Abstract
In the aftermath of the global financial crisis, the prolonged economic downturn in advanced western economies and stalled trade liberalization at the multilateral level, the need for South Asia to boost domestic and regional sources of demand to sustain growth and development has become evident. Deepening Economic Cooperation between India and Sri Lanka is a timely publication that analyzes the performance and impact of the India–Sri Lanka Free Trade Agreement (ISFTA) over the past decade and suggests the way forward in strengthening economic cooperation between the two countries. The main thesis of the study lies in the conviction that expanded economic cooperation, beyond trade in goods to also include services and investment liberalization, has large potential to bring about significant positive developmental outcomes to both countries. The editors provide an introduction of the book in the first chapter, and the six chapters that follow include an analysis of merchandise trade under the ISFTA, a review of secondary literature on trade facilitation and non-tariff barriers (NTBs) pertaining to the ISFTA, an impact assessment survey of the FTA of Indian and Sri Lankan stakeholders and an analysis of investment linkages and services trade between the two countries.
An abundant literature exists on economic relations between India and Sri Lanka and the impacts of the ISFTA on both countries. What distinguishes this book from many other studies with similar coverage is its extensive analysis of both the positive and negative impacts of the ISFTA by undertaking an in-depth survey of exporters and importers directly involved in the trading process and identification of concrete recommendations in order to overcome challenges and move forward. The underlying theme of the volume is that while the ISFTA has brought about notable benefits to both parties during its time of implementation, there still exists large potential for further economic cooperation—particularly in the form of services and investment liberalization—which could result in a win-win situation for both economies.
The editors set the ball rolling in the introductory chapter by discussing the rationale for forming bilateral FTAs in the current context, particularly in the South Asian region. In Chapter 2 of the book, Subrata Behera and Indra Nath Mukherji undertake a comprehensive analysis of merchandize trade under the ISFTA and show how the agreement has impacted trade between the partner countries, both in terms of volume as well as composition. An important element of the study is to go beyond the traditional pattern of analyzing trade flows between the two countries, by comparing India–Sri Lanka trade with that of the rest of the world in order to gauge the real impact of the FTA. The authors find that over the period 2001–2009, preferential imports under different concession categories of both economies grew at a faster rate than that from the rest of the world, ‘thereby reflecting an increasing share of bilateral trade in the respective countries’ world trade’ (p. 37). The study also identifies particular products that can be removed from each country’s negative list, first, by way of classifying products in the negative list of each country which do not feature in their respective negative lists under the South Asia Free Trade Agreement (SAFTA), and second, by calculating a number of trade indices that highlight the export potential of one country in the market of the other for products contained in the latter’s negative list and vice versa. Another key insight emerging from this Chapter is the need to prevent the recurrence of trade deflection for products with notable external tariff differentials—as experienced with regard to Vanaspathi and copper exports—either by imposing rules of origin, or by harmonizing external tariffs on such identified products. A key suggestion in terms of moving forward is to include trade in services and cooperation in investment by entering into the proposed Comprehensive Economic Partnership Agreement (CEPA) or revamping the existing agreement to make the FTA more effective.
Biswajit Nag discusses issues relating to trade facilitation and NTBs in India and Sri Lanka in Chapter 3 using secondary literature. While highlighting key developments in both countries towards automation—particularly with regard to electronic data interchange (EDI)—Nag also highlights a number of NTBs and trade facilitation issues which require unilateral reform.
Chapter 4 forms one of the largest chapters of the volume, where Abhishek Agarwal and Nihal de Silva present the findings of field surveys conducted among exporters, importers and business associations from India and Sri Lanka undertaken by Marketing and Development Research Associates (MDRA), New Delhi and Lanka Market Research Bureau (LMRB), respectively. The surveys cover a wide range of areas including factors prompting the use of the ISFTA, external barriers faced by traders, NTBs, trade facilitation issues and suggestions for improvement. Both surveys reveal varying reasons of trading with each partner country for exporters and importers, among which close proximity, tariff concessions and low prices feature among the top factors. A main problem encountered by traders pertains to the sudden changes in rules and regulations, which affects one-third of Indian traders and 53 per cent of Sri Lankan exporters. Another important issue emerging from the analysis is that over 60 per cent of Sri Lankan exporters and importers claim to have not been consulted by the government of Sri Lanka before signing the ISFTA, which is a concern that has also emerged with regard to the CEPA.
