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The Diplomatic Column

3rd January 1999

Hiccups almost scuttled Indo-Lanka free trade pact

By our Diplomatic Editor

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The mbitious Indo-Lanka free trade pact is now a reality. But as the tough as nails bureaucrats from the two sides battled over a million nitty gritties in New Delhi, few outside expected them to thrash out an agreement ahead of the departure of the visiting Sri Lankan President, Mrs. Chandrika Kumaratunga, as the hiccups at the stage were one too many.

A cautious foreign office in Colombo has wisely played down the treaty signing aspect of the President's official visit to India, and said that the primary purpose of the visit was to lay the foundation stone of a Buddhist pilgrim centre in New Delhi. But the hush hush manner in which the pact was being negotiated had raised the hackles of a section of the intelligentsia in Sri Lanka. Doubts were raised about the wisdom of concluding a free trade pact without an adequate public debate. And to top it all, President Kumaratunga's disdain for punctuality was not exactly winning friends in the corridors of power in New Delhi.

A habitual late comer in her native Lanka, Mrs. Kumaratunga was true to type in India, too, where she unabashedly kept the highest in the land cooling their heels for hours on end. According to The Pioneer daily of Dec. 31 Mrs. Kumaratunga has kept the Indian Prime Minister waiting for half an hour at the opening of the New Buddhist pilgrim centre. The Indian Home(Interior) Minister, Mr K.L. Advani, and Vice President, Mr. Krishna Kant, could not meet her at all, as she did not keep her appointment. Mr. Advani, who is also a key figure in the ruling BJP, tried to meet the visiting President twice, but in vain. The first appointment was fixed for 6 pm on Monday , but when she was not available at the time, it was rescheduled for 11 am on Tuesday. When Mr. Advani went at the appointed hour to the Rashtrapthi Bhawan, where the Lankan President was staying, he was told that she had extended her meeting with the Congress(I) President, Mrs. Sonia Gandhi. An embarrassed Advani has no option but to get back to his office.

The extended meeting with Rajiv Gandhi's widow and India's prospective Prime Minister, has also resulted in an hour's delay in the President's appearance at a luncheon meeting with 250 of India's top entrepreneurs at the Taj Palace hotel. On the day of her arrival, she had kept 400 top dignitaries waiting for over an hour at a dinner hosted by the Sri Lankan High Commissioner, Mr. Mangala Moonesinghe. The very first ceremony in New Delhi, the formal welcome with a guard of honour and a 21 gun salute at the Rashtrapthi Bhawan, was delayed because she came late. The unpunctual President left the Indian Establishment acutely embarrassed and "red faced", The Pioneer said.

But all's well that ends well. The epoch making free trade pact was signed by the Sri Lankan President and the Indian Prime Minister, on schedule on Dec. 29 . Clearly, the Indian leaders and the bureaucracy were influenced by the need to build bridges with Sri Lanka for strategic reasons and allowed this consideration to over- ride the embarrassment caused by the Lankan President's capricious ways. Fortunately for the two countries, the personal chemistry between Mrs. Kumaratunga and Mr. Vajpayee remained intact and they, along with their foreign ministers, played a catalytic role by rescuing the negotiations from the mire that the punctilious bureaucrats had dragged them into.

As it turned out, the pact was a flexible one with adequate safeguards for Sri Lanka which has a legitimate fear of being gobbled up by the gargantuan Indian economy next door. Contrary to the popular impression, the Sri Lankan negotiators were neither oblivious to their country's vital interests nor were they being arm-twisted by their Indian counterparts. Each country was only interested in getting the best bargain. But both sides were also keen on signing an agreement, even if only an outline of it, fast, while President Chandrika Kumaratunga was in Delhi. "We cannot be defeated by detail," said the Indian Foreign Minster, Mr. Jaswant Singh, urging the negotiators not to get bogged down in a whole lot of small print.

Bare bone agreement

The Indian Express very rightly described the pact as a "bare bone" agreement. It is a statement of intent, which left many things to be decided later, albeit within specific time frames. The inclusion or exclusion of specific items of trade could be contentious and these matters were left to be decided within sixty days. This took the heat off the negotiations. The pact is also a statement of the goodwill which underlies the relations between the two countries. India has abandoned the politico/hegemonistic baggage of the eighties and is now seriously interested in doing business with Sri Lanka. This, despite the ruling BJP's alliance with pro-LTTE political parties like the PMK and MDMK.

As in Sri Lanka, in India too, Indo-Sri Lankan free trade has the fullest concurrence of the opposition. Of course the Congress (I) led by Mrs. Sonia Gandhi is at odds with the LTTE and would ideally like Colombo to extradite LTTE supremo V. Prabhakaran, accused of assassinating her husband, former Prime Minister Rajiv Gandhi. But Mrs. Sonia Gandhi would not use Sri Lanka's inability to oblige in this matter to scuttle the trade pact. There is now a consensus in India that close economic and political ties with Colombo should be a key element in India's regional policy.

