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International Journal of Accounting & Business Management
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Vol. 2 (No.1), April, 2014 Page: 49-67
ISSN: 2289-4519
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Research Paper
India Sri Lanka Free Trade Agreement (IFTA)
A. A. M. Nufile Senior Lecturer
South Eastern University of Sri Lanka [email protected]
A. N. Ahmed Senior Lecturer
South Eastern University of Sri Lanka [email protected]
M. B. M. Ismail Senior Lecturer
South Eastern University of Sri Lanka [email protected]
Abstract
This paper examined the advantage of India-Sri Lanka Free Trade Agreement using the gravity model of trade. Panel data for the period 1980-2013 across two countries was employed in the analysis. The coefficients obtained from the model were used to identify the trade potential of both countries worldwide as well as within specific SAARC region. The results expose that Sri Lanka’s existing trade potential with India was high. Therefore, Sri Lanka should explore ways and means to further improve its trade relations with India and also concentrate more on new kinds of products to increase its market share as far as possible. However, the volume of trade of Sri Lanka with India was higher than that of Pakistan and other member countries, in the face of the existing significant potentials. The main obstacles to this end were the political, ethnic and socio-economic tensions with India, which was the key player of SAARC. Moreover, Sri Lanka and India have faced several major challenges such as diminishing marginal returns to economic integration, importance of non-tariff barriers to trade, homogeneous products and pressure for abolishing socio-political and economic relationship by Tamil Nadu leadership in India. It was pointed out that Sri Lankan entrepreneurs and exporters need to be deviated attention from traditional export markets to industrial markets in India. In addition to that, post-ISFTA scenario explained that Sri Lanka’s trade dependency ratios have increased compared with pre-ISFTA scenario. This is evidenced from continuously increased post-ISFTA trade deficit. Hence, Sri Lanka should encourage investors from India to invest in Sri Lanka. Finally, the bilateral agreement was compared with SAARC and SAFTA and it was found that due to bilateral agreement there was a potential market seen for new products. In addition, a few important measures that should be taken in order to sustain the trade with India were pointed out in this study. Keywords: SAARC, SAPTA/SAFTA, ISFTA and Gravity Model 1. Introduction
It has been a long felt need of both the less developed and developing countries in South
Asia Region to expand their domestic markets for sustaining economic growth based on Gross Domestic Product (GDP) to ensure per capita income to balance the expenditure and capital accumulation based on their international resources from Agriculture, Industries, Commerce, Technologies and etc. forming the major sector of economy for improving a quality of human life and focusing on social, cultural and political development until the 1980s to have signed the
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South Asian Association for Regional Co-operation (SAARC) and expanding the facilities of the local market by means of trade of goods and services with other countries of South Asia. After that the regional integration of intra-regional trade had been mooted since middle 1990s. The South Asian Preferential Trade Arrangement (SAPTA) was started on 8th December 1995 and South Asian Free Trade Area (SAFTA) was signed by the Heads of the regional countries on 12th January 2004. The leaders of the SAARC nations expected that SAFTA would work well and fulfilled its goals since 2006 at the 12th conference of SAARC in Pakistan.
However, the SAPTA and SAFTA had covered very small and limited products lines of
trade among the member countries. Meanwhile, two major countries of SAARC have come to dominate other members on intra-regional trade activities. India and Pakistan are not in a position to favour other smaller countries of the SAARC region. At the same time, severe competition was started among them due to military and political situation in the region.
Therefore, Sri Lanka looked at bilateralism with greater benefits and concerned with the
joint trade and economic cooperation that have emerged within the region. The Department of Commerce, Sri Lanka also functions as the important point for joint commissions on trade and economic cooperation which have been established under trade agreements. The Sri Lankan government representatives from the ministerial units functioning as the Department of Commerce (DOC) are entrusted with the responsibilities for co-ordination and conduct of the following Joint Commission/Committees held at Ministerial level.
The Sri Lanka has opened and signed agreement with Bangladesh, China, Egypt, Iran, Iraq,
Maldives, Pakistan, Romania, Thailand, and India. However, the India-Sri Lanka bilateral agreement and Pakistan-Sri Lanka bilateral agreement are very effective and influence with line of intra-regional trade activities among the partner countries. The first agreement was signed with India on 28th December 1998 and implemented on 1st March 2000. The second agreement was signed with Pakistan which came into effect in June 2005. These three nations are the important partner countries of SAARC. Free trade agreements have provided Sri Lanka with important market access to its main trading partners in the region, the reason for it is that three member countries of SAARC have entered into bilateral trade agreements and highlight the significance of SAFTA for trading purposes also.
Twenty eight years have completed since the commencement of the SAARC, fourteen
years have passed since the beginning of the India-Sri Lanka Free Trade Agreement (ISFTA), and seven years have completed since the start of the South Asian Free Trade Area (SAFTA) and it is now possible to have a better idea of the insinuations of all agreements. Meanwhile, total values show the strong benefits for Sri Lanka in terms of export growth and reduce of negative imbalances of net trade as well. However, it is to be pointed out that a few of the studies carried out by the experts and researchers show that the actual picture is less encouraging (Deshal de Mel, 2008). He further pointed out that the ISFTA has had limited impacts on trade. Thus the efficacy of the agreement and lessons for other countries can be considered on this point of view. 2. Significance of the Study
Today it has come to face some problems regarding the issue of some (both India and
Lanka) fishermen allegedly poaching in Sri Lanka’s as well as India’s territorial waters and this subject is watchful for the nations in SAARC in particular to the need to positively re-fashion their ties with regional benefits. Because of the currently boiling issue is providing a somewhat divisive problem in Indo-Lanka political relations as well as mutual trade. Lynn Ockersz (2014) has also pointed out that, “the majority of India’s neighbours have differences with her on matters, such as cross-border terror, geographical and territorial boundaries, sharing of river waters, perceived interferences in domestic politics and imbalances in bilateral trade”.
