India-Sri Lanka Free Trade Agreement (ISFTA): A Comparison with

Transcription

International Journal of Accounting and Business Management (Online), Volume 2, Issue 1 (April 2014)
Research Paper
India-Sri Lanka Free Trade Agreement (ISFTA):
A Comparison with SAARC and SAFTA
A. A. M. Nufile
A. N. Ahmed
Senior Lecturer
South Eastern University of Sri Lanka
nufile68@seu.ac.lk
Senior Lecturer
ahmed312@yahoo.com
M. B. M. Ismail
Senior Lecturer
mbmismail1974@gmail.com
Abstract
This paper examined the advantage of India-Sri Lanka Free Trade Agreement using the gravity
model of trade. Panel data for the period 1980-2013 across two countries was employed in the
analysis. The coefficients obtained from the model were used to identify the trade potential of both
countries worldwide as well as within specific SAARC region. The results expose that Sri Lanka’s
existing trade potential with India was high. Therefore, Sri Lanka should explore ways and means
to further improve its trade relations with India and also concentrate more on new kinds of
products to increase its market share as far as possible. However, the volume of trade of Sri Lanka
with India was higher than that of Pakistan and other member countries, in the face of the existing
significant potentials. The main obstacles to this end were the political, ethnic and socio-economic
tensions with India, which was the key player of SAARC. Moreover, Sri Lanka and India have faced
several major challenges such as diminishing marginal returns to economic integration,
importance of non-tariff barriers to trade, homogeneous products and pressure for abolishing
socio-political and economic relationship by Tamil Nadu leadership in India. It was pointed out
that Sri Lankan entrepreneurs and exporters need to be deviated attention from traditional export
markets to industrial markets in India. In addition to that, post-ISFTA scenario explained that Sri
Lanka’s trade dependency ratios have increased compared with pre-ISFTA scenario. This is
evidenced from continuously increased post-ISFTA trade deficit. Hence, Sri Lanka should
encourage investors from India to invest in Sri Lanka. Finally, the bilateral agreement was
compared with SAARC and SAFTA and it was found that due to bilateral agreement there was a
potential market seen for new products. In addition, a few important measures that should be
taken in order to sustain the trade with India were pointed out in this study.
Keywords: SAARC, SAPTA/SAFTA, ISFTA and Gravity Model
1.
Introduction
It has been a long felt need of both the less developed and developing countries in South
Asia Region to expand their domestic markets for sustaining economic growth based on Gross
Domestic Product (GDP) to ensure per capita income to balance the expenditure and capital
accumulation based on their international resources from Agriculture, Industries, Commerce,
Technologies and etc. forming the major sector of economy for improving a quality of human life
and focusing on social, cultural and political development until the 1980s to have signed the
South Asian Association for Regional Co-operation (SAARC) and expanding the facilities of the
local market by means of trade of goods and services with other countries of South Asia. After
that the regional integration of intra-regional trade had been mooted since middle 1990s. The
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South Asian Preferential Trade Arrangement (SAPTA) was started on 8th December 1995 and
South Asian Free Trade Area (SAFTA) was signed by the Heads of the regional countries on 12th
January 2004. The leaders of the SAARC nations expected that SAFTA would work well and
fulfilled its goals since 2006 at the 12th conference of SAARC in Pakistan.
However, the SAPTA and SAFTA had covered very small and limited products lines of
trade among the member countries. Meanwhile, two major countries of SAARC have come to
dominate other members on intra-regional trade activities. India and Pakistan are not in a
position to favour other smaller countries of the SAARC region. At the same time, severe
competition was started among them due to military and political situation in the region.
Therefore, Sri Lanka looked at bilateralism with greater benefits and concerned with the
joint trade and economic cooperation that have emerged within the region. The Department of
Commerce, Sri Lanka also functions as the important point for joint commissions on trade and
economic cooperation which have been established under trade agreements. The Sri Lankan
government representatives from the ministerial units functioning as the Department of
Commerce (DOC) are entrusted with the responsibilities for co-ordination and conduct of the
following Joint Commission/Committees held at Ministerial level.
The Sri Lanka has opened and signed agreement with Bangladesh, China, Egypt, Iran, Iraq,
Maldives, Pakistan, Romania, Thailand, and India. However, the India-Sri Lanka bilateral
agreement and Pakistan-Sri Lanka bilateral agreement are very effective and influence with line
of intra-regional trade activities among the partner countries. The first agreement was signed
with India on 28th December 1998 and implemented on 1st March 2000. The second agreement
was signed with Pakistan which came into effect in June 2005. These three nations are the
important partner countries of SAARC. Free trade agreements have provided Sri Lanka with
important market access to its main trading partners in the region, the reason for it is that three
member countries of SAARC have entered into bilateral trade agreements and highlight the
significance of SAFTA for trading purposes also.
Twenty eight years have completed since the commencement of the SAARC, fourteen
years have passed since the beginning of the India-Sri Lanka Free Trade Agreement (ISFTA),
and seven years have completed since the start of the South Asian Free Trade Area (SAFTA) and
it is now possible to have a better idea of the insinuations of all agreements. Meanwhile, total
values show the strong benefits for Sri Lanka in terms of export growth and reduce of negative
imbalances of net trade as well. However, it is to be pointed out that a few of the studies carried
out by the experts and researchers show that the actual picture is less encouraging (Deshal de
Mel, 2008). He further pointed out that the ISFTA has had limited impacts on trade. Thus the
efficacy of the agreement and lessons for other countries can be considered on this point of
view.
2.
Significance of the Study
Today it has come to face some problems regarding the issue of some (both India and
Lanka) fishermen allegedly poaching in Sri Lanka’s as well as India’s territorial waters and this
subject is watchful for the nations in SAARC in particular to the need to positively re-fashion
their ties with regional benefits. Because of the currently boiling issue is providing a somewhat
divisive problem in Indo-Lanka political relations as well as mutual trade. Lynn Ockersz (2014)
has also pointed out that, “the majority of India’s neighbours have differences with her on
matters, such as cross-border terror, geographical and territorial boundaries, sharing of river
waters, perceived interferences in domestic politics and imbalances in bilateral trade”.
