Last week, the media were abuzz with a news item that the Sri Lankan Government would revive the shelved Comprehensive Economic Partnership Agreement or CEPA with India. It said that an inter – institutional committee comprising representatives of some 10 institutions, including Finance, Exports and Economic Development, will be appointed to redraft the CEPA agreement.
This should surely be good news for those who support CEPA as well as those who oppose it. Those who support can now enjoy the comfort of living in the hope of CEPA at last becoming a reality. Those who oppose can congratulate themselves that they have succeeded in bending the hard stance which the bureaucracy had taken in promoting CEPA a little.
Even the top Sri Lankan Businessman, W.K.H. Wegapitiya of Laugfs fame, who earlier had reservations about CEPA, welcomed the Government‟s move in a telephone interview with ART‟s State of Business. His only concern was that the proposed committee did not have private sector representation which the Government can rectify without any cost at the time of constituting the committee.
This shows that Sri Lanka is now going in the correct direction after losing seven valuable years since 2004, the year in which CEPA would have been sealed by both countries.
What is CEPA?
CEPA is a bilateral arrangement between Sri Lanka and India to make available the markets in the two respective countries to each other under specifically agreed favourable conditions for buying and selling of both visible goods and invisible services. CEPA will, therefore, provide a bigger market access: for Sri Lanka a market of some 1.3 billion people and for India, a market of some 20 million people.
In the present case, CEPA was the logical extension of the Indo – Lanka Free Trade Agreement or ILFTA which both India and Sri Lanka signed in 1998 and became effective from 2000. Under ILFTA, the trade of visible goods between India and Sri Lanka was to be promoted taking advantage of the specialities which each country had in different lines of production. For instance, India has advantage in producing drugs and
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machinery and so Indian producers could sell their products to Sri Lankans at reduced duty rates offered by the Sri Lanka Government. Similarly, Sri Lanka could sell in the Indian market, say, spices and garments in which Sri Lanka had speciality in production again at reduced duty rates offered by the Indian Government.
The objective of ILFTA was, therefore, to promote trade and narrow the trade gap between the two countries. The track record of ILFTA shows that the two countries have indeed made satisfactory progress toward the realisation of both these objectives. In 1999, Sri Lanka‟s total imports from and exports to India amounted to$545 million. This shot up by more than four times to $2401 million in 2005 and even in the gloomy foreign trade scenario that prevailed after 2008, the total trade amounted to $2142 million in 2009. The narrowing of the trade gap between Sri Lanka and India was much more prominent during this period. In 1999, when Sri Lanka exported one unit to India, it had to import 11 units from India. By 2005, this ratio fell to one export to 3.2 imports. Even in the low trade scenario in 2009, the ratio stood at one export to 5.6 imports, much better than what it was in 1999. In 1999, Sri Lanka‟s trade with India was practically negligible. But in 2009, India was Sri Lanka‟s number one importer and number six exporter.
CEPA: The Next Generation Economic Cooperation with India
Two years after ILFTA, in 2002, the leaders of both India and Sri Lanka decided that it was time for both countries to look into economic prospects beyond free trade in visibles. Accordingly, a joint study group consisting of experts from both countries was formed to study and report on the possibility of having a wider economic cooperation in the form of a comprehensive economic partnership between the two countries. This study group made its recommendation in October 2003 that India and Sri Lanka should go for a formal CEPA, emphasising that the required negotiations be concluded within 4 to 6 months. In terms of this time line, the study group expected CEPA to become operative by April, 2004.
However, due to a series of subsequent events that took place in Sri Lanka including a change in the government two times, first from the existing ruling party to a new party and then within the new ruling party from one leader to another, it took more than six years for both countries to come up with a reasonable draft agreement on the format and the content of such a comprehensive economic partnership.
However, the efforts of both Sri Lankan and Indian experts were totally wasted because the draft agreement was shelved after it ran into stormy weather in the form of wide – spread protests by certain sections in Sri Lanka.