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Therefore, it is necessary to evaluate the importance and the magnitudes of the changes brought about in the Sri Lankan economic benefits through the Indian Ocean. Trade- creation, trade-expansion and trade-diversion resulted by the regional trade have considerably changed the size and quantity of Sri Lankan economy in international trade as well as bilateral trade. Consequently these changes have influenced the Sri Lankan economic growth necessary for economic, energy and social development. From this point of view this research has become necessary, because economics and politics are interlinked and that divide the people of the country. 3. Research Problem of the Study
As the international trade has become prominent in the activities of trade liberalization it
has opened the windows of arrangement as it became inevitable for all countries to prosper. Almost all countries have engaged themselves in international trade with one face on one side and with other face in intra-regional trade as well as bilateral.
In this context, despite several international crisis and issues, Sri Lanka also has opened
her economy with the objectives of building up its economy with the system of regional integration, mutual co-operation and expanding market activities with the goods and services in order to commercialize the country for the poor and rich community to live with social and ethnic cohesion. However, Sri Lanka has not gained the net trade benefits after the trade liberalization except 1978. Of the problems faced by Sri Lanka from the point of such trade liberalization most important question posed is as to how long these free trade is going to last.
Based on the above main research question, this study seeks to find out the answer for the
two research questions regarding Sri Lanka’s current bilateral trade with India. First, whether within the border of bilateralism which takes to the given level of trade barriers or negative list between two countries are good or bad for Sri Lanka? Second, whether after taking into account the possible effects of trade agreement the trend is good or bad for Sri Lanka? To have access these to two questions three objectives and four hypotheses are framed.
4. Objectives of the Study
This paper is to examine the structure of bilateral agreement and evaluate the impacts of
agreement on trade between Sri Lanka and India and postmortem of the progress of the SAARC and SAFTA. It also attempts to make a formal analysis of research questions by using a regression model of bilateral trade to examine whether Sri Lanka’s bilateral trade is lower or higher than what is predicted with the economic model. On this background this research has three objectives aiming to find out mainly the trade relationship of Sri Lanka with India after the trade agreement and the achievement of net trade advantages by Sri Lanka.
The following are the specific objectives of the study after having observed the benefits of
SAARC, SAPTA/SAFTA, and ISFTA. 1. To identify the changes taken place with the result of Sri Lanka trade relationship
with India since the inception of trade liberalization to 2013. 2. To analyse the outcome of the trade-expansion based on the implementation of
trade agreement. 3. To compare the overall performance of SAARC with SAPTA/SAFTA after the
liberalization. 5. Hypotheses of the Study
The following hypotheses have been framed as test-parameters to assess and analyses the
benefits derived from the Sri Lankan bilateral trade with India after the trade liberalization.
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1. If the GDP is bigger; there will be more opportunity for more trade between the two countries; so it is expected a positive sign for the coefficient of GDP.
2. Per capita GDP provides a good proxy for the level of development and infrastructures essential to conduct trade. So it is expected a positive sign for the coefficient of PCGDP variable.
3. TR/GDP variable indicates the level of openness and dependency ratio of the country. The more open the country is the more would be the trade activities. So it is expected a positive sign for this variable.
4. Bilateral trade agreement has created trade expansion and reduced trade deficit in Sri Lanka.
5. India is rated as a ‘mostly unfree’ and Sri Lanka is rated as a ‘moderating free’, therefore, economic freedoms are more created on bilateral trade between Sri Lanka and India.
6. Scope of the Study
The evolution of the existing trade pattern and trade system will provide a valuable insight, which will greatly facilitate trade and economic development in Sri Lanka. This investigation will help planners and policy makers to understand the system clearly in a better way and to utilize the different possible and profitable international trade and market more efficiently for successful practices and profits.
This study mainly focuses on the intra-regional trade and bilateral trade pattern in Sri
Lanka which is founded on the idealism of trade liberalization after 1977 and investigates the level of trade creation and horizon of the trade expansion of Sri Lankan’ foreign trade and factors required policy wise attention to improve the trade extension and quality. This investigation based on quantitative research carried out in the area of SAARC and SAFTA which has narrowed down the scope of the broader of concepts of liberalization and regionalization in the Indian Ocean. 7. Literature Review of the Study
This study is an attempt to bring out some empirical works on intra-regional trade among
the member countries. Especially, it is tried to estimate Sri Lanka’s trade relationship with her partner nations which are members of SAARC and SAFTA. Since the inception of SAARC many research have been carried out with reference to economic welfare effect among member countries. These researches have all tried to shed light on whether the possibilities of intra-regional trade extension of SAARC and SAPTA have occurred as expected. And also, intra-regional trade, investment and the trends of economic co-operation were taken into consideration.
These researches were carried out by Waqif and Chatterjee (1993), Ahuja and Battachaya
(1993), Reddy (1993), Shrestha (1993), Thapa (1993), Wanigaratne (1993), and Yapa (1993) belong to the primary stage. These researches reveal the advantages obtained by the co-operation in the fields of agriculture, energy, manufacture, and services through the inflow of investment with intra-regional trade. Furthermore, the limitation of economic and organizational constrains, found among intra-regional economic co-operation of SAARC have been compared with that of European Union. Besides, it has been pointed out in these researches that, through regional arrangement, welfare increase will occur and it is inevitable that a SAARC member country can continue to maintain the trade relationship with a third country.
And also, it has been emphasized in these researches that, the factors like less growth of
GDP, over growth of population and the trend of rapid increase of poverty which are obstacles for economic development of SAARC countries will be eliminated. There by the relationship between SAARC regional development sectors is said to be very essential. Deep concern have
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been expressed in the summary of regional trade extension and the following trade contents like trade policies, tariff, loan arrangement, financial exports, information, shares, marketing, transport and so on. However, it is suggested to avoid fully liberalization followed by Western countries and to impose carefully partial liberalization in selected sectors.
