Financial Times

Sri Lanka last week requested better market access into India, for local clothing and textiles at the 7th round of technical level negotiations between India and Sri Lanka on the proposed Comprehensive Economic Partnership Agreement (CEPA) held in Colombo.

At the discussions Sri Lanka submitted a proposal to improve market access for Sri Lankan textiles and clothing.

“Under this, Sri Lanka seeks duty free access for a number of pre-identified tariff lines in the HS chapters 61 and 62, without any restrictions in regard to fabric sourcing,” the Commerce Department said in a statement.

The proposal is expected to help Sri Lanka’s garment export industry get a foothold in the Indian clothing market. Under the Indo-Lanka free trade agreement, Sri Lanka can export 8 million pieces of apparel to India, with duty reductions of 75% and 100%, provided the items are made out of Indian fabric. But the need to use Indian fabric makes Sri Lankan garments uncompetitive against Indian garments.

The fabric requirement is so restrictive, a majority of garment exports to India from Sri Lanka, is happening outside the Free Trade Agreement and its duty concessions.

“Because of this restriction the preferential quota utilisation has been extremely low. It is below one percent.

So this is not a good situation. This means less than one percent of the garment exports to India from Sri Lanka has been able to go in at lower duty, although the facility is available for eight million pieces per year,” said Acting Director General of Commerce N.C Magedaragamage.

To improve the preferential quota usage and to pass on the benefits of the free trade agreement to the Sri Lankan garment sector, Sri Lanka has requested that India remove the Indian fabric requirement for at least a few identified garment items.

Some 60-odd clothing items have already been identified, in collaboration with the Joint Apparel Association Forum, for Indian consideration. These products, for the most part, are high value goods that will not get into price competition with Indian goods.

On textile exports Sri Lanka requested India to double the duty concession that is already available. “For textiles, the Sri Lankan side requested the Indian side to deepen the current tariff preference from 25% to 50%,” said the Commerce Department. “India has agreed to consider Sri Lanka’s request.

They will get back with their decision at the next round of CEPA talks,” said Magedaragamage.

At the moment Sri Lankan garments can only enter India through the ports of Mumbai, Nhava Sheva, Chennai, Kolkata and Cochin or the inland container depots of Tuglakabad and Bangalore.

The Commerce Department says they did not request for wider port access at this round of trade talks as the garment trade has not indicated a need for it.

However, the two countries did finalise an agreement on Avoidance of Double Taxation during the current round of talks.

“The agreement is about not taxing the profits of Sri Lankan or Indian companies, twice.

If they invest here they are taxable here. They must not be taxed again when they send their profits back to India,” said Magedaragamage.

India and Sri Lanka are also developing an investment agreement to encourage Indian investors to enter Sri Lanka and for Sri Lankan companies to invest in India. In the garment sector a few large local players like Brandix, MAS Holdings and Hirdaramani have already invested in India.

Even the kitchen sink

At the latest round of trade talks Sri Lanka requested that India suspend its recent decision to canalize vanaspati, bakery shortenings and margarine exports from Sri Lanka.

The Indian government took this decision after strong protests from the India vanaspati producers against the import of these goods from Sri Lanka, at zero duty under the Indo-Lanka free trade agreement.

Sri Lanka voluntarily limited vanaspati exports to a maximum of 250,000 metric tonnes per year, India later said that combined exports of both vanaspati and bakery shortenings should not exceed 100,000 MT per year. In June this year India decided to canalize all imports of vanaspati, bakery shortenings and margarine.

“As canalization erodes the investor confidence in regard to the future of the ISFTA (Indo-Sri Lanka Free Trade Agreement), Sri Lanka requested India to suspend the implementation of the canalization procedure and permit export of 250,000 MT of vanaspati and a separate (combined) quantity of 100,000 MT of bakery shortenings and margarine annually,” said the statement from the Commerce Department.

The two sides also took up the touchy subject of pepper.

India is trying to restrict duty free pepper imports from Sri Lanka on the grounds that it is hurting pepper farmers in India. However, Sri Lanka maintains that capping pepper exports would reduce benefits of the trade agreement to poor farmers in Sri Lanka.

The two countries will pick up the subject again as no agreement was reached.

Sri Lanka also brought up the threat to local manufacturers from increasing Indian imports of refrigerators and stainless steel kitchen sinks. If domestic manufactures face increased difficulties, Sri Lanka will seek formal consultations with Indian to introduce some remedial measures.

Meanwhile, India agreed to consider a request by Sri Lanka for preferential terms for Sri Lankan desiccated coconut. Although desiccated coconut is in India’s negative list and is not open for tariff concessions, India agreed to discuss this item under the CEPA.

“In response to Sri Lanka’s request on market access for Desiccated Coconut under the previous Bangkok Agreement rate of 30%, India stated that the maximum quantity that could be considered for this is 500 MT per year,” said the Commerce Department statement. The two sides will discuss this further at the next round of talks.

Taking into account another request from Sri Lanka, India will look into the possibility of relaxing rules of origin, on a product specific basis, for 560 items.
India also agreed to consider the possibility of recognising certificates issued by accredited laboratories in Sri Lanka, until an agreement on mutual recognition of product standards and certification procedures, is finalised.

To widen the trade in goods between the two countries, India and Sri Lanka will also identify what items each country will remove from the shelter of negative lists.