AKD and ETCA with India: Trap or opportunity?

ETCA is a way forward for Sri Lanka to harness the benefits of international trade for creating prosperity to Sri Lankans

Resurfacing ETCA in negotiations with India

According to the 34-point agreement which President Anura Kumara Dissanayake, AKD for short, had with Prime Minister Narendra Modi or simply Modi, the two countries have agreed to promote, among others, trade and investment between them1. There are three agreements that are strikingly prominent and promising. One is that they have agreed to continue discussion on economic and technological agreement, shortened as ETCA, which is now in an abortive state. Another is the direct use of Indian Rupee or INR and Sri Lanka Rupee or LKR for transactions thereby avoiding the intermediate exchange currency, the US dollar. The third is for India to invest in sectors that will increase Sri Lanka’s export potential. All these are interrelated and should naturally form the core of any ETCA to be negotiated.

AKD’s criticism of ETCA in 2016

But this is not an easy task for AKD, given that the political force behind him, namely, Janata Vimukthi Peramuna or JVP, had taken an anti-ETCA stand in the past2. Speaking at an anti-ETCA seminar hosted by JVP in January 2016, AKD, while appreciating the beneficial impact for Sri Lanka from globalised economic relations with other countries, is reported to have objected to the proposed ETCA with India. He had pronounced at this seminar: “Our opposition depends on whether such an agreement is advantageous to the country or not.”3 He is reported to have further elaborated on this point relating to ETCA with India: “There is a political gamble here. India is trying to intervene in politics in our country. Already, there are many RAW spies in Jaffna. Before our country is made a political play-ground India wants to gobble our economy. Already India has a monopoly in the vehicle, medicine and construction sectors. Already, they are controlling our economy. Through that they manipulate politics in our country. It is this political need that jumps out of Ranil’s mouth. We would never allow this agreement to be signed,”4.

AKD should not treat ETCA as a trap but an immense opportunity for Sri Lanka to get out of the current problems in the medium to long run. In that context, the previous ETCA should be expanded further by incorporating educational affiliations by local universities with those high-ranking Indian counterparts. It will pave way for Sri Lankan universities to improve the academic standards as well as research capabilities. India is expanding its investments heavily in technology and Sri Lanka should seek to harness benefits out of those tech advancements. Hence, AKD should immediately set to business by setting up a competent negotiation team to negotiate, finalise and implement ETCA as early as possible

Pragmatic AKD’s new view of ETCA

Eight years after this public denouncement of India and its ETCA, pragmatic AKD has realised that India is indeed a friend, not a rival, and a force to be reckoned with. The political transformation of a leader in this manner considering the best interest for his people is a salutary development. But to make this agreement a reality, AKD should now field a competent team from Sri Lanka to negotiate with their Indian counterparts on an equal footing so that those so-called dangerous components will not penetrate the final version of ETCA.

Praises and brickbats over new initiative

The announcement in the joint press statement drew praises as well as brickbats for AKD immediately. Ex-President Ranil Wickremesinghe who had made two abortive attempts at upgrading Indo-Sri Lanka Free Trade Agreement or ISLFTA to a comprehensive economic partnership agreement or CEPA in 2004 and rebranding the same as an economic and technological cooperation agreement or ETCA in 2017 had praised AKD for his bold stand on a new ETCA5. Meanwhile, those who had got their political training through hard JVP ideology have been up in arms against any attempt at rescuing ETCA by AKD. 

Former student leader Wasantha Mudalige who struggled against Wickremesinghe government has told a media briefing that if ETCA is allowed, about a half a million unemployed doctors from India may invade Sri Lanka drawing on its adverse consequences6. Critics are reported to have informed a national newspaper that the proposed move will adversely affect the country’s small and medium enterprises and its services sector, implying that both these sectors are still unable to compete with more advanced Indian counterparts7. 

Taking cue from the critics, foreign minister Vijitha Herath is said to have denied that Sri Lanka has either signed or implemented an ETCA with India8. This is a ‘move for neutralising political opponents’, but it does not augur well for the country intending to enter into an important trade and investment agreement with another country. It seems that AKD’s political backers, namely, National People’s Power or NPP, is buying time.

Indo-Sri Lanka trade relations in the past

Sri Lanka and India being close neighbours, it is natural that both these nations should have a vibrant trade relation with each other. In early days, merchants from Far East visited South Indian ports to buy export goods from Sri Lanka9. But during the latter part of the first millennium, this entrepot trade shifted from south Indian ports to ports in Sri Lanka making it an important trading centre along the East-West marine route10. Sri Lankan numismatist, Osmund Bopearachchi has established through archaeological findings the presence of Sri Lankan traders in South India and Tamil traders in Sri Lanka11. 

