© 2013 Asian Development Bank All rights reserved. Published in 2013. Printed in India. ISBN 978-92-9254-169-9 (Print), 978-92-9254-170-5 (PDF) Publication Stock No. BKK135771-2 Cataloging-In-Publication Data Mukherji, Indra Nath and Kavita Iyengar. Deepening economic cooperation between India and Sri Lanka Mandaluyong City, Philippines: Asian Development Bank, 2013. 1. Trade. 2. Free trade agreement. 3. India. 4. Sri Lanka. I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily refl ect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. 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Attri, Vyuptkesh Sharan, B.B. Bhattacharya, and Mahendra Lama. This work was undertaken under RETA 6472: Strategic Partnership for Policy Development and Action to Foster Regional Cooperation in South Asia Preface This study analyzes the India–Sri Lanka Free Trade Agreement (FTA) over the past decade. It is noted that bilateral trade between the countries has increased steadily and India became the most favored import source for the Sri Lankan importers immediately after the implementation of the FTA. The structure of bilateral trade has also undergone considerable diversifi cation since the agreement came into force and trade in a number of new products has increased considerably. It is noted that due to provisions under the agreement, although India became an important source of imports initially, Sri Lanka subsequently benefi ted substantially from access to the vast Indian market. The study suggests scope for expanded cooperation for goods, investments, and services by computing indices suggesting pruning the negatives lists, identifying potential investment on the basis of bilateral intra-industry trade in commodities at the disaggregate level, and suggesting policies for expanding cooperation in services. Consultation seminars were undertaken with policy- makers, academia, businesspersons, and other stakeholders in New Delhi and Colombo and the feedback was incorporated. The seminar in Sri Lanka was held in partnership with Pathfi nders Foundation, Colombo. Research and Information System for Developing Countries (RIS) has led the work on this study. I would like to specially thank Biswajit Dhar, Director- General, RIS for partnering with us in this very fruitful endeavor. Hun Kim Country Director India Resident Mission Contributors Subrata K. Behera Drewry Maritime Services Kavita Iyengar Asian Development Bank, India Resident Mission Abhishek Kumar Marketing and Development Research Associates Deshal de Mel Institute of Policy Studies, Colombo Indra Nath Mukherji Research and Information System for Developing Countries Biswajit Nag Indian Institute of Foreign Trade Nawal K. Paswan Centre for South, Southeast and Central Asian Studies School of International Studies, Jawaharlal Nehru University Nihal de Silva Lanka Market Research Bureau Anushka Wijesinha Institute for Policy Studies, Colombo Contents Preface iii Contributors iv List of Tables viii List of Figures xii List of Abbreviations xv 1 Introduction 1 INDRA NATH MUKHERJI AND KAVITA IYENGAR 1.1 Stages of Regional Integration 1 1.2 Rationale for Bilateral FTAs 2 1.3 An Overview of Studies 5 2 Indo-Sri Lanka Free Trade Agreement: An Analysis of Merchandise Trade 14 SUBRATA K. BEHERA AND INDRA NATH MUKHERJI 2.1 Introduction and Objectives of the Study 14 2.2 Review of Literature 15 2.3 Data Sources and Methodology 19 2.4 Overview of Bilateral Trade 20 2.5 Changing Structure of Bilateral Trade 23 2.6 Macro Analysis of the FTA 32 2.7 Pruning of the Negative List 39 vi CONTENTS 2.8 Role of Decline in Preferential Margins 45 2.9 Major Findings 50 2.10 Policy Implications 50 3 Issues Related to Trade Facilitation and Non-tariff Barriers in India and Sri Lanka: A Synthesis of Secondary Literature 53 BISWAJIT NAG 3.1 Background 53 3.2 Non-Tariff Barriers to Trade: Issues Pertaining to Indo-Sri Lanka Free Trade Agreement 65 3.3 Conclusion 88 4 India–Sri Lanka Free Trade Agreement: An Impact Assessment Survey of Indian and Sri Lankan Stakeholders 92 ABHISHEK AGARWAL, MARKETING AND DEVELOPMENT RESEARCH ASSOCIATES, NEW DELHI (INDIA) NIHAL DE SILVA, LANKA MARKET RESEARCH BUREAU, COLOMBO (SRI