trail.

There is also scope for expanded air and ferry services between the two countries and grid connectivity.

People-to-people contacts and business will benefit from India's new liberalised visa regime for Sri Lankans which was pledged by Modi during his visit to Sri Lanka and implemented in April.

Expanded Indo-Lanka bilateral economic relations offer significant benefits for both sides.

Sri Lanka can benefit from increased trade, investment, training, technology and markets. India for its part can lay the foundation for a more prosperous neighbourhood that not only boosts its own development but also enables it to focus on its global agenda.