All the above primary researches were related to Pre-SAPTA. All other Post-SAPTA
researches carried out by Hassan, Mehanna and Basher (2001), Henegedara (2003), Dharmapriya (2003), Nori and Patnaik (2003), Frankel (1997), Frankel and Wei (1997) explain the extension of intra-regional trade, interested bilateral trade arrangement among member countries and the effect resulted by trade-creation, trade-diversion and trade deficit. Generally, the SAARC nations produced more likely homogenous goods as well as their market is also perfectly competitive. The first generation theory assumes constant returns to scale works in the production side. In this background the following studies consist of comparative and descriptive analysis especially on SAARC as well as SAFTA.
Sirinivasan and Canonero (1993 a, 1993 b), Sirinivasan (1994) maintain that, South Asian
countries could obtain innumerable benefits through their regional co-operation and regional trade extension. The research conclusion reached by them states that, small economy of SAARC countries have contributed remarkably to the intra-regional trade development. That is to say that, comparatively in small economy trade extension has taken place more than big economy. But, according to Das (2001) big economic countries like India and Pakistan did not have a considerable trade-creation effect.
Some researchers have tried to focus on the special aspects of the relationship inside and
outside the region taking as example certain prioritized countries. Among such researches carried out by Henegedara (2003), Dharmapriya (2003) and Dheerasinge (2003) have done with reference to Sri Lanka are remarkable. These researchers have utilized descriptive analysis and comparative analysis in their researches. They have tried to assess the general trend of Sri Lanka’s foreign trade and the trade extension resulted by the economic policy changes taken place after 1997. And also, they have tried to explain the different progressive stages of the trade relationship Sri Lanka had with SAARC member countries. They have identified the changes in Sri Lankan imports and exports structures with India. It has been proved that, as a result of the growth in the manufacturing sector, proportional increase of goods has also occurred in export. At the same time, the ratio of agricultural goods in export has decreased. And also, they have pointed out that the considerable changes have taken place in Sri Lanka’s per capita income, consumption level, production, labour movement and technology etc.
Hassan, Mehanna and Basher (2001) have done their researches using gravity model.
They declare through the arrangement of regional trades among the SAARC members neither the trade-creation nor the trade-diversion effects has occurred in the SAARC countries. They found that liberalization of trade in SAARC countries offers significant benefits for all the countries in the region. The results show that the variables of GDP, GDP Per capita and distance to be highly significant at the 1% level but BORDER not similar.
Hirantha (2003) has done a gravity base model analysis regarding to SAPTA and SAFTA.
He has used the gravity model analysis to examine the progress of SAPTA using panel data cross sectional data for the period of 1996-2002. His gravity model results explained that there is a significant trade creation effects under SAPTA and finds no facts of trade diversion effect with the respect of the world.
Darmapriya (2003) has shown the Indo-Lanka Free Trade Agreement and its
consequences of favourable changes to Sri Lanka. In his research comparative study of the pre and the post situations of the Indo-Lanka Free Trade Agreement, comparative advantage analysis of findings has been obtained. Furthermore, he has pointed out that, since the implementation of this agreement, the Sri Lankan trade deficit with India, had decreased considerably and the advantages to Sri Lanka gained by the trade extension. And also, he
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explained the multi-nature of the export with India. He focused on the next five years, that 30% of growth in Sri Lankan exports could be expected and more interest of the investors would increase considerably and he further says if Indo-Lanka Bridge completed there will be possibilities of Sri Lankan trade extension taking place to other SAARC member countries through India.
Mehta and Kumar (2004) argued that starting of SAFTA was a land mark in the evolution
of SAARC which was formed in 1995. SAARC would benefit if its cooperation would expand beyond formal trade. That means SAARC should convert from political regionalism into intra-regional trade bloc. Rahman (2003) gave evidence on their gravity model, elimination of trade barriers and structural rigidities originating from adverse political relationship could lead to substantial increase in intra-SAARC trade.
Mehta and Kumar (2004) argued that starting of SAFTA was a land mark in the evolution
of SAARC which was formed in 1995. SAARC would benefit if its cooperation would expand beyond formal trade. That means SAARC should convert from political regionalism into intra-regional trade bloc. A research document can be produced by Dhungel (2004) points out actual progress and achievement in implementation of SAARC agendas and considered very insignificant. Jhamb (2006) also supported Dhungel’s view and argued that it was in the primary stage due to the weak political relationship and a general environment of distrust between member countries. However, Rahman et.al (2006) gave evidence on their gravity model, elimination of trade barriers and structural rigidities originating from adverse political relationship that could lead to substantial increase in intra-SAARC trade.
Pitigala (2005) found that the trade structures that changed the South Asian countries
might not assist a rapid increase in intra-regional trade due to weak trading relations among the SAARC nations. The above view was supported by Baysan et.al (2006). They concluded that the economic matters for SAFTA were comparatively weak. This region is small and tiny based on economically, geographically and size of GDP compared with other region like ASEAN, NAFTA and EFTA can be viewed.
Other computable general equilibrium analysis was done by Perera (2008) regarding
Impact of the Indo-Lanka free trade agreement on the Sri Lankan economy, he attempts to capture a comparative analysis of impacts of Indo-Lanka full trade liberalization phenomena and Indo-Lanka free trade agreement including negative list. To achieve the above objective he has used and compiled list for bilateral exports and imports and tariff inclusive of other flows for 87 nations and 57 tradable goods of the world. He performs simulation using Global Trade Analysis Project (GTAP model version 6) to examine the economic effects on intra-regional trade under the assumptions of producers employed constant return to scale and constant technology.
