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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka and India economic ties: time running out: envoy

Sri Lanka and India economic ties: time running out: envoy

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Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
July 16, 2012 (LBO) - While Sri Lanka was delaying the signing of an economic partnership deal, despite India being prepared to offer concessions, similar deals were being rapidly wrapped up with other countries and regions, India's envoy to Colombo said.

Sri Lanka and India worked out a draft agreement for a Comprehensive Economic Partnership Agreement as far back as 2008, but four years later nothing has happened.
"India will be prepared to give to concessions without expecting reciprocal benefits from Sri Lanka, because we are mindful of the asymmetries in the size of the two countries and the economies of the two countries," high commissioner Ashok Kantha told member of the Indo Lanka Chamber of Commerce in Colombo.

"But we need to move ahead. We can take our own time waiting for respective domestic consensus. But by the time we have developed our consensus friends, the instrument will be meaningless."

Asymmetrical Deal

India's high commissioner to Colombo Ashok K. Kantha said India had now signed similar deals with Korea, Malaysia, and was negotiating new deals with European countries.

"That puts you at a certain competitive disadvantage," he said. "And trade is all a matter of relative competitive dis-advantage."

India has also signed up a deal with the Association of South East Asian nations.

ASEAN itself is has been lowering trade barriers rapidly giving freedom to its citizens, promoting visa free travel and countries within it have become part of a global supply chain.

High Commissioner Kantha said when the first Indo Lanka Free Trade agreement was signed Sri Lanka was given 'asymmetrical concessions.'
In the first free trade deal with India, Sri Lankan businesses were allowed to restrict the freedoms of Sri Lankan citizens to a greater extent, than Indian businesses were allowed to do so, through a 'larger negative list'.

Indian bureaucrats have been able to give far greater freedoms under the existing deal to her citizens than Sri Lankan negotiators.

In the case of the second deal under negotiation, several politically powerful businesses have blocked the signing of the agreement preventing citizens from gaining further trade freedoms.

South Asia saw a rise in protectionism which acts as an economic sanction on itself after gaining independence from British rule.

Analysts say widespread trade restrictions came to the region under Dutch East India Company, which also sought to earn super profits by constraining the trade freedoms of South Asians, just as nationalist rent seeking businesses are doing now.

Since the start of the Indo Lanka free trade deal, bi-lateral trade has grown more than seven times, but most of it coming outside the areas where concessions were offered.

Broader Links

In pushing to restrict trade freedoms of its citizens, nationalist Sri Lankan businesses have focused on a trade deficit - which improves living standards and freedom of its own - and ignored other economic links.

Sri Lanka is India's largest trade partner and it is the largest destination for its foreign direct investment, Kantha said.

Sri Lankan ports profitability and growth is hinged on Indian transshipment business. India is also the largest source of tourists to Sri Lanka.

Sri Lanka's state airline flies more than 60 times a week to relatively profitable Indian destinations sometimes bringing people to fill seats to other destinations.

Kantha said while bilateral trade between Sri Lanka and India grew 65 percent in 2011, in the first five months, Indian exports to Sri Lanka has dropped 12 percent and Sri Lankan exports to India has dropped 9 percent.

Kantha said there may not be enough engagement at government levels, but said the Indo Lanka chamber could itself raise issues.

"If there are issues that you need to find that government of India is sufficiently forthcoming in terms of addressing your expectations, please tell us," Kantha said.

"We are willing to go the extra mile. But if the road block comes from imaginary concerns I am afraid we can't do much about it."

India for its part was pushing ahead, organizing an 'India Show' in Sri Lanka, with a high level ministerial visit and a chief executive officers forum.

Kantha said last year merchandize imports to India were close to 500 billion US dollars.

"We had a trade deficit close to 190 billion dollars," Kantha said. "We do not mind getting two billion US dollars extra trade deficit accruing on account of Sri Lanka. It is a question of creating requisite export capacity."

"Here investments are important. Through investments you create the capacity to enter the Indian market."

Manifest Destiny

Since the 1991 balance of payments crisis, which was the height of state interventions in India, where interest and exchange rates were manipulated until the country ran out of reserves equal to about 7.5 days, India has given greater economic freedoms to its citizens.

India is now again suffering somewhat from heavy state interventions in foreign exchange markets, which do not match underlying monetary policy. Growth is expected to slow both in India and Sri Lanka and advanced economies are in more trouble.

Meanwhile Kantha said in times of troubles, there is a tendency to look at protectionism and trade barriers.

"One major challenge we are facing today whether in India or Sri Lanka or in advanced economies, is the threat of protectionism," Kantha said.

"Because when you are under pressure the first response is 'How do we protect ourselves? How do we raise some tariffs here? How do we introduce some new cess there?

"But friends, frankly in today's world any policy of import substitution, any policy of sitting in a fortress, is not feasible for countries like India or Sri Lanka," he said.

While it may have been feasible for India to do so 10 years ago, it was no longer possible to restrict external interactions.

"But today India's external economic engagement in terms of trade in goods and services accounts for 90 percent of gross domestic product," Kantha said.

"It is more than one trillion dollars. Clearly we can't sit behind these tariff barriers. "

"Likewise Sri Lanka's manifest destiny is in a hub economy. You do not have the luxury of a large domestic economy for you to develop as a middle income economy until you engage with the outside world.".

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