Therefore, it is necessary to evaluate the importance and the magnitudes of the changes
brought about in the Sri Lankan economic benefits through the Indian Ocean. Trade- creation,
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trade-expansion and trade-diversion resulted by the regional trade have considerably changed
the size and quantity of Sri Lankan economy in international trade as well as bilateral trade.
Consequently these changes have influenced the Sri Lankan economic growth necessary for
economic, energy and social development. From this point of view this research has become
necessary, because economics and politics are interlinked and that divide the people of the
country.
3.
Research Problem of the Study
As the international trade has become prominent in the activities of trade liberalization it
has opened the windows of arrangement as it became inevitable for all countries to prosper.
Almost all countries have engaged themselves in international trade with one face on one side
and with other face in intra-regional trade as well as bilateral.
In this context, despite several international crisis and issues, Sri Lanka also has opened
her economy with the objectives of building up its economy with the system of regional
integration, mutual co-operation and expanding market activities with the goods and services in
order to commercialize the country for the poor and rich community to live with social and
ethnic cohesion. However, Sri Lanka has not gained the net trade benefits after the trade
liberalization except 1978. Of the problems faced by Sri Lanka from the point of such trade
liberalization most important question posed is as to how long these free trade is going to last.
Based on the above main research question, this study seeks to find out the answer for the
two research questions regarding Sri Lanka’s current bilateral trade with India. First, whether
within the border of bilateralism which takes to the given level of trade barriers or negative list
between two countries are good or bad for Sri Lanka? Second, whether after taking into account
the possible effects of trade agreement the trend is good or bad for Sri Lanka? To have access
these to two questions three objectives and four hypotheses are framed.
4.
Objectives of the Study
This paper is to examine the structure of bilateral agreement and evaluate the impacts of
agreement on trade between Sri Lanka and India and postmortem of the progress of the SAARC
and SAFTA. It also attempts to make a formal analysis of research questions by using a
regression model of bilateral trade to examine whether Sri Lanka’s bilateral trade is lower or
higher than what is predicted with the economic model. On this background this research has
three objectives aiming to find out mainly the trade relationship of Sri Lanka with India after the
trade agreement and the achievement of net trade advantages by Sri Lanka.
The following are the specific objectives of the study after having observed the benefits of
SAARC, SAPTA/SAFTA, and ISFTA.
1. To identify the changes taken place with the result of Sri Lanka trade relationship
with India since the inception of trade liberalization to 2013.
2. To analyse the outcome of the trade-expansion based on the implementation of
trade agreement.
3. To compare the overall performance of SAARC with SAPTA/SAFTA after the
liberalization.
5.
Hypotheses of the Study
The following hypotheses have been framed as test-parameters to assess and analyses the
benefits derived from the Sri Lankan bilateral trade with India after the trade liberalization.
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1. If the GDP is bigger; there will be more opportunity for more trade between the two
countries; so it is expected a positive sign for the coefficient of GDP.
2. Per capita GDP provides a good proxy for the level of development and
infrastructures essential to conduct trade. So it is expected a positive sign for the
coefficient of PCGDP variable.
3. TR/GDP variable indicates the level of openness and dependency ratio of the
country. The more open the country is the more would be the trade activities. So it is
expected a positive sign for this variable.
4. Bilateral trade agreement has created trade expansion and reduced trade deficit in
Sri Lanka.
5. India is rated as a ‘mostly unfree’ and Sri Lanka is rated as a ‘moderating free’,
therefore, economic freedoms are more created on bilateral trade between Sri Lanka
and India.
6.
Scope of the Study
The evolution of the existing trade pattern and trade system will provide a valuable
insight, which will greatly facilitate trade and economic development in Sri Lanka. This
investigation will help planners and policy makers to understand the system clearly in a better
way and to utilize the different possible and profitable international trade and market more
efficiently for successful practices and profits.
This study mainly focuses on the intra-regional trade and bilateral trade pattern in Sri
Lanka which is founded on the idealism of trade liberalization after 1977 and investigates the
level of trade creation and horizon of the trade expansion of Sri Lankan’ foreign trade and
factors required policy wise attention to improve the trade extension and quality. This
investigation based on quantitative research carried out in the area of SAARC and SAFTA which
has narrowed down the scope of the broader of concepts of liberalization and regionalization in
the Indian Ocean.
7.
Literature Review of the Study
This study is an attempt to bring out some empirical works on intra-regional trade among
the member countries. Especially, it is tried to estimate Sri Lanka’s trade relationship with her
partner nations which are members of SAARC and SAFTA. Since the inception of SAARC many
research have been carried out with reference to economic welfare effect among member
countries. These researches have all tried to shed light on whether the possibilities of intraregional trade extension of SAARC and SAPTA have occurred as expected. And also, intraregional trade, investment and the trends of economic co-operation were taken into
consideration.
These researches were carried out by Waqif and Chatterjee (1993), Ahuja and Battachaya
(1993), Reddy (1993), Shrestha (1993), Thapa (1993), Wanigaratne (1993), and Yapa (1993)
belong to the primary stage. These researches reveal the advantages obtained by the cooperation in the fields of agriculture, energy, manufacture, and services through the inflow of
investment with intra-regional trade. Furthermore, the limitation of economic and
organizational constrains, found among intra-regional economic co-operation of SAARC have
been compared with that of European Union. Besides, it has been pointed out in these
researches that, through regional arrangement, welfare increase will occur and it is inevitable
that a SAARC member country can continue to maintain the trade relationship with a third
country.
And also, it has been emphasized in these researches that, the factors like less growth of
GDP, over growth of population and the trend of rapid increase of poverty which are obstacles
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for economic development of SAARC countries will be eliminated. There by the relationship
between SAARC regional development sectors is said to be very essential. Deep concern have
been expressed in the summary of regional trade extension and the following trade contents
like trade policies, tariff, loan arrangement, financial exports, information, shares, marketing,
transport and so on. However, it is suggested to avoid fully liberalization followed by Western
countries and to impose carefully partial liberalization in selected sectors.