His estimated results explained that Sri Lanka’s GDP increases by 0.15 % while the same
for India is 0.06 %. According to this point, the small economy like Sri Lanka has much benefited by trade liberalization. Further said, the household utilities in Sri Lanka increases by 0.17 % as against India’s 0.01% and also real wages of skilled and unskilled labour increase higher in Sri Lanka. However, the trade balances are not in favour for Sri Lanka. That means that presently Sri Lanka’s imports from India have an increasing trend under the Indo-Lanka bilateral agreement. On the other hand, Sri Lanka’s terms of trade become positive. Because, the cheapest intermediate goods can be imported from India and final goods can be exported to other countries. Meanwhile, under the negative list scenario given benefits to Sri Lanka as GDP increased by 0.23 % while India received by only 0.01 %. The trade liberalization situation also suggested both countries would benefits from this FTA. But this gain variety related with size of economy and allocated efficiency. The estimated welfare gain for Sri Lanka is US $ 23.49 million while it is US $ 11.24 under the situation of negative list scenario.
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Suresh Moktan (2008) has employed the gravity equation to examine the intra-regional trade exports and trade-creation and trade-diversion effects of trade agreements in SAARC nations. His investigation of gravity model has included a pooled panel data for the period of 1980-2005. The regressions are designed to evaluate economic effects as follows, pre-SAARC/pre-SAPTA and post-SAARC /post-SAPTA. According to the study, the sign of the coefficients for the member countries’ GDPs, Populations, Distance, Common border, Common currency, Island and Port are as expected, and are statically significant. The impact of Devaluation of Real Exchange is found to be positive, however largely insignificant. And the variable of landlocked has a significant positive impact on the intra-trade.
Regional trade would lead to trade-creation and trade –diversion effect through intra-
regional preferential arrangement or agreement. However, a few study of intra-regional trade patterns on SAARC done by scholars proved that evidence of trade complementarities in South Asia is mixed. Recently Ali and Talukder (2009) pointed out that these are based on Das (2007). Another recent study done by Newfarmer and Pierola (2007) found that the SAFTA fell short of their possible advantages because of product exemptions, special priority for selected productions and negative list or rules for point of origin.
The above research covers four themes; Lanka-SAARC intra-regional trade relations;
Lanka- ASEAN trade relations; Lanka-NAFTA trade relations and Lanka-EC trade relationship. All these are considered as economic relationship and regional initiative which means that the FTA dilemma (Tuli Sinha 2009). Razeen Sally and Rahul Sen (2005) worked titled ‘Whither Trade Policies in South East Asia: the wider Asian and global context’, this paper wind up for ASEAN countries said that trade liberalization and regularity reforms are as an engine of development.
Tuli Sinha (2010) evaluates ASEAN and SAARC as two key regional stages for motivating
economic cooperation in South Asia and South East Asia. This study attempts to find the size of AFTA has exceeded SAFTA in terms of trade gains and value addition to the overall regional economic growth. An investigation exposes that the formation of AFTA has led to a remarkable expansion of intra-ASEAN trade since its beginning. The results indicate the intra-ASEAN trade has been always increasing over the years from US $ 81.98 billion in 1993. Even today (in 2010), the intra-ASEAN trade includes nearly 25 % of the total external trade in comparison with just 2 % of the intra-SAARC trade. He has moreover concluded, despite initial benefits, SAFTA has not really achieved much in terms of internal or external trade. He observed India is the only country well-off conditions of intra-regional trade in South Asia. It means that, India’s total imports have been sharply increased from Pakistan, Sri Lanka, Bhutan and Bangladesh. However, India keep up a positive trade balance with other than SAARC member countries. And her trade surplus has risen from US $ 2.3 billion to US $ 5.0 billion in 2009.
Chandrima Sikdar (2010) study was to examine the economic gains with Indo-Sri Lanka
bilateral trade agreement. The practical realization of the model considers trade in 33 sectors equal in the input-output tables of the two economies. She assumed that since the FTA, trade between India and Sri Lanka has grown rapidly. Bilateral trade, statistics show a, raise of US $ 706 million in 2001 to US $ 3.3 billion in 2007. India’s export to Sri Lanka has increased from US $ 638 million in 2001 to US $ 2744 million in 2007. Even export from Sri Lanka to India is raised US $ 68 million in 2001 to US $ 515 million. Her model concluded the total gains to India on tea and garments are now 32.3 % as compared with other goods (32.9%). She found that the gain is lowered even more from 81.8 percent to 79 percent.
8. Methodology of the Study In order to conduct of the study, methodology is handled under the following sub section
and gravity analysis model is applied with variables such as GDP, Per capita GDP, Openness ratio/ trade dependency ratio, bilateral dependency ratio, and Exchange rate.
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8.1 Sampling design
The research results were obtained through Minitab software using gravity model. The gravity model research is carried out on Bangladesh, by Rahman (2003). He has analysed the bilateral trade of the Bangladesh’s trade with its major trading partners and also, Hirantha (2003) has used gravity model for his research on intra-regional trade of SAARC countries. They have explained the trade-diversion and trade-creation effect by their researches. Our research model is based on gravity model as follows;
Where: Tij = Total bilateral trade (US $) between Sri Lanka and India at t time PCGDPij = per capita GDP (US $) of Sri Lanka and India at t time TRi/GDPi =Trade-GDP ratio [openness (US $)] of Sri Lanka at t time TRij/GDPj = Total bilateral trade-GDP ratio [openness (US $)] of Sri Lanka and India
at t time IFij = Inflation (GDP Deflator) annual percentage of Sri Lanka and India at t
time ERij = Nominal Exchange Rate of Sri Lanka and India j at t time IEFij = Index of Economic Freedom of Sri Lanka and India at t time
= is error term
0, 1, 2, 3, 4, 5, 6 = parameters; and t = time period
9. India-Sri Lanka Free Trade 9.1 Background to the Agreement:
Economic links between India and Sri Lanka have a long history with recorded
commercial links going as far as back as the 4th century (High Commission of India, 2013:7). India-Sri Lanka free trade agreement is a significant symbol of the impressments of bilateral concept among them. It indicates the major role of the intra-regional trade activities and as well as bilateral activities roles to be played by them as member countries of SAARC. A bilateral trade agreement initially was signed between the two countries in 1961 in order to facilitate trade. Although, the concept of strengthening bilateral trade collaboration between them was tracked once more in the early 1990s.