LANKA) 4.1 Introduction 92 4.2 Reasons of Trade 98 4.3 Reasons of Opting for FTA 102 4.4 Effect of ISFTA on Bilateral Trade 104 4.5 Intentions to Invest 108 4.6 Problems Faced by Exporters and Importers 109 4.7 External Barriers Faced by Traders 114 4.8 General Perception about Benefi t Sharing 118 4.9 Non-tariff Barriers 119 4.10 Trade Facilitation 125 4.11 Suggestions for Improvement 157 4.13 Summary of Findings 160 5 India–Sri Lanka Investment Linkages 167 NAWAL K. PASWAN 5.1 Introduction 167 5.2 Theoretical Framework and Review of Literature 174 5.3 Status and Changing Structure of India–Sri Lanka Foreign Direct Investment 180 5.4 Horizontal and Vertical Integration Intra-Industry Trade 199 CONTENTS vii 5.5 Two Case Studies 206 5.6 Measures to Enhance Effectiveness of BIPA and DTTAs 210 5.7 Conclusion 216 6 Trade in Services between India and Sri Lanka 219 DESHAL DE MEL AND ANUSHKA WIJESINHA 6.1 Introduction 219 6.2 Trade in Services by Sector: Exports 220 6.3 Trade in Services by Sector: Imports 223 6.4 Revealed Comparative Advantages between Sri Lanka and India in Trade in Services 226 6.5 Some Policy Issues in Liberalization of Services 228 6.6 Outcomes of WTO Negotiations 234 6.7 The Comprehensive Economic Partnership Agreement between India and Sri Lanka 234 6.8 Conclusion 242 7 Conclusions and Major Recommendations 243 INDRA NATH MUKHERJI 7.1. Background 243 7.2. Merchandise Trade 243 7.3. Trade Facilitation 247 7.4 Investment and Services 249 Tables 2.1 Availability of UN COMTRADE Data 19 2.2 Availability of TRAINS Data 20 2.3 Emergence of New Products as a Result of ISFTA: India’s Imports from Sri Lanka 28 2.4 Emergence of New Products as a Result of ISFTA: India’s Exports to Sri Lanka 30 2.5 Broad Agreement on Tariff Concessions under ISFTA 34 2.6 Compound Annual Growth Rate of Imports of the Two Contracting States under Different Product Categories, 2001–09 38 2.7 Illustrative List of Products in India’s Negative List in the ISFTA but not under SAFTA 39 2.8 Illustrative List of Products in Sri Lanka’s Negative List in the ISFTA but not under SAFTA 40 2.9 Criteria for Selection of Products in the Negative list 43 2.10 India’s Potential in Sri Lanka’s Negative List 43 2.11 Sri Lanka’s Potential in India’s Negative List 44 2.12 India and Sri Lanka’s Tariff Barriers, 2001–2009 45 2.13 Major Sri Lankan Products Losing Competitiveness in the Indian Market Due to Fall in India’s MFN Rates 47 2.14 Differential between India’s MFN (≥50%) and Preferential Tariff (duty-free) vis-à-vis Sri Lanka’s MFN Tariff, 2009 47 LIST OF TABLES ix 3.1 Selected Indicators of Trade Facilitation in the South Asian Region, 2010–2011 56 3.2 Trading Across Borders, India, Sri Lanka, and South Asia, 2010 57 3.3 Export and Import Procedures, Duration, and Cost in Sri Lanka 61 3.4 Classifi cation of Taxes and Levies on Imports in Sri Lanka 73 3.5 Principal Single Payment Scheme Legislation and Implementing Agencies in India, 2006 76 4.1 Sample of Indian Respondents 96 4.2 Sample of Sri Lankan Respondents 96 4.3 Details of Telephone Calls Made to Fix Appointments 97 4.4 Reasons to Trade with Sri Lanka (Indian exporters) 98 4.5 Reasons to Trade with India (Sri Lankan exporters) 99 4.6 Reasons of Trade with Sri Lanka (Indian importers) 100 4.7 Reasons to Trade with India (Sri Lankan importers) 102 4.8 Main Reasons for Opting for FTA Route (India) 103 4.9 Main Reasons for Opting for FTA Route (Sri Lanka) 104 4.10 Effect of ISFTA on the Business of Indian Exporters/Importers 105 4.11 Effect of ISFTA on Bilateral Trade (Sri Lankan traders) 107 4.12 Indian Traders’ Investment Plans to Increase Exports to Sri Lanka 108 4.13 Sri Lankan Traders’ Investment Plans to Increase Exports to India 109 4.14 Problems Faced by Indian Exporters in Sri Lanka 114 4.15 External Barriers Faced by Sri Lankan Exporters 115 4.16 Problems Faced by Indian Importers in Sri Lanka 116 4.17 External Barriers Faced by Sri Lankan Importers in India 117 4.18 Opinion about the Benefi ts of ISFTA (Indian perception) 119 4.19 Opinion about the Benefi ts of ISFTA (Sri Lankan perception) 119 4.20 Rating of NTBs Faced by Indian Exporters 121 4.21 Major NTBs Faced by Sri Lankan Exporters 122 4.22