All the above primary researches were related to Pre-SAPTA. All other Post-SAPTA
researches carried out by Hassan, Mehanna and Basher (2001), Henegedara (2003),
Dharmapriya (2003), Nori and Patnaik (2003), Frankel (1997), Frankel and Wei (1997) explain
the extension of intra-regional trade, interested bilateral trade arrangement among member
countries and the effect resulted by trade-creation, trade-diversion and trade deficit. Generally,
the SAARC nations produced more likely homogenous goods as well as their market is also
perfectly competitive. The first generation theory assumes constant returns to scale works in
the production side. In this background the following studies consist of comparative and
descriptive analysis especially on SAARC as well as SAFTA.
Sirinivasan and Canonero (1993 a, 1993 b), Sirinivasan (1994) maintain that, South Asian
countries could obtain innumerable benefits through their regional co-operation and regional
trade extension. The research conclusion reached by them states that, small economy of SAARC
countries have contributed remarkably to the intra-regional trade development. That is to say
that, comparatively in small economy trade extension has taken place more than big economy.
But, according to Das (2001) big economic countries like India and Pakistan did not have a
considerable trade-creation effect.
Some researchers have tried to focus on the special aspects of the relationship inside and
outside the region taking as example certain prioritized countries. Among such researches
carried out by Henegedara (2003), Dharmapriya (2003) and Dheerasinge (2003) have done
with reference to Sri Lanka are remarkable. These researchers have utilized descriptive analysis
and comparative analysis in their researches. They have tried to assess the general trend of Sri
Lanka’s foreign trade and the trade extension resulted by the economic policy changes taken
place after 1997. And also, they have tried to explain the different progressive stages of the
trade relationship Sri Lanka had with SAARC member countries. They have identified the
changes in Sri Lankan imports and exports structures with India. It has been proved that, as a
result of the growth in the manufacturing sector, proportional increase of goods has also
occurred in export. At the same time, the ratio of agricultural goods in export has decreased.
And also, they have pointed out that the considerable changes have taken place in Sri Lanka’s
per capita income, consumption level, production, labour movement and technology etc.
Hassan, Mehanna and Basher (2001) have done their researches using gravity model.
They declare through the arrangement of regional trades among the SAARC members neither
the trade-creation nor the trade-diversion effects has occurred in the SAARC countries. They
found that liberalization of trade in SAARC countries offers significant benefits for all the
countries in the region. The results show that the variables of GDP, GDP Per capita and distance
to be highly significant at the 1% level but BORDER not similar.
Hirantha (2003) has done a gravity base model analysis regarding to SAPTA and SAFTA.
He has used the gravity model analysis to examine the progress of SAPTA using panel data cross
sectional data for the period of 1996-2002. His gravity model results explained that there is a
significant trade creation effects under SAPTA and finds no facts of trade diversion effect with
the respect of the world.
Darmapriya (2003) has shown the Indo-Lanka Free Trade Agreement and its
consequences of favourable changes to Sri Lanka. In his research comparative study of the pre
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and the post situations of the Indo-Lanka Free Trade Agreement, comparative advantage
analysis of findings has been obtained. Furthermore, he has pointed out that, since the
implementation of this agreement, the Sri Lankan trade deficit with India, had decreased
considerably and the advantages to Sri Lanka gained by the trade extension. And also, he
explained the multi-nature of the export with India. He focused on the next five years, that 30%
of growth in Sri Lankan exports could be expected and more interest of the investors would
increase considerably and he further says if Indo-Lanka Bridge completed there will be
possibilities of Sri Lankan trade extension taking place to other SAARC member countries
through India.
Mehta and Kumar (2004) argued that starting of SAFTA was a land mark in the evolution
of SAARC which was formed in 1995. SAARC would benefit if its cooperation would expand
beyond formal trade. That means SAARC should convert from political regionalism into intraregional trade bloc. Rahman (2003) gave evidence on their gravity model, elimination of trade
barriers and structural rigidities originating from adverse political relationship could lead to
substantial increase in intra-SAARC trade.
Mehta and Kumar (2004) argued that starting of SAFTA was a land mark in the evolution
of SAARC which was formed in 1995. SAARC would benefit if its cooperation would expand
beyond formal trade. That means SAARC should convert from political regionalism into intraregional trade bloc. A research document can be produced by Dhungel (2004) points out actual
progress and achievement in implementation of SAARC agendas and considered very
insignificant. Jhamb (2006) also supported Dhungel’s view and argued that it was in the primary
stage due to the weak political relationship and a general environment of distrust between
member countries. However, Rahman et.al (2006) gave evidence on their gravity model,
elimination of trade barriers and structural rigidities originating from adverse political
relationship that could lead to substantial increase in intra-SAARC trade.
Pitigala (2005) found that the trade structures that changed the South Asian countries
might not assist a rapid increase in intra-regional trade due to weak trading relations among the
SAARC nations. The above view was supported by Baysan et.al (2006). They concluded that the
economic matters for SAFTA were comparatively weak. This region is small and tiny based on
economically, geographically and size of GDP compared with other region like ASEAN, NAFTA
and EFTA can be viewed.
Other computable general equilibrium analysis was done by Perera (2008) regarding
Impact of the Indo-Lanka free trade agreement on the Sri Lankan economy, he attempts to
capture a comparative analysis of impacts of Indo-Lanka full trade liberalization phenomena
and Indo-Lanka free trade agreement including negative list. To achieve the above objective he
has used and compiled list for bilateral exports and imports and tariff inclusive of other flows
for 87 nations and 57 tradable goods of the world. He performs simulation using Global Trade
Analysis Project (GTAP model version 6) to examine the economic effects on intra-regional
trade under the assumptions of producers employed constant return to scale and constant
technology.