However, both these two countries give the impression of the partner countries apart
from SAARC as that tried to enjoyed benefits from different ideologies, including the materialization of a regional plan in the form of the SAPTA in 1995 and the decision to convert into the SAFTA in 1996. Though, the SAPTA process allowed only very limited liberalization, while the transition to SAFTA moved rather slowly (High Commission of India, 2013:8). This is the reason why Sri Lanka to have obtained significant markets access in India through ISFTA. Sri Lanka was keen in doing the same thing with other major economies in the South Asian region through bilateral negotiation.
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In ISFTA Article -I the objectives of the agreements with relevant requirements of GATT, 1994 is clearly defined. The objectives of this free trade agreement is to promote through the expansion of trade the harmonious development of the economic relations between India and Sri Lanka; to provide fair conditions of competition for trade between India and Sri Lanka; in the implementation of this agreement the contracting parties shall pay due regard to the principle of reciprocity; and to contribute in this way, by the removal of barriers to trade, to the harmonious development and expansion of world trade.
9.2 Scope of the Agreement:
According to the agreement, it covers only trade in goods. It provides all the provisions
either; duty free access (zero duty) or; duty preferences for products that are not under the negative list. It has favourable account for the irregularity between the two countries and is more positive for Sri Lanka which has a larger negative list and longest tariff liberalization periods observed in the process of analysis with selected variables with gravity model.
According to the table No: 1 India is given 4227 duty free items with immediate zero duty
while Sri Lanka is only offered about 2802 goods with immediate zero duty. This is favourable for Sri Lanka in the Indian market access to over 4000 duty free items offered for initially. India provides duty free access to many products categories in almost HS chapters, with the exception of HS chapter 46 (Manufactures of straw, of plaiting materials, basket-ware and wickerwork) and HS chapters 50-63 covering textiles and textiles articles. Sri Lanka also offers 100 per cent duty free to India on a majority of product categories, excluding the following: dairy products; live trees and other plants; coffee, tea, mate and spices; prepared foodstuffs; manufactures of straw; basket-ware and wicker work; footwear and its parts.
Duty concession India’s commitments (number of products)
Sri Lanka’s commitments (number of products)
Duty Free Items Negative List
4227 Immediate zero duty by March 2000 (1351) Zero duty by March 2003 (2870) [cut of 50%, 75%, and 100%] 431
2802 Immediate zero duty by March 2000 (319) Zero duty by March 2003 (889) [cut of 50%, 75%, and 100%] Zero duty by March 2008 (2802) [cut of 35%, 75%, and 100%] 1220
Source: Hand Book on the ISFTA (2013:11), and Deshal de Mel (2008)
Table No: 1 India’s and Sri Lanka’s Commitments
The negative lists have indicated that facts that same goods were produced and exported
by both countries. The Table no: 1 clearly shows that total number (1651) of items are listed by the contracting parties with lines of negative list which never finished without duty free or non-barriers into the both country’s markets. The negative items listed by India are such as coconut, beer, wine, garment items, rubber products, dairy products, plastic products, and etc. In case of Sri Lanka it has listed as a negative list of items such as agricultural/livestock products, rubber products, paper products, electrical items, etc. However, India has offered quotas on exports of tea, textiles and garments.
The Table no: 1 explained that duty concessions of tariff quotas are also favourable to Sri
Lanka. For example, Sri Lanka can export 50 per cent tariff preferences on five tea items subject to a quota 15 million kg to India annually. Garments covering 50 per cent tariff concessions for 223 products on a fixed basis, subject to annual restriction of 8 million pieces. These 8 million pieces would be allowed at zero duty with no Indian made fabric as input. India has reduced 155 textile ranks through a 30 per cent reduction of its sensitive list under SAFTA. 10. Trade relationship between India and Sri Lanka
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The study of intra-regional trade indicates that every contracting party gets benefits
equally. Meanwhile, any two countries tried to make joint efforts towards the line of intra-regional trade or bilateral activities with the hope to get mutual benefits. Before the bilateral agreement is brought into practice one country has been experiencing deficit or negative balance of payment even that trade deficit, for long. Reason for that is that those two countries will join and try to share benefits among them through integration or mutual agreement. Under this situation, it is examined that Sri Lanka’s trade relationship with India will never touch in favour of Sri Lanka even for single year after 1980. The Table No: 2 clearly show that the balance of trade was not favourable to Sri Lanka (negative) in all years since 1980.
