Indo-Lanka FTA; misused and underused

Trade authorities here say Sri Lankan industries are not exploiting opportunities created through the Indo-Lanka free trade agreement (FTA). Although Sri Lankan businesses can export over 4,000 items to India duty free under the FTA, only about five items are traded in any significant volumes.

"Our businesses are not exerting themselves to find out how to make use of this opportunity. There are over 4,000 tariff lines which give duty free, quota free access to the Indian market. But so far only a very small number of items, other than the traditional exports which are of agricultural nature, are being exported in any big way," said Secretary to the Ministry of Trade, Dr K Ratnayake.

In fact, trade data shows that Sri Lanka's utilisation of the hard bargained Indo-Lanka FTA is dominated by only two items - vanaspati and copper products. In 2005 these two items accounted for almost 40% of the US$ 559 million exports to India under the FTA. The number one export in 2005 was the hydrogenated vegetable oil, vanaspati, to the value of US$ 120 million. Exports of copper products came second at US$ 78 million.

On top of this limited usage of the FTA, the trade authorities are also concerned about the below-expectation benefits accruing to Sri Lanka. For instance both vanaspati and copper exports are not generating the type of returns that were expected from the FTA. The Trade Ministry points out that the biggest FTA export, vanaspati, exploits a legal loophole to bypass Indian domestic laws, rather than increasing trade benefits.

"The investments are driven by Indian tariff increases, to bypass the tariffs. India put a tax of 80% on palm oil, the raw material for vanaspati. Sri Lanka does not charge a tax on palm oil. So some Indian manufacturers shifted factories to Sri Lanka, to export vanaspati into India without having to pay tax," said Dr Ratnayake. Therefore, the Indian government, concerned that the FTA could be misused to bypass Indian laws and policies, canalized vanaspati exports from Sri Lanka. India is also concerned that large volumes of duty free Sri Lankan vanaspati could hurt India manufacturers by putting them at a cost disadvantage - because manufacturers in India must still pay the Indian government taxes.

The Trade Ministry also says that the vanaspati investments in Sri Lanka do not provide substantial benefits to the Sri Lankan economy. As many of the companies are under the Board of Investment and some even employ Indian workers, Sri Lanka sees little in terms of tax revenues and only limited employment generation from vanaspati investments. Due to similar reasons, copper products exports too, are under stringent Indian scrutiny. Given these unforeseen developments the Trade Ministry says expanding the FTA into a comprehensive economic partnership agreement "requires greater scrutiny."

Currently only five items account for 51% of total exports to India using the FTA. In addition to vanaspati and copper, these items are aluminium products, worth US$ 40 million in 2005, intermediate pharmaceutical products worth US$ 30 million and exports of cloves of around US$ 20 million. Beyond this, very few Sri Lankan companies have ventured out to take on the booming Indian market. Given that the zero duty export opportunity is open to slightly over 4,000 items, the Trade Ministry says Sri Lankan businesses have so far made poor use of a large and growing market opportunity.

The Secretary General of the Ceylon Chamber of Commerce was not available for comment on the telephone on the trade response to the ministry's comments.