His estimated results explained that Sri Lanka’s GDP increases by 0.15 % while the same
for India is 0.06 %. According to this point, the small economy like Sri Lanka has much benefited
by trade liberalization. Further said, the household utilities in Sri Lanka increases by 0.17 % as
against India’s 0.01% and also real wages of skilled and unskilled labour increase higher in Sri
Lanka. However, the trade balances are not in favour for Sri Lanka. That means that presently
Sri Lanka’s imports from India have an increasing trend under the Indo-Lanka bilateral
agreement. On the other hand, Sri Lanka’s terms of trade become positive. Because, the cheapest
intermediate goods can be imported from India and final goods can be exported to other
countries. Meanwhile, under the negative list scenario given benefits to Sri Lanka as GDP
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increased by 0.23 % while India received by only 0.01 %. The trade liberalization situation also
suggested both countries would benefits from this FTA. But this gain variety related with size of
economy and allocated efficiency. The estimated welfare gain for Sri Lanka is US $ 23.49 million
while it is US $ 11.24 under the situation of negative list scenario.
Suresh Moktan (2008) has employed the gravity equation to examine the intra-regional
trade exports and trade-creation and trade-diversion effects of trade agreements in SAARC
nations. His investigation of gravity model has included a pooled panel data for the period of
1980-2005. The regressions are designed to evaluate economic effects as follows, preSAARC/pre-SAPTA and post-SAARC /post-SAPTA. According to the study, the sign of the
coefficients for the member countries’ GDPs, Populations, Distance, Common border, Common
currency, Island and Port are as expected, and are statically significant. The impact of
Devaluation of Real Exchange is found to be positive, however largely insignificant. And the
variable of landlocked has a significant positive impact on the intra-trade.
Regional trade would lead to trade-creation and trade –diversion effect through intraregional preferential arrangement or agreement. However, a few study of intra-regional trade
patterns on SAARC done by scholars proved that evidence of trade complementarities in South
Asia is mixed. Recently Ali and Talukder (2009) pointed out that these are based on Das (2007).
Another recent study done by Newfarmer and Pierola (2007) found that the SAFTA fell short of
their possible advantages because of product exemptions, special priority for selected
productions and negative list or rules for point of origin.
The above research covers four themes; Lanka-SAARC intra-regional trade relations;
Lanka- ASEAN trade relations; Lanka-NAFTA trade relations and Lanka-EC trade relationship.
All these are considered as economic relationship and regional initiative which means that the
FTA dilemma (Tuli Sinha 2009). Razeen Sally and Rahul Sen (2005) worked titled ‘Whither
Trade Policies in South East Asia: the wider Asian and global context’, this paper wind up for
ASEAN countries said that trade liberalization and regularity reforms are as an engine of
development.
Tuli Sinha (2010) evaluates ASEAN and SAARC as two key regional stages for motivating
economic cooperation in South Asia and South East Asia. This study attempts to find the size of
AFTA has exceeded SAFTA in terms of trade gains and value addition to the overall regional
economic growth. An investigation exposes that the formation of AFTA has led to a remarkable
expansion of intra-ASEAN trade since its beginning. The results indicate the intra-ASEAN trade
has been always increasing over the years from US $ 81.98 billion in 1993. Even today (in 2010),
the intra-ASEAN trade includes nearly 25 % of the total external trade in comparison with just 2
% of the intra-SAARC trade. He has moreover concluded, despite initial benefits, SAFTA has not
really achieved much in terms of internal or external trade. He observed India is the only
country well-off conditions of intra-regional trade in South Asia. It means that, India’s total
imports have been sharply increased from Pakistan, Sri Lanka, Bhutan and Bangladesh.
However, India keep up a positive trade balance with other than SAARC member countries. And
her trade surplus has risen from US $ 2.3 billion to US $ 5.0 billion in 2009.
Chandrima Sikdar (2010) study was to examine the economic gains with Indo-Sri Lanka
bilateral trade agreement. The practical realization of the model considers trade in 33 sectors
equal in the input-output tables of the two economies. She assumed that since the FTA, trade
between India and Sri Lanka has grown rapidly. Bilateral trade, statistics show a, raise of US $
706 million in 2001 to US $ 3.3 billion in 2007. India’s export to Sri Lanka has increased from US
$ 638 million in 2001 to US $ 2744 million in 2007. Even export from Sri Lanka to India is raised
US $ 68 million in 2001 to US $ 515 million. Her model concluded the total gains to India on tea
and garments are now 32.3 % as compared with other goods (32.9%). She found that the gain is
lowered even more from 81.8 percent to 79 percent.
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8.
Methodology of the Study
In order to conduct of the study, methodology is handled under the following sub section
and gravity analysis model is applied with variables such as GDP, Per capita GDP, Openness
ratio/ trade dependency ratio, bilateral dependency ratio, and Exchange rate.
8.1
Sampling design
The research results were obtained through Minitab software using gravity model. The
gravity model research is carried out on Bangladesh, by Rahman (2003). He has analysed
the bilateral trade of the Bangladesh’s trade with its major trading partners and also,
Hirantha (2003) has used gravity model for his research on intra-regional trade of SAARC
countries. They have explained the trade-diversion and trade-creation effect by their
researches.
Our research model is based on gravity model as follows;
Where:
Tij
PCGDPij
TRi/GDPi
TRij/GDPj
IFij
ERij
IEFij
= Total bilateral trade (US $) between Sri Lanka and India at t time
= per capita GDP (US $) of Sri Lanka and India at t time
=Trade-GDP ratio [openness (US $)] of Sri Lanka at t time
= Total bilateral trade-GDP ratio [openness (US $)] of Sri Lanka and India
at t time
= Inflation (GDP Deflator) annual percentage of Sri Lanka and India at t
time
= Nominal Exchange Rate of Sri Lanka and India j at t time
= Index of Economic Freedom of Sri Lanka and India at t time
= is error term
0, 1, 2, 3, 4, 5, 6 = parameters; and t = time period
9.
India-Sri Lanka Free Trade
9.1
Background to the Agreement:
Economic links between India and Sri Lanka have a long history with recorded
commercial links going as far as back as the 4th century (High Commission of India, 2013:7).
