Conquering the Indian market

‘Conquering the Indian Market – Strategic Partnership for Policy Development and Action to Foster Regional Cooperation in South Asia’ was the theme of a collaborative workshop organised by Research and Information System for Developing Countries (New Delhi) and the Pathfinder Foundation.

The workshop was funded by the Asian Development Bank and is part of a major project being undertaken on strengthening economic cooperation in South Asia, which is the least integrated region in the world. The research undertaken under the project is being presented around the region and is intended to influence policy-making processes in South Asian Countries.

The Colombo Workshop focused on two themes:

1. Indo- Sri Lanka Free Trade Agreement (ISLFTA): Towards More Comprehensive Engagement; and

2. Regional Production Networks.

The workshop provided an opportunity to assess progress made under the ISLFTA a decade after its signing. Indo-Lanka trade has experienced a major boost from the date of implementation of the ISLFTA ($ 544 million in 1999 to $ 3,368 million in 2008).

In addition, there has been significant diversification, with the number of products traded between the two countries increasing significantly over the decade. The share of Indo-Lanka trade in world trade has also improved.

There is clear evidence that Sri Lanka has benefited significantly form ISLFTA, even after excluding the unfortunate experiences related to Indian investors arbitraging on tariff differentials on copper and vanaspati oil.

Sri Lanka’s exports increased substantially in value and the number of items also rose threefold during the first decade of the FTA. Imports from India to Sri Lanka rose even more sharply. It is, however, noteworthy that while over 70% of the increase in Sri Lanka’s exports to India benefited from the preferential access provided by the FTA (i.e. India’s positive list) over 70% of the rise in Indian exports involved items on Sri Lanka’s negative list (i.e. they did not benefit from the FTA).

This means that while Sri Lankan exporters benefited greatly from the preferential access provided by the ISLFTA, Indian exporters largely entered Sri Lankan market because they were internationally competitive. The rise in Indian imports has, therefore, had the added benefit of lowering costs for Sri Lankan producers and consumers.

The findings presented at this workshop also indicate that Sri Lanka could benefit from a pruning of the negative lists. There are 22 products on the Indian negative list where Sri Lanka has export potential. India has 6 such products on Sri Lanka’s negative list.

The research also revealed that the margin of preference available under the ISLFTA has been eroded, in recent years, due to unilateral tariff liberalisation. It is now argued that liberalisation in services and cooperation in investment are urgent needs to maintain the momentum in Indo-Lanka trade growth. This can be done by moving to the next platform, such as a comprehensive economic partnership agreement.

A paper on ‘Trade in Services’ presented at the workshop found that the proposed CEPA services agreement followed many of the WTO GATS principles and adopted a positive list, request-offer approach.

It argued that this approach has given both countries a great deal of flexibility in making commitments. Furthermore, the paper pointed out that, like the existing FTA in goods, the services agreement fully recognised the asymmetry of the two economies. As a result, much less than full reciprocity is expected of Sri Lanka.

The paper emphasised that compared to India, Sri Lanka’s draft offers in the services agreement are much more limited. Sri Lanka’s offers build upon what is already on the table at the WTO GATS negotiations and include a few additional sectors based on Sri Lanka’s service import needs.

A study conducted by Lanka Market Research Bureau (Pvt) Ltd. also highlighted a number of non-tariff barriers and trade facilitation issues that have been major constraints for Sri Lankan exporters seeking to penetrate Indian markets. A number of these have already been overcome through negotiations between the two countries. There were others that still need to be addressed.

The second theme discussed at the workshop was ‘Regional Production Networks’. The research undertaken has focused on capturing maximum value in production chains within the region. An objective was to identify areas where the countries in the region could “cooperate to compete”.

Case studies were presented on the tea industry in Sri Lanka as well as onion and potato production in India. A key issue that emerged in the discussion was the potential for developing Sri Lanka as a global hub for tea production, blending and branding.

Following the workshop, it is reported that the Pathfinder Foundation is seeking to follow-up through collaborative policy- oriented research on ways and means of Sri Lanka plugging into dynamic supply chains of Indian companies and multinationals operating there.