Introduction

The Indo-Sri Lanka Free Trade Agreement (ISFTA), which was signed on 28th December 1998 and entered into force with effect from 1 March 2000, aims at promoting economic linkages between India and Sri Lanka through enhancement of bilateral trade and investment. The Agreement covers only trade in goods and requires the two countries to offer market access for each other's exports on duty free basis and concessionary tariffs. The ISFTA does not provide for elimination of non-tariff barriers.

Trade between Sri Lanka and India

01.Total Trade
Spurred by the implementation of ISFTA in 2000, exports from Sri Lanka to India have increased over the years except for the year 2006 (vide table 1).  The value of Sri Lanka’s exports to India increased from US$ 55.7 Mn. in 2000, (the year ISFTA became operational) to US$ 516.4 Mn. in 2007. The decline of Sri Lanka’s exports to India in 2006 was mainly due to a significant decrease in exports of the two main products, namely, primary copper (HS. 7403) and vanaspati (HS. 151620).

For the first time in the history, the two way merchandise trade exceeded US$ three billion in 2007 representing 17% of Sri Lanka’s trade with the world.  

Trade behavior between India and Sri Lanka
Value in Mn US$

02.Balance of Trade  
The balance of trade between India and Sri Lanka, which has always been in favour of India, continued to widen over the years. The bilateral balance of trade exceeded US$ 2 Billion (US$ 2,268.6 Mn) in 2007, which was the highest trade gap between the two countries in favor of India.  This was mainly due to the increase outlay on major import items from India, such as petroleum products, iron or steel & its' articles, cotton, Import from India in terms of value increased from US$ 1.8 billion in 2006 to US$ 2.8 billion in 2007 registering an increase of 52%. Sri Lanka’s exports however, grew only by 4.5% from US$ 494.1 million to US$ 516.4 million in 2007 resulting in a huge trade gap.    

03.  Exports
India, which ranked as the 16th largest export destination of Sri Lanka in year 2000, emerged as the 3rd largest buyer in 2003. Accounting for 6.7% of Sri Lanka’s total exports to the world, India remained the island’s 3rd largest buyer in the year 2007 after U.S.A. and U.K. At present, more than 70% of the total value of Sri Lanka’s exports enters India under the tariff preferences offered through the ISFTA. In 1996, 1997 and from 2001 India became the largest supplier to Sri Lanka overtaking Japan. Sri Lanka’s share of imports from India during 2007 accounted for 24.4% of its total imports from the whole world.

Export from Sri Lanka to India increased by 4.5 % from US$ 494.06 Million in 2006 to US$ 516.40 Million in 2007(Please see Annex I). It is observed that in 2007, several major product categories recorded increases, when compared with 2006.  (Vide table 2) Items in the table 2 (Export of major product categories to India) represent 73.7% of Sri Lankan total exports to India in 2007 and recorded 67% growth when compared with 2006.   

Major items, which recorded export growth (Value in Mn US$)

Products, which are otherwise uncompetitive, become competitive in term of landed price in the importing country by enjoying tariff concessions. Such products lost their competitiveness during the year 2007 due to the erosion of margin of preferences consequence to the MFN tariff reduction in India. Relocation of factories based on the incidence of tariff arbitrage also find it difficult to sustain in the new location due to the erosion of tariff preferences.
Under these circumstances, the values of following products (Vide table 3 (a)) have been gradually declining in parallel to the unilateral reduction of MFN duties by India. 

Major items, which recorded export decrease
Value in Mn US$

Other major export items other than those listed in the above table, recorded negative growths at varying degrees due to a variety of reasons.

Major items, which recorded export decrease
Value in Mn US$

 04. Import from India
Imports from India to Sri Lanka increased by 52.8% from US$ 1.8 billion in 2006 to US$ 2.7 billion in 2007(Plea see Annex 2).  This increase was mainly due to higher import outlay on petroleum products, which accounted for 43% of total imports from India in 2007. (Table 4)  

Table 4: Analysis on total Indian export to Sri Lanka
Value in Mn US$

Major categories of imports from India, in addition to petroleum product, are agricultural products medicaments and its articles, cotton, motorcycles, motorcars and other motor vehicles.
A salient feature of Sri Lanka’s import from India is 100 products (at 6 digit level) accounted for 84% of total value in 2007(Table 5).

Analysis on main 100 import items (Tariff lines at six digit level) from India to Sri Lanka 

Out of 100 products referred to the above, 35 products accounting for 60% of Sri Lanka’s total imports from India in 2007 did not enjoy duty concession under the ISFTA as these products come under Sri Lanka’s negative list.  This category includes products such as petroleum products, certain categories of motor vehicles, main agricultural products and paper and paper products.  
 
Out of 100 products referred to the above, 28 products accounting for 09% of Sri Lanka’s imports from India in 2007 were subject to 0% duty on MFN basis. This category included essential products such as textile, carbon, yarn, pharmaceutical products etc.

Out of 100 products referred to the above, 37 products accounting for 15% of Sri Lanka’s imports from India in 2007 were eligible for tariff concessions. This category included motor cycles, solid residues, cement etc.

05. Import / Export Growth and Import / Export Ratio

Despite the widening trade gap in favour of India, Sri Lanka has been enjoying higher export growth than that of India from 2002 to 2005 as could be seen from the Table 6.  The pattern of Import / Export Ratio has also been improving to the advantage of Sri Lanka till year 2006 (Table 7).   However, these patterns have changed in the opposite direction from 2006, which were deepened by the higher import outlay on petroleum products.

Import / Export Growth
Value in Mn US$

Import Export Ratio
Value in Mn US$