India-Sri Lanka free trade agreement is a significant symbol of the impressments of bilateral
concept among them. It indicates the major role of the intra-regional trade activities and as well
as bilateral activities roles to be played by them as member countries of SAARC. A bilateral
trade agreement initially was signed between the two countries in 1961 in order to facilitate
trade. Although, the concept of strengthening bilateral trade collaboration between them was
tracked once more in the early 1990s.
However, both these two countries give the impression of the partner countries apart
from SAARC as that tried to enjoyed benefits from different ideologies, including the
materialization of a regional plan in the form of the SAPTA in 1995 and the decision to convert
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into the SAFTA in 1996. Though, the SAPTA process allowed only very limited liberalization,
while the transition to SAFTA moved rather slowly (High Commission of India, 2013:8). This is
the reason why Sri Lanka to have obtained significant markets access in India through ISFTA. Sri
Lanka was keen in doing the same thing with other major economies in the South Asian region
through bilateral negotiation.
In ISFTA Article -I the objectives of the agreements with relevant requirements of GATT,
1994 is clearly defined. The objectives of this free trade agreement is to promote through the
expansion of trade the harmonious development of the economic relations between India and
Sri Lanka; to provide fair conditions of competition for trade between India and Sri Lanka; in the
implementation of this agreement the contracting parties shall pay due regard to the principle
of reciprocity; and to contribute in this way, by the removal of barriers to trade, to the
harmonious development and expansion of world trade
9.2
Scope of the Agreement:
According to the agreement, it covers only trade in goods. It provides all the provisions
either; duty free access (zero duty) or; duty preferences for products that are not under the
negative list. It has favourable account for the irregularity between the two countries and is
more positive for Sri Lanka which has a larger negative list and longest tariff liberalization
periods observed in the process of analysis with selected variables with gravity model.
According to the table No: 1 India is given 4227 duty free items with immediate zero duty
while Sri Lanka is only offered about 2802 goods with immediate zero duty. This is favourable
for Sri Lanka in the Indian market access to over 4000 duty free items offered for initially. India
provides duty free access to many products categories in almost HS chapters, with the exception
of HS chapter 46 (Manufactures of straw, of plaiting materials, basket-ware and wickerwork)
and HS chapters 50-63 covering textiles and textiles articles. Sri Lanka also offers 100 per cent
duty free to India on a majority of product categories, excluding the following: dairy products;
live trees and other plants; coffee, tea, mate and spices; prepared foodstuffs; manufactures of
straw; basket-ware and wicker work; footwear and its parts.
Duty concession
Duty Free Items
India’s commitments
(number of products)
4227
Immediate zero duty by March 2000 (1351)
Zero duty by March 2003
(2870)
[cut of 50%, 75%, and 100%]
Negative List
431
Source: Hand Book on the ISFTA (2013:11), and Deshal de Mel (2008)
Sri Lanka’s commitments
(number of products)
2802
Immediate zero duty by March 2000 (319)
(889)
[cut of 50%, 75%, and 100%]
(2802)
[cut of 35%, 75%, and 100%]
1220
Table No: 1 India’s and Sri Lanka’s Commitments
The negative lists have indicated that facts that same goods were produced and exported
by both countries. The Table no: 1 clearly shows that total number (1651) of items are listed by
the contracting parties with lines of negative list which never finished without duty free or nonbarriers into the both country’s markets. The negative items listed by India are such as coconut,
beer, wine, garment items, rubber products, dairy products, plastic products, and etc. In case of
Sri Lanka it has listed as a negative list of items such as agricultural/livestock products, rubber
products, paper products, electrical items, etc. However, India has offered quotas on exports of
tea, textiles and garments.
The Table no: 1 explained that duty concessions of tariff quotas are also favourable to Sri
Lanka. For example, Sri Lanka can export 50 per cent tariff preferences on five tea items subject
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to a quota 15 million kg to India annually. Garments covering 50 per cent tariff concessions for
223 products on a fixed basis, subject to annual restriction of 8 million pieces. These 8 million
pieces would be allowed at zero duty with no Indian made fabric as input. India has reduced
155 textile ranks through a 30 per cent reduction of its sensitive list under SAFTA.
10.
Trade relationship between India and Sri Lanka
The study of intra-regional trade indicates that every contracting party gets benefits
equally. Meanwhile, any two countries tried to make joint efforts towards the line of intraregional trade or bilateral activities with the hope to get mutual benefits. Before the bilateral
agreement is brought into practice one country has been experiencing deficit or negative
balance of payment even that trade deficit, for long. Reason for that is that those two countries
will join and try to share benefits among them through integration or mutual agreement. Under
this situation, it is examined that Sri Lanka’s trade relationship with India will never touch in
favour of Sri Lanka even for single year after 1980. The Table No: 2 clearly show that the
balance of trade was not favourable to Sri Lanka (negative) in all years since 1980.
Year
Exports
(from Sri
Lanka)
Ave.
growth
rate %
Imports
(from India)
Ave. growth
rate %
1980
34.5
96.7
1985
6.20
-50.4
74.7
-33.0
1990
20.0
100
118
78.8
1995
32.0
33.3
469
16.1
2000
58.03
19.4
600.14
17.3
2005
566.41
44.7
1835.43
27.5
2010
437.27
46.6
3647.65
91.4
2011*
286.50
-34.5
2170.80
-40.5
2012*
302.00
5.4
2260.60
4.1
2013*
317.50
5.1
2350.40
4.0
Sources: IMF (1987-2011), ‘Direction of Trade Statistics Year Book’. *: Projected
Balance of
Trade (BOT)
Sri Lanka’s
Total Trade
% in
Sri Lanka’s
total trade
-62.4
-68.5
-98.0
-437
-542.1
-1269.0
-3210.4
-1884.3
-1958.6
-2032.9
3067.8
4530.0
12146.8
17135.7
18936.5
22201.8
17291.1
19348.0
19969.0
20590.0
8.61
5.03
5.78
11.14
10.77
31.57
36.12
25.03
25.28
25.51
Table No: 2 Sri Lanka- India bilateral trades (1980-2013), Values in US $ Million
According to the table No: 2 and Annex No: 1, the average percentage of bilateral trade on
Sri Lanka’s total trade was 15.34 per annum. Sri Lanka’s average exports to India were only 148
M US $ but Sri Lanka’s average imports from India was 929 M US $ annually. Another point of
view is that the balance of trade of Post-liberalization period is -781 M US $ per year. It was
increased by 2 fold even post-ISFTA (-1581M US $). It seemed to indicate that the bilateral
activities have been not favourable to Sri Lanka. Even though the average percentage of bilateral
trade on Sri Lanka’s total trade was 25.1 after ISFTA. Sri Lanka’s average exports were only
324.4 M US $ to India but Sri Lanka’s average imports from India is 1905 M US $ annually after
ISFTA. It seemed to show again that the bilateral activities have been not favour to Sri Lanka. In
fact, Sri Lanka’s dependency ratio has increases as highly. For example, the dependency ratio
(Import: Exports) was 0.16 annually for post- trade liberalization period (1980-2013). It has
been increased to 0.18 per annum for post- ISFTA. Because of the dependency ratio of preISFTA period (1980-1999) it has only 0.14 per year. However, the projected period (20112013) was declined as 0.13 annually (see also graph no: 2).
