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Mainstream, Vol XLVII, No 32, July 25, 2009

Indo-Sri Lankan Economic Cooperation: Contemporary Scenario

Monday 27 July 2009, by Bharti Chhibber


With the end of civil war in Sri Lanka and the defeat of the LTTE, a frictional chapter in Indo- Sri Lankan history has come to an end. It is time for India and Sri Lanka to start a new chapter with renewed vigour and vitality by rigorous cooperation especially in the economic realm.

At a time when the whole world is reeling under economic recession Sri Lanka is no exception. In fact the economic crisis will have a far deeper impact on the war-torn economy of Lanka. The economy in Sri Lanka was expanding rapidly but the conflict took its toll on it seriously affecting the Sri Lankan tourism industry. Large scale inflation added to the problem. Sri Lanka is a trade-dependent country and has a highly concentrated trade basket. The EU and US account for 62 per cent of its total exports comprising mainly of garments, gems and tea. With rising unemployment and low consumption in the US and EU markets the demand for Sri Lankan products has gone down. War in Sri Lanka has seriously affected the region’s two vital economic sectors—fishing and agriculture. Production of food like rice, vegetables and fruit has also been adversely affected.

Apart from reconstructing Tamil homeland and rehabilitating the massive refugee population with the help of the international community, especially India, the island state should also take steps to address the political concerns of the minorities as promised and begin a counciliatory process. The government has promised a political package to address the grievances of the Tamil community and resettle the displaced people in the north.

India’s Sri Lankan policy rests on commitment to the island’s sovereignty through a federal structure, consistent with the sensitivity of the Tamil folk in India. There is also greater pressure for Indian participation in the peace process through economic means in the interest of human security. The escalation of conflict between the Sri Lankan Army and the LTTE saw a large number of refugees coming into Tamil Nadu. Maximum refugees, approximately 70 per cent, came from Trincomalee, while the remainder came from Mannar and Jaffna. This put pressure on the refugee camps in the vicinity of Rameswaram. The Indian Government had expressed its concerns about the humanitarian crisis in the country. Sri Lanka has pointed out that it will facilitate the return of nearly one lakh of its Tamil citizens, now living in India as refugees, once it completes the resettlement of the displaced people in the northern areas of the country.

Now with the LTTE issue out of the way India can look for a greater engagement in Sri Lanka. Over the past few years, China has stepped in as one of Colombo’s largest defence suppliers seeking and getting a valuable port, Hambantota, in the Indian Ocean. At a time when other states are making inroads into neighbouring Sri Lanka why should India not be at the forefront? For example the Norochcholai coal power plant is being built with Chinese assistance, as well as expressway from Colombo to the Katunayake airport and the construction of the Hambantota Port. The Sri Lankan Board of Investment (BoI) had also taken important steps to facilitate the needs of investors from China. The BoI has demarcated a separate zone for Chinese investors at Mirigama, established an investment promotion office in Shanghai and earmarked a special five-year visa for investors.

India has abiding interest and commitment to the domestic political stability and peace in Sri Lanka as the developments in Sri Lanka affect the peace and order situation in some of Indian States, particularly Tamil Nadu. On the economic front, for India, Sri Lanka is a small market and accounts for about two per cent of Indian exports and less than one per cent of Indian imports. India exports to Sri Lanka varieties of goods and services including transport equipment, cotton yarn, fabrics, readymade garments, iron and steel, machinery and instruments, sugar and wheat, drugs and pharmaceuticals, chemicals, glass and glassware, ceramics, cement and paper and wood products; and imports non-ferrous metals such as copper, spices, electronic goods, electrical machinery, scrap metal paper pulp and chemicals. Though in terms of total quantum, bilateral trade remains modest but it shall definitely grow.

The two countries have created a large legal framework to advance their cooperation: a free trade agreement; a double taxation avoidance agreement; and a series of bilateral agreements and understandings for cooperation in the areas of small-scale industries, agriculture, tourism, space and information technology and air travel facilities.


The Free Trade Agreement between India and Sri Lanka came into full existence from March 1, 2000. This FTA basically deals with the modalities of the duty free import of the goods manufactured in Sri Lanka. This provides opportunity for manufacturers from India to set up unit in Sri Lanka so that the goods produced in Sri Lanka can be brought to India duty free availing the exemption provided in the Free Trade Agreement. A free trade arrangement between India and Sri Lanka has promoted mutually beneficial bilateral trade and strengthened intra-regional economic cooperation. Under the agreement zero duty on around 1000 items has been provided by India except for those in the negative list. Domestic value-addition requirements have been kept at 35 per cent. If the raw material/inputs are sourced from each other’s country, this is further reduced to 25 per cent within the overall limit of 35 per cent.