Year Exports (from Sri
Lanka)
Ave. growth rate %
Imports (from India)
Ave. growth rate %
Balance of Trade (BOT)
Sri Lanka’s Total Trade
% in Sri Lanka’s total trade
1980 34.5 - 96.7 - -62.4 3067.8 8.61 1985 6.20 -50.4 74.7 -33.0 -68.5 4530.0 5.03 1990 20.0 100 118 78.8 -98.0 12146.8 5.78 1995 32.0 33.3 469 16.1 -437 17135.7 11.14 2000 58.03 19.4 600.14 17.3 -542.1 18936.5 10.77 2005 566.41 44.7 1835.43 27.5 -1269.0 22201.8 31.57 2010 437.27 46.6 3647.65 91.4 -3210.4 17291.1 36.12 2011* 286.50 -34.5 2170.80 -40.5 -1884.3 19348.0 25.03 2012* 302.00 5.4 2260.60 4.1 -1958.6 19969.0 25.28 2013* 317.50 5.1 2350.40 4.0 -2032.9 20590.0 25.51
Sources: IMF (1987-2011), ‘Direction of Trade Statistics Year Book’. *: Projected
Table No: 2 Sri Lanka- India bilateral trades (1980-2013), Values in US $ Million
According to the table No: 2 and Annex No: 1, the average percentage of bilateral trade on
Sri Lanka’s total trade was 15.34 per annum. Sri Lanka’s average exports to India were only 148 M US $ but Sri Lanka’s average imports from India was 929 M US $ annually. Another point of view is that the balance of trade of Post-liberalization period is -781 M US $ per year. It was increased by 2 fold even post-ISFTA (-1581M US $). It seemed to indicate that the bilateral activities have been not favourable to Sri Lanka. Even though the average percentage of bilateral trade on Sri Lanka’s total trade was 25.1 after ISFTA. Sri Lanka’s average exports were only 324.4 M US $ to India but Sri Lanka’s average imports from India is 1905 M US $ annually after ISFTA. It seemed to show again that the bilateral activities have been not favour to Sri Lanka. In fact, Sri Lanka’s dependency ratio has increases as highly. For example, the dependency ratio (Import: Exports) was 0.16 annually for post- trade liberalization period (1980-2013). It has been increased to 0.18 per annum for post- ISFTA. Because of the dependency ratio of pre-ISFTA period (1980-1999) it has only 0.14 per year. However, the projected period (2011-2013) was declined as 0.13 annually (see also graph no: 2).
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Million US $
Based on table no: 2
Graph No: 1 Sri Lanka- India Bilateral Trade (1980-2013)
Based on table no: 2
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Graph No: 2 Sri Lanka- India Bilateral Trade Growth Rate (1980-2013) 11. Results of Gravity Model
11.1 Economic Impact of Trade-liberalization
In the Table No: 3 Sri Lanka-India bilateral trade activities are explained with the
analytical indicators of variables through per capita income, trade to GDP ratios or openness intra-trade to GDP ratios, inflation, exchange rate, and economic freedom for the periods of 1980-2013 (P=0.01). Hence, per capita income, intra-regional trade, Exchange rate and economic freedom are meaningful influences into the bilateral trade however, economic freedom index negatively influence the bilateral trade. Clearly explained that the table no: 3, when per capita income of both countries increased by 1 US $ the bilateral trade had been increased by 1.2354 M US $. Meanwhile, the trade ratio of the GDP is changed by 1 unit the Sri Lanka’s bilateral trade with India it is increased by 895013 US $. It means that, there is trade expansion among them if both countries removed the trade barriers simultaneously.
Therefore, both countries have necessarily removed barriers all together. That is a good
example for mutual free trade of these two countries that has led to trade-expansion among the partner countries. Further, the exchange rate has positively impacted on Sri Lanka’s bilateral trade. This is other evidence that both countries in chorus devaluation of their currency did support the trade-expansion. However, the Index of Economic freedom has negatively impacted on Sri Lanka’s bilateral trade. This is other evidence that Sri Lanka is a moderating free (69.9-60.0) country but India still mostly unfree (59.9-50.0) country this kind of situation did not support the trade-expansion. Regression result shows that the exchange rate depreciation was by 1 percent the bilateral trade was increased by 1,855,392 US $. But the overall economic freedom has increased by 1 percent the bilateral activity decreases by 3,478 US $. 11.2 Economic Impact of SAARC
Other necessary test was to see whether the SAARC could be able to change Sri Lanka’s
bilateral trade activities with India after the formation of SAARC. According to the Table No: 3 Sri Lanka-India bilateral trade is explained through per capita income, trade to GDP ratios or openness intra-trade to GDP ratios, inflation, exchange rate, and economic freedom for the periods of 1985-2013 (P=0.01). Hence, per capita income, intra-regional trade, Exchange rate and Economic freedom are meaningful influences on the bilateral trade at 1 percentage of confidence level but economic freedom is negatively influencing on the bilateral trade. It is clearly explained that the table no: 3, when per capita income of both countries are increased by 1 US $ the bilateral trade are also increased by 1.4468 M US $. Relatively per capita income slightly high (0.2114) influencing on bilateral activity of post-SAARC scenario.
