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1. 3/22/2015 TheNews Weekly Magazine ­ Money Matters
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Monday, March 16, 2015, Jamadi ul Awwal 24, 1436 A.H Jang Online | Daily Jang | The News | Back issues
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Long path to forge ties
By Sourajit Aiyer
Apart from Bhutan, India hardly had sustained, progressive relations
with any other regional country in recent years. While it made inroads
with Sri Lanka, there were tenuous twists even in this relation. Sri
Lankans voted for a new President early this month. This vote does
matter to India, as it holds the promise of a more inclusive relationship ­
in geo­politics, trade and investments.
As former President Rajapaksa reeled under human­rights challenges
post the 2009 war, there was a gradual shift in his stance towards
China. This geo­political shift saw China funding several infrastructure
projects in Sri Lanka. A more worrisome finding was that Sri Lankan
soil was being used for Chinese military activity. Under the new
administration, India hopes the motivation for this geo­political shift
towards China might reduce.
The new President, Sirisena, announced in his manifesto that he aimed
to maintain equal relations with India and China, and was concerned about excessive indebtedness to any
specific foreign power. Sirisena’s Prime Minister, Wickremasinghe, also announced that they might relook at
the Chinese­funded port project due to environmental concerns. All in all, India hopes that China’s free­run in
the country may reduce and this might help balance the geo­political equation.
Apart from geo­politics, the other impact is related to economic ties – trade and investments. The expectation
is that the new President might bring back focus on economic development, a reason believed why Sri
Lanka’s south voted for him.
Since 2000, the India–Sri Lanka Free Trade Agreement (FTA) has worked to liberalize trade, including
transforming Sri Lanka’s exports from low­value primary products to value­added processed products. Sri
Lanka has moved from exporting only pepper, nuts, fruit, cloves, etc to value­added products like insulated
wires, cables, pneumatic tires, garments, ceramics, tableware, vegetable oils, copper products, furniture,
freezers, etc.
Imports from India largely include petroleum products, vehicles, sugar, cotton, pharmaceuticals, etc. However,
the challenge is that many items seeing high volumes fall in the FTA’s negative list of products, and hence, is
hardly influenced by it. While both sides have been working on the Comprehensive Economic Partnership
Agreement (CEPA), progress has been slow. The change in government is expected to usher in much­
needed momentum in this.
As the new administration is expected to work towards diversifying its exports, possible opportunities can
emerge for India. Exports have to be a thrust area for Sri Lanka, since the size of its domestic market is limited
– its population is only about 21 million, and the economy cannot achieve scale without global integration. Sri
Lanka’s export basket is currently highly concentrated to specific regions (USA, EU) and products (tea,
garments).
This impacted Lankan exports when the West saw a prolonged slowdown. Export diversification needs to be a
priority to make the country less vulnerable to shocks in specific areas. This thrust towards diversification
should bode well for India, in terms of broadening the overall scope of trade between India and Sri Lanka by
enhancing the list of competitive products. The FTA also placed quotas on tea and garments, which comprised
bulk of Sri Lanka’s export basket. The attempt now should be to maximize Sri Lanka’s exports in its areas of
core competencies, as well as reduce any non­tariff barriers. This would help India eke out maximum quotas
for its own exports, in return.
Investments (FDI) from India to Sri Lanka started with bus manufacturing in the 1980s to sectors like steel,
cement, vanaspati, copper, etc in the 1990s to services like telecom, banking, oil, tourism in the 2000s. India is
now amongst the largest investors in Sri Lanka. Sri Lankan companies have also invested in India, including
sectors like apparel, logistics, hospitality, etc.
Going forward, Sri Lanka would need investments to develop the new export sectors, to set up the production
facilities and supply­chains. Also, Sri Lanka does not possess the supply capacity to cater to the sizable Indian
market. Renewed focus on the economy should spell opportunities to invest into production in those specific
sectors. An option might be to promote Joint­Ventures between Indian and Sri Lankan companies with buy­
back arrangements.
Another challenge for low trade volumes has been that intra­industry integration between the two countries
has not grown much. Sri Lankan manufacturers have not been successful in creating vertical­integration with
Indian industries.
Infrastructure is another area of potential, especially in re­building projects. Apart from rail, power generation
and transmission, housing and construction, cement and water supply infrastructure also hold promise in Sri
Lanka. In water infrastructure alone, projects worth Rs 21,000 crore are expected to come up, as per Sri Lanka
National Water Supply and Drainage Board. The challenge here for Indian companies is access to cheap
funding.

2. 3/22/2015 TheNews Weekly Magazine ­ Money Matters
http://www.thenews.com.pk/newsmag/mag/detail_article.asp?magId=10&id=9982 2/2
This is where China has an edge. Apart from huge cash piles, China also has a better sovereign rating than
India. This means its cost of funding is more favourable than India. To help Indian companies, India has
extended a credit line of $1 billion to Sri Lanka through EXIM Bank for infra­projects. India also needs to play
its geographical proximity to its advantage, which can help reduce the cost of transporting key raw materials
and heavy equipment from India for projects there.
More Lankan students and patients are travelling to India each year, as they face supply constraints
domestically. While affluent Lankans generally travelled to the West, Australia or Singapore for education or
healthcare, India is emerging as a viable option for the middle­class Lankans.
India could do well to promote its medical tourism and higher­education facilities further in Sri Lanka,
including easing the access to such facilities. Tourism has also picked speed, following visa liberalization and
better connectivity. Sri Lankan Airlines already derives a significant chunk of its income from India, as does a
Lankan budget airline.
There is also potential in information technology. Lankan IT companies are already servicing Indian firms. Sri
Lanka is emerging as a feasible base for analytical work. Copal AMBA has invested in a centre in Colombo.
Wage­arbitrage can play a role in moving of IT services from India to Sri Lanka, just like it is moving IT services
from China to Vietnam (as Microsoft did). Wages in India are expected to increase higher relative to Sri Lanka,
and this might make Lankan IT services much more competitive. This includes investments from IT companies
looking to service the Indian market through lower­cost centres in Sri Lanka.
The writer is a free lancer based in India
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