ISSN: 2289-4519
Page 44
Million US $
Exports (from Sri Lanka)
Imports (from India)
Based on table no: 2
Percentage
Graph No: 1 Sri Lanka- India Bilateral Trade (1980-2013)
Ave. growth rate % of Exports
Ave. growth rate % of Imports
Based on table no: 2
Graph No: 2 Sri Lanka- India Bilateral Trade Growth Rate (1980-2013)
ISSN: 2289-4519
Page 45
11.
Results of Gravity Model
11.1 Economic Impact of Trade-liberalization
In the Table No: 3 Sri Lanka-India bilateral trade activities are explained with the
analytical indicators of variables through per capita income, trade to GDP ratios or openness
intra-trade to GDP ratios, inflation, exchange rate, and economic freedom for the periods of
1980-2013 (P=0.01). Hence, per capita income, intra-regional trade, Exchange rate and
economic freedom are meaningful influences into the bilateral trade however, economic
freedom index negatively influence the bilateral trade. Clearly explained that the table no: 3,
when per capita income of both countries increased by 1 US $ the bilateral trade had been
increased by 1.2354 M US $. Meanwhile, the trade ratio of the GDP is changed by 1 unit the Sri
Lanka’s bilateral trade with India it is increased by 895013 US $. It means that, there is trade
expansion among them if both countries removed the trade barriers simultaneously.
Therefore, both countries have necessarily removed barriers all together. That is a good
example for mutual free trade of these two countries that has led to trade-expansion among the
partner countries. Further, the exchange rate has positively impacted on Sri Lanka’s bilateral
trade. This is other evidence that both countries in chorus devaluation of their currency did
support the trade-expansion. However, the Index of Economic freedom has negatively impacted
on Sri Lanka’s bilateral trade. This is other evidence that Sri Lanka is a moderating free (69.960.0) country but India still mostly unfree (59.9-50.0) country this kind of situation did not
support the trade-expansion. Regression result shows that the exchange rate depreciation was
by 1 percent the bilateral trade was increased by 1,855,392 US $. But the overall economic
freedom has increased by 1 percent the bilateral activity decreases by 3,478 US $.
11.2 Economic Impact of SAARC
Other necessary test was to see whether the SAARC could be able to change Sri Lanka’s
bilateral trade activities with India after the formation of SAARC. According to the Table No: 3
Sri Lanka-India bilateral trade is explained through per capita income, trade to GDP ratios or
openness intra-trade to GDP ratios, inflation, exchange rate, and economic freedom for the
periods of 1985-2013 (P=0.01). Hence, per capita income, intra-regional trade, Exchange rate
and Economic freedom are meaningful influences on the bilateral trade at 1 percentage of
confidence level but economic freedom is negatively influencing on the bilateral trade. It is
clearly explained that the table no: 3, when per capita income of both countries are increased by
1 US $ the bilateral trade are also increased by 1.4468 M US $. Relatively per capita income
slightly high (0.2114) influencing on bilateral activity of post-SAARC scenario.
Although, the reason for 1 unit of change in the intra-regional trade ratio in the GDP the
bilateral trade between Sri Lanka and India also has increased by 818,822 US $. This evidence
explained that intra-regional trade had been decreased after the formation of SAARC by 76,191
US $. Therefore, both countries have carefully removed barriers simultaneously under the
regional trading bloc. Nevertheless, the exchange rate has positively impacted on Sri Lanka’s
bilateral trade. This is other evidence that Sri Lanka and India are competitive devaluation of
their currency did support the trade-expansion for both countries. Regression result shows that
the exchange rate depreciation is by 1 percent, the bilateral trade is increased by 2,541,368 US
$. After the formation of SAARC, the exchange rate would help more to move up the bilateral
activities among them. However, the Index of Economic freedom has negatively impacted on Sri
Lanka’s bilateral trade even post-SAARC scenario. Sri Lanka is a moderating free (69.9-60.0)
country but India still mostly unfree (59.9-50.0) country. This did not support the tradeexpansion. Regression result shows that the overall economic freedom has increased by 1
ISSN: 2289-4519
Page 46
percent, the bilateral activity decreases by 4,237 US $. This unfair situation be compared with
the post-liberalization period tiny extra (759 US $).