In Chapter 5, Nawal Paswan examines investment linkages between India and Sri Lanka. A review of the literature and investment trends is followed by an assessment of the extent of production fragmentation and intra-industry trade between the countries. The study notes that investment flows from India to Sri Lanka has increased over the years, ‘primarily influenced by the increased profile of economic ties between the two countries and increased investors’ confidence as a result of the FTA’ (p. 168). Paswan also argues that ‘the real significance of Indian FDI in the Sri Lankan economy lies not in its contribution to capital formation, but also in its impact on technology transfer and trade creation’ (p. 188). It further appears that Sri Lankan FDI to India has increased in recent times, indicative of a ‘two-way relationship’. This study highlights some possibilities of Indo-Sri Lankan joint ventures in both markets and presents two case studies of investments made by each partner country. The author also emphasizes the role of vertical specialization in reaping of economies of scale by concentrating on a specific production process in the value addition chain and proposes the establishment of production agreements between both countries in specific sectors such as textiles and clothing, leather, rubber and electronics which could qualify for production integration schemes.
The extent of services trade between India and Sri Lanka and potential for further cooperation is examined by Deshal de Mel and Anushka Wijesinha in Chapter 6. They argue that, given the importance of services in the GDP composition of both countries, ‘true economic integration would require services to be taken into account’ (p. 219). An examination of the revealed comparative advantage (RCA) of both India and Sri Lanka in different sectors highlights the potential for mutual cooperation. For example, Sri Lanka has a higher RCA in the transport, communications and insurance sectors, whereas India’s RCA is much higher in computer and related services and other business processing services, indicative of the high potential for mutually beneficial trade. The authors further argue that ‘even in sectors where such complementarities do not necessarily exist, there is scope for trade within niche areas and through the equivalent of intra-industry trade in services’ (p. 228). The study proceeds to examine some policy issues in service liberalization covering business services, financial services, education, health and transport services. The next section of the chapter is devoted to a discussion on the proposed India–Sri Lanka CEPA—its structure, nature of commitments, importance to both countries and the nature of concerns expressed by stakeholders—followed by several arguments which challenge many of the concerns expressed. They call for better communication between the government and stakeholders in assuring different stakeholders that their concerns have been taken into account through various flexibilities and allowances made available in the framework of the CEPA. Chapter 7 concludes by summarizing the key findings and recommendations of the six main chapters.
In summing up, this volume embarks on an extensive analysis of the performance and impact of the ISFTA, and suggests scope for deepening economic cooperation between the two countries by pruning the negative lists for trade in goods, identifying potential investment and suggesting policies for expanding cooperation in services. Its significance is manifest with the increasing importance assigned to regional and bilateral integration in the context of the slowdown in developed markets and slow progress of the Doha Round of the World Trade Organization. Direct feedback from surveys conducted among exporters and importers also adds significant value to the analysis. The writing style is simple, and many findings are presented in a straightforward and clear manner aided by plenty of illustrative figures and tables.
One element lacking in the volume, however, is a discussion of political economy factors, which no doubt have a significant bearing on economic relations between the two countries. An analysis of the current political situation between the two countries and recommendations on how to move forward in the presence of such political constraints would have added much value to the publication. Another aspect missing in the analysis is an examination of employment generation effects of the ISFTA. While this is briefly touched upon in relation to investment linkages, a more detailed evaluation of direct and indirect employment opportunities created and/or lost as a result of the ISFTA—based on information obtained through the field surveys—would have enriched the analysis and provided a more wide-ranging picture of developmental impacts of the FTA. In addition, some Chapters provide a detailed regional perspective, the relevance of which is unclear, given the particular focus of this book on India–Sri Lanka cooperation.
Despite such limitations, Deepening Economic Cooperation between India and Sri Lanka is an important and valuable contribution in terms of offering concrete proposals for furthering economic cooperation between India and Sri Lanka. The outcomes of the study are likely to be particularly useful to policy makers and relevant stakeholders including exporters, importers, business associations, logistic firms and freight forwarders associated with trade between the two countries. This book will be of interest to students, scholars, researchers, industry stakeholders and policy makers with an interest in international trade and regional cooperation issues, and is essential reading for anyone interested in enhancing their knowledge of the subject.