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How can ISFTA use as an investment promotional tool in Sri Lanka?

1. The overall trade turnover has grown eight times since the entry into force of the FTA in the year 2000 and reached USD 4.9 billion in 2011. 2. India has emerged as the largest trade partner of Sri Lanka. Sri Lanka has also emerged as Indias largest trade partner in South Asia, displacing Bangladesh from that position a few years ago. 3. India is also Sri Lankas most balanced trade partner. It is the only country among the top ten Sri Lankan trade partners where both exports and imports are substantial. Thus, India ranks first as exporter to Sri Lanka and third as importer from Sri Lanka. All other leading partners of Sri Lanka, viz., USA, UK, China, Singapore etc are either predominantly exporters to or importers from Sri Lanka. 4. India was the second largest exporter to Sri Lanka before the FTA and is now the largest exporter to Sri Lanka. But, more important, India became the third largest export destination for Sri Lankan products (rising from 16th rank) as a result of FTA. 5. Overall Sri Lankan exports to India have grown 10 times since 2000 while Indian exports, mostly on the non-FTA route, has grown 5 times. 6. Sri Lankan exports to India have largely been of new products where Sri Lanka did not traditionally have capacities. Therefore, FTA has created new export capacities in Sri Lanka that hitherto did not exist. It has brought precious foreign exchange to the country by helping create this potential. 7. While the trade gap has expanded, the FTA has helped by creating export opportunities for Sri Lanka at a much faster rate helping in bringing down the exportimport ratio from 10.4:1 in 1999 to 8.4:1 in 2011. 8. A better way to look at benefits of the FTA is to compare the trade between India and Sri Lanka using the FTA concessions, as this is trade generated by FTA for either country and conversely at non-FTA trade where trade is carried out without any concessions. Trade under FTA between India and Sri Lanka shows that Sri Lankan exports are at about USD 450-500 million and Indian exports at USD 600-700 million, which is fairly balanced. 9. Non-FTA exports from Sri Lanka to India are negligible at about US$ 50 million, the same as it was in 2000, when FTA came into force. Non-FTA exports from India to Sri Lanka are substantial standing at about US$ 2 billion, up from about US$ 500 million in 2000. 10. FTA has benefited Sri Lanka by creating 90% of its current export potential. In contrast, FTA accounts for only 30% of Indias export to Sri Lanka. The importexport ratio which has come down from 10:1 in 2000 to 8:1 in 2011 would have been 40:1 if the FTA was not there.

How can ISFTA use as an investment promotional tool in Sri Lanka?


Indian Investments
The increase of Indian investments to Sri Lanka has been a more visible indirect benefit of the ISFTA. India is now the countrys second largest investor; investing US$ 126 million in 2008, second only to Malaysia (which invested US$ 150 million in 2008). This is a contribution of 14% of total FDI inflows to Sri Lanka, and is a marked increase from the previous investment levels during 1978-1995 which amounted to just 1.2% of total investments. The number of projects too increased from 18 in 1999 to 83 in 2006, with a majority of recent Indian investment being in telecommunications, retail services, energy, hospitality trade and air transport services. An example of a recent Indian investment success story has been the entry of Piramal Glass (acquisition of Ceylon Glass Company), which is now not only catering to the Sri Lankan market but has also begun exporting nearly 70% of their output to the Indian market. Sri Lankan investments in India too have increased, and include areas such as garments, confectionaries, hotels and furniture, with some of Sri Lankas top blue chip companies opening up ventures there (e.g., Brandix, MAS, Aitken Spence, John Keells).

Taking it to the next level the CEPA


Given the positive outcomes of the ISFTA and emerging services/investment links encouraged both India and Sri Lanka to broaden economic cooperation by including services and investment under a proposed Comprehensive Economic Partnership Agreement (CEPA). Potential areas of cooperation for the CEPA identified by the Joint Study Group included trade in services, investment, and economic cooperation. Although the Framework Agreement was scheduled to be signed on the sidelines of the 15th SAARC Summit in Colombo in 2008, reservations and pressure from some Sri Lankan stakeholders halted the signing of the agreement. The CEPA is expected to provide Sri Lanka access to a fast expanding Indian economy with a rapidly growing middle class, encourage Indian FDI in services, provide greater access to technology, and a more regulated mechanism for the movement of workers. Although many cite the downside risks like higher competition for domestic service providers and the flooding of Indian professionals in to Sri Lanka, the CEPA makes provisions to address many of these concerns which are often misplaced. CEPA negotiations have been on a positive list approach where only specified sectors are liberalized and Indias offers to Sri Lanka has been much more extensive than that of Sri Lankas offers. With India pursuing stronger economic relations with the wider Asian region, closer economic integration with India would no doubt open doors of new opportunities for Sri Lanka. India has already signed Comprehensive Economic Cooperation Agreements (CECAs) with Singapore and South Korea, and a Trade in Goods Agreement with ASEAN (soon to be expanded to an FTA in services). India has also begun negotiations on an FTA with the Gulf Cooperation Council (GCC) and EU (European Union).

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