Indo - Lanka Economic Relations: Potential for A Transformative Leap Forward

A VIF-Pathfinder joint analysis​

Indo – Lanka economic relations are on the cusp of a transformative leap forward. Mr. 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. It is important that India is seen as an opportunity rather than a threat for the full potential of this historical moment to be realized.

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 capitalizing on this in power generation and grid connectivity as well as 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 going forward. Mr. Modi called for Sri Lanka to participate in India’s accelerated process. Greater dynamism in the Indian economy is likely to create opportunities for countries in the sub-region, including Sri Lanka.
• The ‘make-in-India’ strategy is likely to 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 both 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. Now better roads, ports and railways are creating more conducive conditions for supply chain driven growth in trade and investment between the two countries.

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

• The SWAP arrangement (400 mn) 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 as well as 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 utilization of an underperforming 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. This means that concerns regarding asymmetry between the two economies can be handled through negative / positive lists, safeguards against imports surges and differences in the speed of liberalization 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. Mr. 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 current 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; as well as being a large and rapidly growing market.

There is also a strong case for extending the current FTA to include services as this is the most competitive component of the Sri Lankan economy. Here again, 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 liberalize very few items beyond what is available under existing laws, such as the Board of Investment Act.

India already 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 both the quantity and quality of its hotel inventory as well as customized products, such as the Ramayana trail.

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

People – to –people contacts as well as business will benefit from India’s new liberalized visa regime for Sri Lankans which was announced by Mr. Modi during his visit to Sri Lanka and implemented on 14th April 2015.

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 foundations for a more prosperous neighbourhood that not only boosts its own development but also enables it to focus on its global agenda.

(This is first of a series of articles to be jointly authored by VIF and Pathfinder Foundation, Colombo on matters of mutual interest)

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Published Date: 4^th June 2015, Image Source: http://exploresrilanka.lk