Hence, historical evidence has revealed that, as in under trade agreements, it has been a two-way traffic and not trade from India to Sri Lanka alone or vice versa. Both the previous CEPA and ETCA had elaboratively identified these goods to be traded between the two countries under duty-free conditions. But this list may need further updating today and it is the responsibility of the ETCA negotiators from each country to make a hard negotiation of same.

Promising outcome of ISLFTA

Sri Lanka has only a four-and-a-half-decade experience of trade with India under trade agreements. The first Indo-Sri Lanka Free Trade Agreement or ISLFTA, signed in December 1998, was in effect since January 2000. This trade agreement covers only the visible merchandise goods and not services. But why should Sri Lanka go for a free trade agreement with India when the global trade has become almost free with the average global tariff rate has fallen to 2% by 2022? Several reasons. 

The global trade as a share of the world gross domestic product or GDP has increased from 20% in 2000 to 29% in 2022. But Sri Lanka’s share of exports in the world’s GDP has declined by about 38% during this period and it has remained even less than 0.1% over these years. In contrast, India’s share has increased by about 176% from 0.7% to 1.8% during this period12. 

Given this perilous state, Sri Lanka should naturally jump the bandwagon of India and seek to harness the positive outcomes that would emanate from that relationship. What this means is that though the global tariff rates have declined, Sri Lanka had not been able to benefit from it by competing independently with its competitors. Hence, the support which it can marshal from a dynamic and expanding nation like India is to be utilised fully by developing bilateral trade relations.

Sri Lanka should naturally jump the bandwagon of India and seek to harness the positive outcomes that would emanate from that relationship. What this means is that though the global tariff rates have declined, Sri Lanka had not been able to benefit from it by competing independently with its competitors. Hence, the support which it can marshal from a dynamic and expanding nation like India is to be utilised fully by developing bilateral trade relations

Trading with individuals and not countries

The purpose of trade agreements is to promote trade, both imports and exports. It will therefore enable the two agreeing nations to exchange the surplus goods, while filling shortages at zero or preferential tariff rates. This is true for ISLFTA too. But there are two objections to bilateral trade relations. One relates to the big-small country syndrome like India is big and Sri Lanka is small and, therefore the two countries cannot do trading on an equal footing. This objection is based on unfounded logic since trade takes place not with countries but with individuals or firms. If the big-small logic is valid, a small nation like Singapore can never have trade relations with a giant like USA. But Singapore does trade with USA well because the firms which do trading are guided not by the size but by the quality, price, and the mutual satisfaction.

Protection of domestic industries through a negative list

The other objection relates to the superior competitive advantage which one party may have over the other. In the case of ISLFTA, India is viewed as an economy with higher competitive advantage over those in Sri Lanka. Hence, Indian competition is feared by Sri Lankan counterparts because they, still being infants in business, cannot successfully compete with Indian products. As a result, it is feared that Indian goods will flood the market displacing Sri Lankan producers. This fear has an element of validity, but it had been successfully addressed in ISLFTA by having a list of goods which do not come within the agreement. This list, known as negative list, is longer in the case of Indian goods coming to Sri Lanka containing 1,180 goods and shorter in the case of Sri Lankan goods going to India covering only 429 goods13. This negative list does not enjoy tariff relief and, hence, should be traded under normal trading conditions. 

According to EDB, on average, about 70% of Sri Lanka’s exports to India during 2000-13 had been made under ISLFTA, while Indian products coming to Sri Lanka under the agreement had been only 17%14. Hence, the fear that ISLFTA has caused a free flow of Indian goods to Sri Lanka is not warranted. These negative lists were introduced to ISLFTA to protect domestic industries and thereby allay the fears of local producers. However, an economic analyst has found that the list has negatively contributed to the growth of the protected industries harnessing both the comparative and competitive advantages and preventing both countries to get the maximum benefit from trade liberalisation initiative15. What is suggested here is that countries should expose themselves to free trade arrangements without prohibitive strings attached to them.

India’s signing of trade agreements with all the countries

It is in this background that both India and Sri Lanka planned to graduate themselves to the next stage of economic relations by commencing negotiations for a wider trade agreement in the style of a comprehensive economic partnership in early 2000s. These negotiations produced a basic document for sanctioning by both countries by 2004. However, the change in the Government in Sri Lanka aborted that attempt. CEPA has been India’s style of developing economic relations with the rest of the world which it says is being done with all the countries in the world. So far India has signed comprehensive or enhanced trade partnership agreements with UAE, Australia, Canada, Israel, UK, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, South Africa, Botswana, Lesotho, Swaziland, Namibia, Japan, South Korea, Singapore, Malaysia, Thailand, Nepal, Bhutan, Mauritius, covering the entire world16. Sri Lanka remaining outside this net has been a loser in the trade.