11.3 Economic Impact of SAPTA/SAFTA
Further necessary test done was that the free trade could change Sri Lanka’s bilateral
trade activities with India after the formation of SAPTA or establishment of SAFTA. According to
the Table No: 3 Sri Lanka-India bilateral trade is explained through the selected variables
namely per capita income, trade to GDP ratios or openness intra-trade to GDP ratios, inflation,
exchange rate, and economic freedom for the periods of 1995-2013 (P=0.01). Hence, openness
ratio in the GDP, intra-regional trade to GDP, inflation, and exchange rate are found having
meaningful influences in the bilateral trade at 1 percentage of confidence level but unilateral
openness and inflation are negatively found having influences in the bilateral trade. According
to the table No: 3, however, relatively per capita income did not influence the bilateral activity
of post-SAPTA/SAFTA scenario. Meanwhile, the trade ratio of the GDP was changed by 1 unit
the Sri Lanka’s bilateral trade with India was decreased by 3.4961 M US $. It means that, there is
not a trade-expansion occurred among them if both countries removed furthermore trade and
non-trade barriers mutually by 1 percent. Although, the reason for 1 unit of change in the intraregional trade ratio in the GDP the bilateral trade between Sri Lanka and India has increased by
0.26963 M US $. This evidence explained that intra-regional trade had been increased after the
formation of SAPTA/SAFTA. Therefore, both countries have carefully removed all unnecessary
barriers simultaneously under the regional trading bloc. The inflation has hit the bilateral trade
activity (reduced) by 0.004016 M US $. However, the exchange rate is positively impacted on Sri
Lanka’s bilateral trade. This is other evidence that Sri Lanka and India are observed in
competitive devaluation of their currency supported to promote trade-expansion for both
countries. Regression result shows that when the exchange rate is declined by 1 percent then
the bilateral trade has increased by 1.5503 M US $.
11.4 Economic Impact of the ISFTA
The regression test shows that the free trade system could be able to change Sri Lanka’s
bilateral trade activities with India after India-Sri Lanka Free Trade Agreement. According to
the Table No: 3 Sri Lanka-India bilateral trade could be explained with the aids of variables
through per capita income, trade to GDP ratios or openness intra-trade to GDP ratios, inflation,
exchange rate, and economic freedom for the periods of 2000-2013 (P=0.01). Hence, unilateral
openness ratio in the GDP and intra-regional trade are showing meaningful influences in the
bilateral trade at 1 percentage of confidence level but unilateral openness ratio in the GDP is
negatively influencing the bilateral trade. The table no: 3 clearly explain that, when the
unilateral openness by Sri Lanka is changed by 1 percent the bilateral trade could be decreased
by 1.43180 M US $. Relatively this declination is more helpful to Sri Lanka because negative
impact has highly reduced by 2.0643 M US $ into bilateral trade. However, the bilateral trade
ratio of the GDP is changed by 1 unit the Sri Lanka’s bilateral trade with India is increased by
1.2462 M US $. It means that, there is trade-expansion occurred among them if both countries
have added more goods and services in the negative list. Although, the reason for 1 unit of
change in the intra-regional trade ratio in the GDP the bilateral trade between Sri Lanka and
India has increased by 0.97657 M US $ compared to post-SAFTA. This figure explained that
intra-regional trade has increased after the free trade agreement. Therefore, both countries
carefully have reduced their negative list simultaneously under the trade negotiation. It would
be more useful to both countries and Sri Lanka particularly. However, the exchange rate,
inflation, and economic freedom have not impacted on Sri Lanka’s bilateral trade after the
ISFTA.
12.
Summary and Conclusions
ISSN: 2289-4519
Page 47
In this paper, the bilateral trade agreement that Sri Lanka has signed with India, is
analysed as to the structure of the respective agreement and the trade impact of this. It was
found that whilst the agreement has provided significant market entrance to Sri Lanka full
advantage has not been taken to this market right to utilize due to certain reasons. However, Sri
Lanka enjoys duty free market access on 4,227 products to Indian market, while India, gained
duty free access on 2,802 products in the Sri Lankan market. The aim of a free trade agreement
is to reduce barriers, to facilitate exchange so that trade can grow as a result of specialization,
division of labor, and most importantly via comparative advantage (Masood 2010).
Sri Lanka's trade with India changed considerably following the implementation of the
FTA. During the period 1980-2000 immediately preceding the agreement, average annual
exports from Sri Lanka to India was USS $ 25.3 million while average imports were US$ 262
million. Evidence to that India was an important source of imports even pre-free trade
agreement. By 2005, Sri Lanka’s exports to India reached a peak of US$ 566.4 million, a tenfold
increase compared to 2000, and stood at US$ 519 million in 2011 (Handbook, 2013:12).
Further, this study conclude that the average annual exports from Sri Lanka to India were
US$ 345 million while average imports were US$ 2006 million after 2000. This has explained
that imports are highly motivated compared to exports by the ISFTA. However, in general, the
trade gap between the two countries narrowly reduces through the ISFTA. Furthermore,
regression result has shown that trade-expansion has occurred significantly for both countries
but Sri Lanka’s trade deficits were found highly with India. The negative list has shown big
restrictions for Sri Lanka and has remained certain barriers to trade despite the existence of the
free trade agreements and these barriers are indicated in this paper. In addition to this, it was
pointed out that Sri Lankan producers and exporters need to be more open to diversifying from
traditional export markets in India.