With the introduction of FTA trade has grown rapidly between the two states. The FTA prompted a 257 per cent increase in bilateral trade between 2001 and 2004. Bilateral trade exceeded US $ 1.7 billion in 2004 and rose to US $ 2.025 billion in 2005. India is the 3rd largest destination for Sri Lankan exports. With FDI approvals of US $ 450 million, India is the 4th largest investor in Sri Lanka.

Indian Oil Corporation, Taj Hotels, Apollo Hospitals, Ambujas, Tatas and Ashok Leyland are among the prominent Indian companies operating in Sri Lanka. The recent escalation in conflict between the Sri Lankan Army and LTTE hurt exports of auto makers such as Ashok Leyland and Mahindra and Mahindra. The neighbouring state has been a key export destination for Indian firms. India’s auto exports to Sri Lanka in 2007-08, before the tensions mounted, had risen to $249.19 million, at least five times the $45.27 million figure of 2001-02, according to the Federation of Indian Chambers of Commerce and Industry. Similarly in the two-wheeler market, Indian brands have an edge over their Chinese rivals. With the end of the war the investment scenario for Sri Lanka will definitely improve.

No doubt the Free Trade Agreement between the two states is a significant step forward but a lot more needs to be done in near future to make it a real success story. In recent years the Indo-Sri Lankan economic relations have become a kind of model cooperation in the South Asian region. But there is scope for improvement. At present there are a large number of items in the negative lists as well as quantitative restrictions which can be done away with. Already the two states have concluded negotiations for the next step of economic integration by expediting the Comprehensive Economic Partnership Agreement. However, there are some practical difficulties which need to be sorted out. Tea and textiles are the major exports in both the countries; hence, the two countries often compete in the same market. But the global economic recession calls for further cooperation to offset its impact.

Already around 100 flights operate per week between the two states. India is also a significant partner in Sri Lanka’s development. About one-sixth of the total development credit granted by Government of India is made available to Sri Lanka for capital goods, consumer durables, consultancy services, food items and for purchase of petroleum products. India has also provided a US $31 million line of credit for purchase of three hundred thousand tonnes of wheat from India so as to enable Sri Lanka tide over its occasional food shortages. Besides, India has also taken up several educational and technical training programmes and projects in Sri Lanka. Under its bilateral aid programmes, India is also involved in building a Rs 25-crore, 150-bed general hospital at Hatton in Central Province, and establishment of a Rs 33-crore cancer centre in Colombo. Another line of credit was made available to Sri Lanka for post-tsunami rehabilitation of the coastal railway line. India’s greater involvement in development in Sri Lanka was further evident with a contract signed between the National Thermal Power Corporation (NTPC) and the Ceylon Electricity Board (CEB) for a joint venture power project in Trincomalee.

Reconstructing tourism industry would be crucial to uplift the Sri Lankan economy. Already the state had planned to work on Kalpitiya tourism project. The Kalpitiya Integrated Tourism Resort Development Project (KITRDP) in the Puttalam district, along the north western coast of the country offers 4000 acres in Kalpitiya which also include 514 small islands. The KITRDP is aimed at converting the venue to an up market luxury resort with theme parks, cable cars, golf courses, 4000 luxury villas, conference facilities and many other attractions. The project is expected to generate 15,000 direct employment opportunities. As the host government seeks foreign investment, foreign entrepreneurs including from India had shown interest to invest in the project.

Further, both the states undertook a feasibility study for a Rs 20 billion undersea power transmission link between India and Sri Lanka. The 200 km long submarine cable would enable India to export electricity to Sri Lanka and is likely to be set up with a capacity to wheel around 1000 MW of electricity. The link is likely to connect Madurai in Tamil Nadu and Anuradhapura in Sri Lanka’s North Central Province. This link will be a forward step in Indo-Sri Lankan relations. In South Asia there is tremendous potential for developing regional and sub-regional energy resources in an integrated manner and to strengthen regional cooperation in capacity development, technology transfer and trade in energy to meet regional energy requirements. However, usually domestic politics take its toll on such efforts.

Thus in the case of India and Sri Lanka there already exists a broad spectrum of mechanisms and institutions for bilateral cooperation; need is to revitalise and deepen economic relations between the two states. Apart from mutually beneficial interdependence that is evident from such cooperation, one must not forget that economic relations have a political significance also and can go a long way in building and cementing stable and peaceful relations.

Dr Bharti Chhibber teaches Political Science, University of Delhi.

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