On its part, Sri Lanka is trying hard to see India in a new light, as a partner in progress rather than as a hegemony breathing down its neck. Because India has set its face against the LTTE and is not, at the same time, propping up any other Tamil politico-military group, Sri Lanka's attitude to India is more friendly now.


One of the most important safeguards for Sri Lanka written into the trade pact, is the option of suspending preferential treatment in the event of imports increasing in such a manner that they cause serious injury to the economy as it is feared that the import of agricultural produce, including fisheries, and selected industrial products would be detrimental to Sri Lanka. It was agreed that these items would be on the Sri Lankan "negative list" and barred from the tariff concessions applicable to other products.

India has been given a three year period to bring down tariffs to zero but Sri Lanka has been given eight years. For Sri Lanka, the time table for phasing out would be as follows: Duty would come down to zero in respect of 300 items when the agreement comes into force, namely, in a week's time. In the case of 600 other items, it would come down by 35% by the end of three years; by 70% at the end of the sixth year; and by 100% at the end of the eighth year. Therefore, India will have duty free access to Sri Lanka in respect of all the items only at the end of the eighth year. By that time, it is hoped, the Sri Lankan economy would have grown enough to cope with free trade.

India would be letting in Sri Lankan goods duty free at a faster pace. About 1,000 items would be allowed in at zero duty when the agreement comes into force. In respect of the balance of items, entry would be allowed at 50% concession in the first year; 75% concession in the second year and 100% in the third year. Thus Sri Lanka would have duty free access to the Indian market in respect of all the 1,000 items in three years time. If India has given immediate duty free entry to 1,000 Sri Lankan items, Sri Lanka has given such entry to only 300 Indian items. These are mostly raw materials needed for manufacturing. The revenue loss would be marginal because such items attract only 5% duty even now.

India and Sri Lanka have been given 60 days to earmark items to be put into the various categories. India has indicated the broad contours of its negative list as has Sri Lanka. India has put garments, petro chemicals, alcoholic spirits, coconuts and coconut milk in its negative list. Sri Lanka has said that it would put agricultural and fishery products and certain industrial items on its negative list.

One of the touchy issues was the indigenous value addition clause or the country of origin rule. India began by insisting that to be eligible for duty concessions, the indigenous value addition should be 50%. Sri Lanka pleaded that this should be scaled down to 25% in view of its less advanced and less developed industrial base. The two countries finally settled for 35%. It was further agreed that a Sri Lankan product with 25% value addition would qualify if there was at least a 10% Indian content.

Tea exports to get boost

Fortunately for Sri Lanka, tea is not in the Indian negative list. Sri Lanka has been eyeing the Indian tea market, especially the bulk tea market, for quite some time. The agreement should enable the Sri Lankans to sell anywhere between four and ten million Kgs a year, if the prices are competitive vis-a-vis Indian teas, Colombo's tea brokers say.

Writing before the finalisation of the pact, Lankan economist Dr. J.B Kelegama has argued that Indo-Sri Lanka free trade might not mean much in terms of narrowing the yawning trade gap. In 1997, Indian exports to Sri Lanka totalled $ 569 million and Sri Lanka exports to India totalled $44 million. This despite duty rates having been drastically lowered in both the countries in the nineties making the gap marginal. In India, between 1990 and 1997 , the weighted mean tariff on all imported items has been scaled down from from 83% to 28%. In 1997 the weighted mean tariff in Sri Lanka was 20.7%.

Dr.Kelegama wondered if the breaking down of tariff barriers would actually increase Sri Lankan exports to India. Does Sri Lanka have the goods which India needs, he asks. The two economies were not complementary and Sri Lanka simply did not have what Indian was looking for. Singapore had been able to export Rs. 34,512 million ($ 507 million) worth of goods to India in 1996, because it was able to supply the industrial goods needed by India. Efforts should, therefore, be made to build an industrial base here, Dr. Kelegama says.

The authors of the Indo-Sri Lanka trade pact claim that zero or concessional tariff regime would encourage foreign, including Indian entrepreneurs to invest in Sri Lanka for export to India and other countries. But according to Dr. Kelegama, experience with Indian investors shows that they come to serve the local Sri Lankan market and not sell in India. The 36 Indian ventures valued at Rs 1,387 million now in operation in the island, mainly service a local clientele. One of the reasons for Sri Lankan products not being attractive to Indian buyers is the high price, thanks so the higher cost of production. Sri Lankan labour is more expensive.

Pacts, however well-intentioned, cannot bring about radicial changes. It is up to the Sri Lanka and Indian entrepreneurs to study the market and find out what could be sold and at what price. This could eventually lead to Sri Lanka entrepreneurs going into new lines of production, better technology and more efficient ways of working .

It could lead to Sri Lankans investing in export-oriented industrial ventures and not just internal trading ventures. According to President Kumaratunga, Sri Lankan raw materials and agricultural products would have a ready market in India. Farmers, who burnt their crops because they could not sell, could now find a market in India, which with a population of 900 million, was the second biggest market in the world, she said. As for the Indians, with their reasonably priced products, the Sri Lankan market offers very good prospects. But they would have to be quality oriented, as price alone would not be a criterion in an already globalised Sri Lanka Market.

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