Influence Factors on Sri Lanka -India Bilateral Trade: A comparison with SAARC, SAFTA
and ISFTA
Predictor/ Variables
Coefficient
Constant
PC GDPijt
TRit/GDPit
TRijt/GDPit
IFijt
ERijt
IEFijt
Constant
Log (PC GDPijt)
Log (TRit/GDPit)
Log (TRijt/GDPit)
Log (IFijt)
Log (ERijt)
Log (IEFijt)
“t” Value
Constant
PC GDPijt
TRit/GDPit
TRijt/GDPit
IFijt
ERijt
IEFijt
Constant
Log (PC GDPijt)
Log (TRit/GDPit)
Log (TRijt/GDPit)
Log (IFijt)
ISSN: 2289-4519
Post-Liberalization
(1980-2013)
Post- SAARC
(1985-2013)
PostSAPTA/SAFTA
(1995-2013)
4434217
1.2354
3330999
895013
-2403
1855392
-3478
3301831
1.4468
6711415
818822
4
2541368
-4237
11.222
-0.00000035
-3.4961
0.26963
-0.004016
1.5503
0.0004289
Post- ISFTA
(2000-2013)
20.807
-0.02476
-1.4318
1.2462
0.04319
0.4263
-1.0510
0.81
4.12
0.92
8.59
-0.58
2.00
2.08
0.54
3.64
1.28
6.05
0.00
2.10
-2.15
7.04
-1.15
-4.94
5.60
-1.81
3.53
1.00
2.65
-0.60
-8.16
9.67
0.45
Page 48
Log (ERijt)
Log (IEFijt)
Probability Value
Constant
PC GDPijt
TRit/GDPit
TRijt/GDPit
IFijt
ERijt
IEFijt
Constant
Log (PC GDPijt)
Log (TRit/GDPit)
Log (TRijt/GDPit)
Log (IFijt)
Log (ERijt)
Log (IEFijt)
“R2(Adj)” %
“F” Value
“P” Value
“DW” statistic
“VIF”
Estimated
0.53
-1.11
0.427
0.000
0.367
0.000
0.566
0.055
0.048
92.5
68.77
0.000
2.09445
1.6-4.5
0.594
0.001
0.215
0.000
0.999
0.047
0.043
92.0
54.72
0.000
2.12211
1.1-7.0
0.000
0.273
0.000
0.000
0.095
0.004
0.339
97.7
127.78
0.000
2.84452
1.4-8.8
0.033
0.566
0.000
0.000
0.669
0.615
0.305
99.0
214.34
0.000
1.53051
1.2-9.6
Table No: 3 Regression Results (1980-2013)
Anyhow, Sri Lanka will have to improve the quality of its exports products and minimize
the cost of production to permit it to compete well with others in India market. However, Sri
Lanka’s trade value with India is still high compared to other countries. Therefore, economic
development is the vital path for Sri Lanka and its product goods and services to be in the line of
increase are always necessary to ensure more capital accumulation and income for GDP and GNI
to stabilize these situation local product should be consumed more by the local peoples at low
price based on low-cost of product (Nufile, Santhirasegaram and Ismail 2013 a, b, c).
Nufile et.al (2013 a, b, c) claims that the launch of SAFTA in 2006 has caused the
significant changes in custom tariffs and reduced trade-related barriers for the goods and
services which have also been taken under ISFTA. Hence, sometime ISFTA is felt pointless.
Therefore, there is still opportunity for further trade liberalization between them. Trade
barriers and sensitive list need to be reduced between Sri Lanka and India. It will help them
mutually to get benefits rather than partiality.
In these ways it is clear that the India-Sri Lanka Free Trade Agreement is important, to
improve the socio-economic, culture, political, science and technical field of natural as well as
individual activities. Naturally, it is necessary to increase its income for the development of
nation on short-term, long-term and medium-terms of progress based on the financial position.
In order to, for any development, peaceful and harmonious environment is essential between
India and Sri Lanka.
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ISSN: 2289-4519
Page 51
Appendix: I
Year
Sri Lanka (01)
Exports
(To India)
Imports
(From
India)
India (02)
Exports (To
Sri Lanka)
Imports
(From
Sri Lanka)
Total bilateral
Trade
[3=(01+02)]
Sri Lanka’s
Total Trade
% of bilateral
on Sri Lanka’s
Total Trade
1980
34.3
96.7
101
32
264
3067.8
8.61
1981
30.0
76.7
65
56
227.7
2929.5
7.77
1982
21.2
72.9
66
19
179.1
2769.4
6.47
1983
27.7
115.4
105
31
279.1
2848.6
9.80
1984
12.5
111.5
101
14
239
3281.2
7.28
1985
06.2
74.7
68
07
155.9
3096.7
5.03
1986
11.8
79.2
72
13
176
2992.1
5.88
1987
6.2
83.5
91
64
244.7
3390.7
7.22
1988
19.0
91.0
109
73
292
3740.0
7.81
1989
10.0
66.0
117
11
204
3627.0
5.62
1990
20.0
118
102
22
262
4530.0
5.78
1991
13.0
220
175
12
420
5048.0
8.32
1992
12.0
307
231
14
564
5961.0
9.46
1993
20.0
343
247
17
627
6864.0
9.13
1994
24.0
404
334
31
793
7431.0
10.67
1995
32.0
469
383
39
923
8282.0
11.14
1996
43.0
562
458
35
1098
8829.0
12.44
1997
44.0
560
468
42
1114
9911.0
11.24
1998
38.0
539
488
40
1105
11083.3
9.97
1999
48.62
511.60
484
43
1087.22
10877.0
10.00
2000
58.03
600.14
605
45
1308.17
12146.8
10.77
2001
71.99
601.48
547
79
1299.47
10453.2
12.43
2002
170.57
832.07
848
85
1935.64
10702.7
18.09
2003
245.05
1076.16
1220
169
2710.21
11805.2
22.96
2004
391.51
1439.15
1345
322
3497.66
13757.0
25.42
2005
566.41
1835.43
1872
528
4801.84
15209.9
31.57
2006
489.46
2172.85
2198
497
5357.31
17135.7
31.26
2007
515.28
2610.14
2683
591
6399.42
18936.5
33.79
2008
392.04
3168.56
2484
420
6464.6
22201.8
29.12
2009
298.16
1906.16
1733
328
4265.32
17291.1
24.67
2010
437.22
3647.65
3316
481
7881.87
21818.7
36.12
2011*
286.50
2170.80
2038
348.1
4843.40
19348.0
25.03
2012*
302.00
2260.60
2122
363.2
5047.80
19969.0
25.28
2013*
317.50
2350.40
2206
378.3
5252.20
20590.0
25.51
Sources: IMF (1987-2011), ‘Direction of Trade Statistics Year Book’. *: Projected [S L’s Exports to India = - 30884 + 15.5 Year; S L’s
Imports from India = - 178417 + 89.8 Year; India’s Exports to SL = - 166886 + 84.0 Year; India’s Imports from SL = - 30018 + 15.1 Year;
SL’s Total Trade = - 1229483 + 621 Year;]
Table: Sri Lanka- India Bilateral Trades (1980-2013), Values in US $ Million
ISSN: 2289-4519
Page 52

India-Sri Lanka Free Trade Agreement (ISFTA): A Comparison with

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