There are two objections to bilateral trade relations. One relates to the big-small country syndrome like India is big and Sri Lanka is small and, therefore the two countries cannot do trading on an equal footing. This objection is based on unfounded logic since trade takes place not with countries but with individuals or firms. If the big-small logic is valid, a small nation like Singapore can never have trade relations with a giant like USA. But Singapore does trade with USA well because the firms which do trading are guided not by the size but by the quality, price, and the mutual satisfaction

Rebranding of CEPA as ETCA in 2015

The Ranil Wickremesinghe Government of 2015-9 sought to correct the situation by rebranding the previous CEPA as an economic and technological cooperation agreement or ETCA in 2015. When there was growing opposition to ETCA, I clarified the position in a five-part article series in this column17. I argued in this series that the wrong perception about ISLFTA has been misconceived since the outcome has been for the country’s benefit. The Government should place the ETCA plan before the people so that the critics can be argued out in intellectual forums and not in streets. The fear that Indian professionals in IT, Law, Medicine, and Engineering will flood Sri Lanka is not based on actual inflows but on the fear to face competition. 

The Government should break the silence on the entire ETCA affair and subject itself to review by people, a good practice under the democratic economic governance. Sri Lanka should link its products to global markets through supply chains developed with Indian counterparts. Sri Lanka will benefit by opening its services sector, especially, education, healthcare, and ICT, to Indian partners. ETCA is a way forward for Sri Lanka to harness the benefits of international trade for creating prosperity to Sri Lankans.

ETCA not a trap but an opportunity

It is this aborted ETCA which has resurfaced in the joint statement by the Indian and Sri Lankan leaders after they met in December 2024. In my view, AKD should not treat ETCA as a trap but an immense opportunity for Sri Lanka to get out of the current problems in the medium to long run. In that context, the previous ETCA should be expanded further by incorporating educational affiliations by local universities with those high-ranking Indian counterparts. It will pave way for Sri Lankan universities to improve the academic standards as well as research capabilities. India is expanding its investments heavily in technology and Sri Lanka should seek to harness benefits out of those tech advancements. Hence, AKD should immediately set to business by setting up a competent negotiation team to negotiate, finalise and implement ETCA as early as possible.

Footnotes:

1https://mfa.gov.lk/india-sri-lanka-joint-statement/ 

2https://www.jvpsrilanka.com/english/jvp-would-not-allow-ranil-to-subdue-mass-struggles-with-his-arrogance/ 

3Ibid. 

4Ibid.

5https://www.ft.lk/front-page/Ranil-praises-AKD-for-advancing-ETCA-with-India/44-770633 

6https://www.thecolombopost.org/2024/12/5-lakh-indian-doctors-to-sri-lanka-with-etca-agreement/ 

7https://www.sundaytimes.lk/241222/business-times/indo-lanka-etca-talks-revived-after-presidents-indian-visit-581107.html 

8https://srilankamirror.com/news/vijitha-clarifies-govts-stance-on-etca/ 

9De Silva, K M, 2005, A History of Sri Lanka, Vijitha Yapa, Colombo p 45.

10Siriweera, W I, 1994, A Study of the Economic History of Pre-modern Sri Lanka, Vikas, Delhi, p 133. 

11https://books.openedition.org/ifp/7871#:~:text=Tamil%20Nadu%20and%20Sri%20Lanka,a%20different%20and%20important%20context. 

12https://ourworldindata.org/grapher/share-of-global-merchandise-exports?tab=table&time=earliest..latest&country=Africa+%28UN%29~Asia+%28UN%29~Europe+%28UN%29~Northern+America+%28UN%29~Latin+America+and+the+Caribbean+%28UN%29~Developing+regions~Least+Developed+Countries+%28LDCs%29~Northern+Africa+%28UN%29~Sub-Saharan+Africa+%28UN%29~Oceania+%28UN%29~LKA~IND 

13EDB, 2014, Indo-Sri Lanka Free Trade Agreement, unpublished mimeograph, Colombo.

14Ibid. p 5.

15Perera, M S S, 2008, Impact of the Indo-Lanka Free Trade Agreement on the Sri Lankan Economy: A Computable General Equilibrium Analysis, South Asia Economic Journal, 9:1, p 1-50.

16https://pib.gov.in/Pressreleaseshare.aspx?PRID=1781867 

17They can be accessed at: https://www.ft.lk/columns/sri-lanka-faces-crucial-tests-ahead-with-growing-opposition-to-etca/4-525181 ; https://www.ft.lk/columns/etca-is-not-cepa-in-all-respects-but-it-should-be-made-public-to-allay-fears/4-526676 ; https://www.ft.lk/columns/management-of-economic-policy-3-sri-lanka-should-tap-global-unbundling-opportunities-of-services-und/4-527941 ; https://www.ft.lk/columns/padeniya-chinthana-on-etca-govt-should-fight-it-in-intellectual-forums-not-in-the-streets/4-529777 ; and https://www.ft.lk/columns/etca-or-any-other-policy-is-destined-to-fail-if-not-properly-managed/4-530899 .

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)