The Main Ingredients of CEPA
CEPA, in addition to the trade in goods covered in ILFTA, has three other areas of economic cooperation between the two countries. They include trade in services, promotion of private investment flows and a third category specifically beneficial to Sri Lanka, namely, transfer of technology and facilities from India to Sri Lanka in the areas of transportation, infrastructure, education, tourism and information and communication technology. In this last category of cooperation, it has been proposed to provide Indian support for modernising Sri Lanka‟s railway system and establishing a higher learning institution in the model of Indian Institutes of Technology. Given India‟s growing world
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leadership in these areas, it is not uncommon for the Joint Study Group to come up with this recommendation.
The Objections to CEPA
The objections to CEPA have been made on two premises. The first is the perception that ILFTA is singularly beneficial to India because it has promoted Indian exports to Sri Lanka and not Sri Lankan exports to India.
If one examines the value of exports, this argument appears to be correct. In 1999, Indian exports to Sri Lanka amounted to US $ 500 million. This went up to US $ 1820 million by 2009, when Sri Lanka‟s exports to India increased only from US $ 45 million in 1999 to US $ 322 million in 2009. Surely, these absolute numbers testify to the fact that it is India which has benefited from ILFTA.
But the relative numbers tell a different story. When Indian exports to Sri Lanka increased by nearly four times during this period, Sri Lankan exports to India increased by slightly more than 7 times. Hence, Sri Lanka was making a steady progress in narrowing the trade gap between the two countries.
The larger import volume from India during this period has also been beneficial to Sri Lanka for another reason. Sri Lanka has been importing from India mainly vehicles, machinery, cotton textiles, foods and drugs. If Indian goods are not brought to Sri Lanka, the country would have brought them from the western countries where prices of these products are about two times higher than those from India. Hence, on one side, the cheaper Indian goods have eased the pressure on Sri Lanka‟s external payments. On the other side, they also enabled the country to acquire these intermediate goods at a lower cost and remain competitive in both the domestic and external markets. A good case in point is the price difference between a Suzuki Maruthi or a Bajaj Motorcycle from India and a Nissan March or a Honda Motorcycle from Japan.
This favourable trade diversion to India in the case of motor cars got reversed by the Government‟s recent decision to extend duty free motor car permits to public officials and the reduction of the duty rates on cars in general.
The second objection is that CEPA would open flood gates for Indian professionals like doctors, lawyers, and accountants etc to invade Sri Lanka‟s limited professional services market. Though such a move would increase competition and benefit the clients in the form of reduced fees, the professionals involved in the respective fields made the most vociferous protest against CEPA.
Ancient Lanka: A Champion of Free Trade in both Goods and Services
Contrary to what many contemporary Sri Lankans believe, ancient Lanka had a free trade policy in both visible goods and invisible services.
Having being located on a convenient naval route that linked the East and the West, the ancient Lanka had been a meeting point for traders who came from Europe and the Middle East from the western side and those who came from the Far East from the eastern side. During the reign of Parakramabahu the Great (1153 -86 AD) in the Polonnaruwa period, the country was an entrepot trading centre which stocked goods from all over the world and resold the same to visiting traders. One striking example is the reference by Professor Senarat Paranavitana in the History of Ceylon published by the University of Ceylon (Volume Two) to an Arabian geographer named Idris that the King had bought all the alcohol brought from Irak and Phers and resold to other traders at prices fixed by him. Dr S Arasaratnam, drawing on sources in archives in both Portugal
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and Holland, says in his Dutch Power in Ceylon, that Lanka in the 15th to 17th centuries had exported the country‟s elephants and arecanuts to India and imported the much needed rice and textiles. Both Mahavansa and Chulavansa have numerous references to various artisans coming from foreign lands and providing their services in architecture, sculpture, irrigation and reservoir building and artistic creations such as singing, dancing and composing.
Ancient Lanka had built up enormous amounts of wealth and prosperity by these means. Hence, it was a complete free trade in goods and services without entering into formal CEPAs with other countries.
CEPA is not an unreserved opening of trade in services
Many have feared that CEPA would open up the services sectors of the two countries wholesale in an equal manner, but that is not the case. India has offered to make a deeper and a wider opening of its services sector to Sri Lankan professionals. Sri Lanka has been requested to reciprocate in small measures gradually. Accordingly, India would open up 80 sub sectors upfront, while Sri Lanka would do so only in 20 sub sectors. In this manner, India will allow unlimited number of visas to executives, managers and specialists to work in India; Sri Lanka will do so only in two sectors, namely, IT and maritime services, but thereagain, it is limited to investment projects made by Indians in the country.