Although, the reason for 1 unit of change in the intra-regional trade ratio in the GDP the
bilateral trade between Sri Lanka and India also has increased by 818,822 US $. This evidence explained that intra-regional trade had been decreased after the formation of SAARC by 76,191 US $. Therefore, both countries have carefully removed barriers simultaneously under the regional trading bloc. Nevertheless, the exchange rate has positively impacted on Sri Lanka’s
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bilateral trade. This is other evidence that Sri Lanka and India are competitive devaluation of their currency did support the trade-expansion for both countries. Regression result shows that the exchange rate depreciation is by 1 percent, the bilateral trade is increased by 2,541,368 US $. After the formation of SAARC, the exchange rate would help more to move up the bilateral activities among them. However, the Index of Economic freedom has negatively impacted on Sri Lanka’s bilateral trade even post-SAARC scenario. Sri Lanka is a moderating free (69.9-60.0) country but India still mostly unfree (59.9-50.0) country. This did not support the trade-expansion. Regression result shows that the overall economic freedom has increased by 1 percent, the bilateral activity decreases by 4,237 US $. This unfair situation be compared with the post-liberalization period tiny extra (759 US $). 11.3 Economic Impact of SAPTA/SAFTA
Further necessary test done was that the free trade could change Sri Lanka’s bilateral
trade activities with India after the formation of SAPTA or establishment of SAFTA. According to the Table No: 3 Sri Lanka-India bilateral trade is explained through the selected variables namely per capita income, trade to GDP ratios or openness intra-trade to GDP ratios, inflation, exchange rate, and economic freedom for the periods of 1995-2013 (P=0.01). Hence, openness ratio in the GDP, intra-regional trade to GDP, inflation, and exchange rate are found having meaningful influences in the bilateral trade at 1 percentage of confidence level but unilateral openness and inflation are negatively found having influences in the bilateral trade. According to the table No: 3, however, relatively per capita income did not influence the bilateral activity of post-SAPTA/SAFTA scenario. Meanwhile, the trade ratio of the GDP was changed by 1 unit the Sri Lanka’s bilateral trade with India was decreased by 3.4961 M US $. It means that, there is not a trade-expansion occurred among them if both countries removed furthermore trade and non-trade barriers mutually by 1 percent. Although, the reason for 1 unit of change in the intra-regional trade ratio in the GDP the bilateral trade between Sri Lanka and India has increased by 0.26963 M US $. This evidence explained that intra-regional trade had been increased after the formation of SAPTA/SAFTA. Therefore, both countries have carefully removed all unnecessary barriers simultaneously under the regional trading bloc. The inflation has hit the bilateral trade activity (reduced) by 0.004016 M US $. However, the exchange rate is positively impacted on Sri Lanka’s bilateral trade. This is other evidence that Sri Lanka and India are observed in competitive devaluation of their currency supported to promote trade-expansion for both countries. Regression result shows that when the exchange rate is declined by 1 percent then the bilateral trade has increased by 1.5503 M US $.
11.4 Economic Impact of the ISFTA
The regression test shows that the free trade system could be able to change Sri Lanka’s bilateral trade activities with India after India-Sri Lanka Free Trade Agreement. According to the Table No: 3 Sri Lanka-India bilateral trade could be explained with the aids of variables through per capita income, trade to GDP ratios or openness intra-trade to GDP ratios, inflation, exchange rate, and economic freedom for the periods of 2000-2013 (P=0.01). Hence, unilateral openness ratio in the GDP and intra-regional trade are showing meaningful influences in the bilateral trade at 1 percentage of confidence level but unilateral openness ratio in the GDP is negatively influencing the bilateral trade. The table no: 3 clearly explain that, when the unilateral openness by Sri Lanka is changed by 1 percent the bilateral trade could be decreased by 1.43180 M US $. Relatively this declination is more helpful to Sri Lanka because negative impact has highly reduced by 2.0643 M US $ into bilateral trade. However, the bilateral trade ratio of the GDP is changed by 1 unit the Sri Lanka’s bilateral trade with India is increased by 1.2462 M US $. It means that, there is trade-expansion occurred among them if both countries have added more goods and services in the negative list. Although, the reason for 1 unit of change in the intra-regional trade ratio in the GDP the bilateral trade between Sri Lanka and India has increased by 0.97657 M US $ compared to post-SAFTA. This figure explained that intra-regional trade has increased after the free trade agreement. Therefore, both countries carefully have reduced their negative list simultaneously under the trade negotiation. It would be more useful to both countries and Sri Lanka particularly. However, the exchange rate,
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inflation, and economic freedom have not impacted on Sri Lanka’s bilateral trade after the ISFTA. 12. Summary and Conclusions
In this paper, the bilateral trade agreement that Sri Lanka has signed with India, is
analysed as to the structure of the respective agreement and the trade impact of this. It was found that whilst the agreement has provided significant market entrance to Sri Lanka full advantage has not been taken to this market right to utilize due to certain reasons. However, Sri Lanka enjoys duty free market access on 4,227 products to Indian market, while India, gained duty free access on 2,802 products in the Sri Lankan market. The aim of a free trade agreement is to reduce barriers, to facilitate exchange so that trade can grow as a result of specialization, division of labor, and most importantly via comparative advantage (Masood 2010).
Sri Lanka's trade with India changed considerably following the implementation of the
FTA. During the period 1980-2000 immediately preceding the agreement, average annual exports from Sri Lanka to India was USS $ 25.3 million while average imports were US$ 262 million. Evidence to that India was an important source of imports even pre-free trade agreement. By 2005, Sri Lanka’s exports to India reached a peak of US$ 566.4 million, a tenfold increase compared to 2000, and stood at US$ 519 million in 2011 (Handbook, 2013:12).
Further, this study conclude that the average annual exports from Sri Lanka to India were
US$ 345 million while average imports were US$ 2006 million after 2000. This has explained that imports are highly motivated compared to exports by the ISFTA. However, in general, the trade gap between the two countries narrowly reduces through the ISFTA. Furthermore, regression result has shown that trade-expansion has occurred significantly for both countries but Sri Lanka’s trade deficits were found highly with India. The negative list has shown big restrictions for Sri Lanka and has remained certain barriers to trade despite the existence of the free trade agreements and these barriers are indicated in this paper. In addition to this, it was pointed out that Sri Lankan producers and exporters need to be more open to diversifying from traditional export markets in India. Influence Factors on Sri Lanka -India Bilateral Trade: A comparison with SAARC, SAFTA and ISFTA
Predictor/ Variables
Post-Liberalization (1980-2013)
Post- SAARC (1985-2013)
Post- SAPTA/SAFTA (1995-2013)
Post- ISFTA (2000-2013)
Coefficient Constant PC GDPijt
TRit/GDPit
TRijt/GDPit
IFijt ERijt
IEFijt
Constant Log (PC GDPijt) Log (TRit/GDPit) Log (TRijt/GDPit) Log (IFijt) Log (ERijt) Log (IEFijt)
4434217 1.2354 3330999 895013 -2403 1855392 -3478
3301831 1.4468 6711415 818822 4 2541368 -4237
11.222 -0.00000035 -3.4961 0.26963 -0.004016 1.5503 0.0004289
20.807 -0.02476 -1.4318 1.2462 0.04319 0.4263 -1.0510
“t” Value Constant PC GDPijt
TRit/GDPit
TRijt/GDPit
IFijt ERijt
IEFijt Constant Log (PC GDPijt)
0.81 4.12 0.92 8.59 -0.58 2.00 2.08
0.54 3.64 1.28 6.05 0.00 2.10 -2.15
7.04 -1.15 -4.94 5.60 -1.81 3.53 1.00
2.65 -0.60
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Log (TRit/GDPit) Log (TRijt/GDPit) Log (IFijt) Log (ERijt) Log (IEFijt)
-8.16 9.67 0.45 0.53 -1.11
Probability Value Constant PC GDPijt
TRit/GDPit
TRijt/GDPit
IFijt ERijt
IEFijt
Constant Log (PC GDPijt) Log (TRit/GDPit) Log (TRijt/GDPit) Log (IFijt) Log (ERijt) Log (IEFijt)
0.427 0.000 0.367 0.000 0.566 0.055 0.048
0.594 0.001 0.215 0.000 0.999 0.047 0.043
0.000 0.273 0.000 0.000 0.095 0.004 0.339
0.033 0.566 0.000 0.000 0.669 0.615 0.305
“R2(Adj)” % 92.5 92.0 97.7 99.0 “F” Value 68.77 54.72 127.78 214.34 “P” Value 0.000 0.000 0.000 0.000 “DW” statistic 2.09445 2.12211 2.84452 1.53051 “VIF” 1.6-4.5 1.1-7.0 1.4-8.8 1.2-9.6
Estimated
Table No: 3 Regression Results (1980-2013)
Anyhow, Sri Lanka will have to improve the quality of its exports products and minimize
the cost of production to permit it to compete well with others in India market. However, Sri Lanka’s trade value with India is still high compared to other countries. Therefore, economic development is the vital path for Sri Lanka and its product goods and services to be in the line of increase are always necessary to ensure more capital accumulation and income for GDP and GNI to stabilize these situation local product should be consumed more by the local peoples at low price based on low-cost of product (Nufile, Santhirasegaram and Ismail 2013 a, b, c).
Nufile et.al (2013 a, b, c) claims that the launch of SAFTA in 2006 has caused the
significant changes in custom tariffs and reduced trade-related barriers for the goods and services which have also been taken under ISFTA. Hence, sometime ISFTA is felt pointless. Therefore, there is still opportunity for further trade liberalization between them. Trade barriers and sensitive list need to be reduced between Sri Lanka and India. It will help them mutually to get benefits rather than partiality.
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Appendix: I
Year Sri Lanka (01) India (02) Total bilateral Trade
[3=(01+02)]
Sri Lanka’s Total Trade
% of bilateral on Sri Lanka’s
Total Trade Exports
(To India) Imports (From India)
Exports (To Sri Lanka)
Imports (From
Sri Lanka)
1980 34.3 96.7 101 32 264 3067.8 8.61 1981 30.0 76.7 65 56 227.7 2929.5 7.77 1982 21.2 72.9 66 19 179.1 2769.4 6.47 1983 27.7 115.4 105 31 279.1 2848.6 9.80 1984 12.5 111.5 101 14 239 3281.2 7.28
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1985 06.2 74.7 68 07 155.9 3096.7 5.03 1986 11.8 79.2 72 13 176 2992.1 5.88 1987 6.2 83.5 91 64 244.7 3390.7 7.22 1988 19.0 91.0 109 73 292 3740.0 7.81 1989 10.0 66.0 117 11 204 3627.0 5.62 1990 20.0 118 102 22 262 4530.0 5.78 1991 13.0 220 175 12 420 5048.0 8.32 1992 12.0 307 231 14 564 5961.0 9.46 1993 20.0 343 247 17 627 6864.0 9.13 1994 24.0 404 334 31 793 7431.0 10.67 1995 32.0 469 383 39 923 8282.0 11.14 1996 43.0 562 458 35 1098 8829.0 12.44 1997 44.0 560 468 42 1114 9911.0 11.24 1998 38.0 539 488 40 1105 11083.3 9.97 1999 48.62 511.60 484 43 1087.22 10877.0 10.00 2000 58.03 600.14 605 45 1308.17 12146.8 10.77 2001 71.99 601.48 547 79 1299.47 10453.2 12.43 2002 170.57 832.07 848 85 1935.64 10702.7 18.09 2003 245.05 1076.16 1220 169 2710.21 11805.2 22.96 2004 391.51 1439.15 1345 322 3497.66 13757.0 25.42 2005 566.41 1835.43 1872 528 4801.84 15209.9 31.57 2006 489.46 2172.85 2198 497 5357.31 17135.7 31.26 2007 515.28 2610.14 2683 591 6399.42 18936.5 33.79 2008 392.04 3168.56 2484 420 6464.6 22201.8 29.12 2009 298.16 1906.16 1733 328 4265.32 17291.1 24.67 2010 437.22 3647.65 3316 481 7881.87 21818.7 36.12 2011* 286.50 2170.80 2038 348.1 4843.40 19348.0 25.03 2012* 302.00 2260.60 2122 363.2 5047.80 19969.0 25.28 2013* 317.50 2350.40 2206 378.3 5252.20 20590.0 25.51
Sources: IMF (1987-2011), ‘Direction of Trade Statistics Year Book’. *: Projected [S L’s Exports to India = - 30884 + 15.5 Year; S L’s Imports from India = - 178417 + 89.8 Year; India’s Exports to SL = - 166886 + 84.0 Year; India’s Imports from SL = - 30018 + 15.1 Year; SL’s Total Trade = - 1229483 + 621 Year;]
Table: Sri Lanka- India Bilateral Trades (1980-2013), Values in US $ Million