Economic Cooperation: Sri Lanka is the Beneficiary
India is emerging as a world economic power and some analysts project that it has the potential of growing even faster than China. The reputed British journal, The Economist, in its issue of 2nd October, 2010, has expressed confidence that India could outpace China due to its still growing work force and strong and versatile private companies. When compared to Sri Lanka, India‟s technological and scientific base is much improved and developed. Hence, by going into an economic cooperation pact with India, Sri Lanka always stands to benefit.
Sri Lanka hibernates, but India acts fast
While Sri Lanka has been sleeping over CEPA for over 7 years since 2003, India has been active in negotiating or signing comprehensive economic cooperation and partnership agreements with a number of countries. First, it was with the Association of South East Asian Nations or ASEAN in terms of India‟s „looking east policy‟ promulgated in early 1990s. Accordingly, a comprehensive economic cooperation agreement or CECA was signed with ASEAN in general in 2003. To make it more comprehensive and tailor - made, individual CECAs are now being negotiated with Thailand, Malaysia, South Korea and Singapore and all these agreements are expected to be completed shortly. Outside ASEAN, a similar agreement is being negotiated with Japan too on the basis of a Joint Study Group Report completed in 2006. India expects to conclude this agreement too in the near future.
Moving further forward from its initial looking east policy, India has now been looking in all directions: looking north (EU, Pakistan and Nepal), looking west (Gulf countries, Mauritius, Americas and Chile) and looking south (South Africa). This pragmatic approach by India is due to the recognition that its future depends on its successful integration to the global economy.
Despite its huge domestic market of which Sri Lanka should be envious, India and Indian companies believe that they should build a viable export base in order to harness
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the economies of scale in the long run. This should be done not by offending or annoying the potential economic partners, but by cooperating with them. This is similar to the „leap-frogging‟ policy pursued by Singapore in its initial phase of economic development. India too is leap – frogging around the globe in search of new markets and opportunities.
Many in Sri Lanka believe that India cannot do without Sri Lanka. India‟s $ 1.3 trillion economy is about 29 times bigger than Sri Lanka‟s $ 45 billion economy. Similarly, India‟s $ 177 billion export industry is 22 times bigger than Sri Lanka‟s $ 8 billion export industry. When India has accumulated $ 76 billion worth of FDIs up to end of 2009, Sri Lanka has done so only up to a woeful amount of $ 3 billion. So, without Sri Lanka, India can exist, sustain and prosper. But for Sri Lanka, Indian support is definitely a booster when it comes to realising its future economic aspirations.
Sri Lanka Should Look North, East and Everywhere
For Sri Lanka, India is an important source of economic energy. In the ancient times, Sri Lanka had immensely benefited not only from material goods that came from India, but also from various scientists, spiritual leaders, philosophers and artisans who crossed the borders without any hindrance. Hence, in the current period, Sri Lanka should first „look north‟ to its mighty big brother for support. But, dependence on a single country is also a risk, as noted by Lee Kuan Yew when he planned Singapore‟s initial development strategies. Hence, Sri Lanka should diversify its economic relationships covering as many countries as possible. In this exercise, Sri Lanka should therefore start „looking east‟ toward, ASEAN, China and Japan. Then, Sri Lanka should look west (EU and Americas) and South East (Australia and New Zealand).
What this means is that Sri Lanka should have CEPAs not only with India but also with all other trading partners.
Sri Lanka should act swiftly and decisively
Sri Lanka has already lost seven valuable years since the release of the first study group report in 2003. The current decision to appoint an inter – institutional study group is a welcome sign, but it should not be a repeat exercise of what the previous study group had accomplished. Further, doing it unilaterally without the participation of Indian experts would simply render it to a document “made in Sri Lanka” without taking into account the concerns and the problems of the other party. Hence, it will be a daunting task for Sri Lanka to sell this made in Sri Lanka document to India. Given the fact that India can do without Sri Lanka, but Sri Lanka cannot do without India, it is in the interest of Sri Lanka now to build its credibility relating to international arrangements and show its commitment to bilateral economic cooperation again.
It requires Sri Lanka to act swiftly and decisively.
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